BAT 4M: Chapter 3
ANSWERS TO QUESTIONS
01.
(a) Under the time period assumption, an accountant is required to
determine the relevance of each business transaction to specific
accounting periods, and its effects on those periods.
(b) An accounting time period of one year in length is referred to as a
fiscal year. A fiscal year that extends from January 1 to December
31 is referred to as a calendar year. Accounting periods of less
than one year are called interim periods.
2.
The two generally accepted accounting principles that pertain to
adjusting the accounts are:
1. The revenue recognition principle, which states that revenue
should be recognized in the time period in which it is earned.
2. The matching principle, which states that efforts (expenses)
should be matched with accomplishments (revenues).
03. The law firm should recognize the revenue in April. The revenue
recognition principle states that revenue should be recognized in the
accounting period in which it is earned (i.e., when the work is done).
04. Expenses of $4,500 ($2,000 + $2,500) should be deducted from the
revenues in April. Under the matching principle, efforts (expenses)
should be matched with accomplishments (revenues).
05.
Information presented on an accrual basis is useful because it
reveals relationships that are likely to be important in predicting
future results. To illustrate, under accrual accounting, revenues are
recognized when earned so they can be related to the economic
environment in which they occur. Trends in revenues are thus more
meaningful.
06. The balance in total owner’s equity should not equal the balance in
the cash account. Owner’s equity reflects the net amount the owners
have invested in the company, which comprises total assets–not just
cash–net of liabilities.
3-1
Questions Chapter 3 (Continued)
07. No, adjusting entries are required by the revenue recognition and
matching principles.
08. A trial balance may not contain up-to-date information for financial
statements because:
1. Some events are not journalized daily because it is unnecessary
and inefficient to do so.
2. The expiration of some costs occurs with the passage of time
rather than as a result of recurring daily transactions.
3. Some items may be unrecorded because the transaction data are
not known.
09. The three categories of adjusting entries are prepayments, accruals,
and estimates. Prepayments consist of transactions in which the cash
is exchanged in advance resulting in prepaid expenses and unearned
revenues. Accruals consist of transactions in which the cash will be
exchanged later, resulting in accrued revenues and accrued
expenses. Because we don’t always know what will happen in the
future, estimates are required. One example of an estimate is the
allocation of the cost of a capital asset over its estimated useful life.
10. If the original purchase was recorded as an asset, then in the
adjusting entry expenses are debited (to increase them) and assets
are credited (to decrease them).
11. In the adjusting entry, liabilities are debited (to decrease them) and
revenues are credited (to increase them).
12. It may have credited unearned revenue or accounts receivable.
13. Asset and revenue. An asset (a receivable) is debited and revenue is
credited.
14. Utilities Expense is debited and Accounts Payable (a liability) is
credited.
3-2
Questions Chapter 3 (Continued)
15.
On the income statement, net income was understated $300. Prior to
adjustment, revenues are understated by $900 and expenses are
understated by $600. The impact on net income is $300 ($900 – $600).
On the balance sheet, accounts receivable are understated by $900,
accounts payable are understated by $600, and owner’s equity
understated by $300 (see net income).
16.
The entry is:
Jan. 9 Salaries Payable .............................................
Salaries Expense ............................................
Cash ...........................................................
17.
(a)
(b)
(c)
(d)
(e)
(f)
1,700
3,300
5,000
Accrued revenues.
Unearned revenues.
Accrued expenses.
Accrued expenses, prepaid expenses, or estimates (amortization).
Prepaid expenses or estimates (amortization).
Accrued revenues or unearned revenues.
18. No. Amortization is the process of allocating the cost of an asset to
expense over its useful life in a rational and systematic manner.
Amortization results in the presentation of the book value of the
asset, not its market value.
19. Amortization expense is an expense account whose normal balance
is a debit. This account shows the cost that has expired during the
current accounting period. Accumulated amortization is a contra
asset account whose normal balance is a credit. The balance in this
account is the total of all the amortization that has been recognized
from the date of acquisition to the balance sheet date.
*20. Equipment ......................................... $12,000
Less: Accumulated amortization...
7,000
Net book value .................................
5,000
3-3
Questions Chapter 3 (Continued)
21. (a)
(b)
(c)
(d)
(e)
(f)
Salaries Payable is credited.
Accumulated Amortization is credited.
Interest Expense is debited.
Supplies Expense is debited.
Service Revenue is credited.
Service Revenue is credited.
22. Disagree. An adjusting entry affects only one balance sheet account
and one income statement account.
23. Financial statements can be prepared from an adjusted trial balance
because the balances of all accounts have been adjusted to show
the effects of all financial events that have occurred during the
accounting period.
*24. For Supplies Expense: expenses are overstated and assets (prepaid
expense) are understated. The adjusting entry is:
Assets (Supplies)................................................................
Expenses (Supplies Expense) .....................................
XX
XX
For Rent Revenue: revenues are overstated and liabilities (unearned
revenues) are understated. The adjusting entry is:
Revenues (Rent Revenue) ..................................................
Liabilities (Unearned Rent) ..........................................
3-4
XX
XX
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
1.
Prepaid Insurance—to recognize insurance expired (expenses)
during the period.
2.
Accumulated Amortization—to allocate the cost of the capital asset
to expense over the period it benefits.
3.
Unearned Revenue—to account for Unearned Revenue received in
advance that was earned (revenues) during the period.
4.
Interest Payable—to recognize interest expense accrued but unpaid
on notes payable.
5.
Rent Receivable—to recognize rent earned (revenues) but not yet
collected.
BRIEF EXERCISE 3-2
Dec. 31
Advertising Supplies Expense ..............................
Advertising Supplies ......................................
Advertising Supplies
12/31
8,700 12/31
Balance
1,500
7,200
7,200
Advertising Supplies Expense
7,200
12/31
3-5
7,200
BRIEF EXERCISE 3-3
July
1
Dec. 31
Prepaid Insurance ........................................
Cash ......................................................
10,000
Insurance Expense ($10,000 x 6/24 mos.) ..
Prepaid Insurance ................................
2,500
10,000
2,500
Cash
7/1
Prepaid Insurance
7/1
Insurance Expense
10,000 12/31
12/31 Bal.
10,000
2,500
12/31
2,500
7,500
BRIEF EXERCISE 3-4
July 1
Dec. 31
Cash .......................................................................
Unearned Insurance Revenue ......................
10,000
Unearned Insurance Revenue ..............................
Insurance Revenue ($10,000 x 6/24 mos.) ...
2,500
10,000
2,500
Cash
7/1
10,000
Unearned Insurance Revenue
12/31
2,500 7/1
12/31 Bal.
Insurance Revenue
10,000
12/31
7,500
3-6
2,500
BRIEF EXERCISE 3-5
1.
Dec. 31
2.
3.
31
31
Interest Receivable ........................................
Interest Revenue ....................................
300
Accounts Receivable .....................................
Service Revenue ....................................
1,400
Salaries Expense ...........................................
Salaries Payable .....................................
900
300
1,400
900
BRIEF EXERCISE 3-6
Dec. 31
Amortization Expense—Equipment .....................
Accumulated Amortization—
Equipment ...................................................
Amortization Expense—Equipment
12/31
5,000
5,000
Accum. Amortization—Equipment
5,000
12/31
5,000
TAI WOO COMPANY
Balance Sheet (Partial)
December 31
Capital assets
Equipment ...............................................................
Less: Accumulated amortization ..........................
3-7
$25,000
005,000
$20,000
BRIEF EXERCISE 3-7
Transaction
Cash
Purchased supplies on hand for cash
Recorded the use of supplies
Performed services on account
Received from customers payment of their
account
(e) Purchased office equipment for cash
(f) Recorded amortization of office equipment
-$100
0
0
(a)
(b)
(c)
(d)
Net Income
$
0
-50
+1,000
+800
-500
0
0
0
-50
BRIEF EXERCISE 3-8
(a)
Type of
Adjustment
(b)
Status of Accounts
Before Adjustment
Account
Relationship
1. Prepaid
Expenses
Assets and Expenses
Assets (Supplies) Overstated
Expenses (Supplies Expense)
Understated
2. Accrued
Revenues
Assets and Revenues
Assets (Accounts Receivable)
Understated
Revenues (Service Revenue)
Understated
3. Accrued
Expenses
Expenses and
Liabilities
Expenses (Interest Expense)
Understated
Liabilities (Interest Payable)
Understated
4. Unearned
Revenues
Liabilities and
Revenues
Liabilities (Unearned Rent) Overstated
Revenues (Rent Earned) Understated
5. Amortization Expenses and Assets
(contra account)
Expenses (Amortization Expense)
Understated
Assets (Capital Assets) Overstated
3-8
BRIEF EXERCISE 3-9
(a)
Type of Adjustment
Account
(b)
Related Account
Accounts Receivable
Accrued Revenues
Service Revenue
Prepaid Insurance
Prepaid Expenses
Insurance Expense
Equipment
Estimates
Amortization
Expense/Accum.
Amortization
Supplies
Prepaid Expenses
Supplies Expense
Interest Payable
Accrued Expenses
Interest Expense
Unearned Service
Revenue
Unearned Revenues
Revenue Earned
Interest Receivable
Accrued Revenues
Interest Revenue
Rent Payable
Accrued Expenses
Rent Expense
BRIEF EXERCISE 3-10
KLAR COMPANY
Income Statement
For the Year Ended December 31, 2003
Revenues
Service revenue ......................................................
Expenses
Salaries expense.....................................................
Rent expense ..........................................................
Insurance expense .................................................
Amortization expense.............................................
Supplies expense ...................................................
Total expenses ................................................
Net income ......................................................................
3-9
$38,400
$13,000
4,000
2,000
001,000
500
020,500
$17,900
BRIEF EXERCISE 3-11
KLAR COMPANY
Statement of Owner's Equity
For the Year Ended December 31, 2003
S. Klar, Capital, January 1 ..................................................................
Add: Net income ................................................................................
Less: Drawings ...................................................................................
S. Klar, Capital, December 31 .............................................................
$15,600
017,900
33,500
006,000
$27,500
*BRIEF EXERCISE 3-12
(a)
Dec. 31
Advertising Supplies..............................................
Advertising Supplies Expense ......................
Advertising Supplies
12/31
1,500
1,500
Advertising Supplies Expense
1,500
12/31
8,700 12/31
12/31 Bal.
7,200
1,500
(b) The adjusted balances are the same. It does not matter whether the
original entry is recorded to an asset or an expenses account as long
as the adjustment is done correctly.
3-10
*BRIEF EXERCISE 3-13
(a)
May
1
May 31
Cash ........................................................................
Unearned Rental Revenue .............................
600
Unearned Rental Revenue .....................................
Rental Revenue...............................................
600
Cash ........................................................................
Rental Revenue...............................................
600
600
600
(b)
May
1
May 31
No adjustment required
(c) The ending balances are the same under either alternative.
3-11
600
SOLUTIONS TO EXERCISES
EXERCISE 3-1
(a)
Accrual basis accounting records the events that change an entity’s
financial statements in the periods in which the events occur, rather
than in the periods in which the entity receives or pays cash. That
is, revenue is recognized when it is earned. Expenses are
recognized when services or goods are used or consumed in the
production of revenue. Information presented on an accrual basis is
useful because it reveals relationships that are likely to be important
in predicting future results.
Conversely, under the cash basis of accounting, revenue is recorded
only when cash is received, and an expense is recognized only when
cash is paid. As a result, the cash basis of accounting often leads to
misleading financial statements.
(b)
The government is not using either the cash or accrual basis of
accounting. It is using some other basis that is not a generally
accepted accounting policy. The government may believe it is
appropriate because the commitment to spend the funds has been
made.
(c)
Dear Member of Parliament,
It is my understanding that the Federal government is making
changes in the method of accounting it uses and is switching from
the cash basis of accounting to the accrual basis. I understand in
2001 accrual accounting is fully in use.
The government is to be commended for this change. The use of full
accrual accounting will provide a more accurate reflection of the true
costs of services that government provides and a more complete
reflection of its assets and liabilities. This will result in improved
information for decision makers and citizens.
Sincerely,
ACCOUNTING STUDENT
3-12
EXERCISE 3-2
(a)
Revenue
Expenses
Operating
Insurance
Net income
Cash
$22,000
Accrual
$26,000
13,500
2,500
$ 6,000
15,000
0000000
$ 11,000
(b) The accrual basis provides the most useful information for decision
making as it reflects transactions in the period in which they occur and
properly matches revenue and expenses.
EXERCISE 3-3
(a) 1. Prepaid Rent ...........................................................
Cash ...................................................................
To record payment of rent for January 1May 31, 2002.
20,000
2. Security Deposit .....................................................
Cash ...................................................................
To record payment of security deposit.
5,000
3. Prepaid Rent ...........................................................
Cash ...................................................................
To record payment of rent for June 1November 30, 2002.
30,000
20,000
5,000
30,000
4. No entry required.
(b)
Rent Expense .............................................................. 55,000
Prepaid Rent .......................................................
Rent Payable.......................................................
See (c) for calculations.
3-13
50,000
5,000
EXERCISE 3-3 (Continued)
(c) Rent expense:
$20,000 January 1 – May 31 ($4,000 x 5 mos.)
30,000 June 1 – November 30 ($5,000 x 6 mos.)
5,000 December 1 – December 31 ($5,000 x 1 mos. accrual)
$55,000
(d) Balance sheet amounts with respect to rent:
Assets
Security deposit, $5,000
Liabilities
Rent payable, $5,000 (for the month of December)
3-14
EXERCISE 3-4
(a) July 10 Supplies ..........................................................
Cash ........................................................
200
14 Cash ................................................................
Service Revenue .....................................
3,000
15 Salaries Expense ............................................
Cash ........................................................
1,200
20 Cash ................................................................
Unearned Service Revenue ...................
700
(b) July 31
31
31
31
200
3,000
1,200
700
Supplies Expense ..........................................
Supplies ..................................................
500
Accounts Receivable .....................................
Service Revenue ....................................
500
Salaries Expense ...........................................
Salaries Payable .....................................
1,200
Unearned Service Revenue...........................
Service Revenue ....................................
900
3-15
500
500
1,200
900
EXERCISE 3-5
Answer
Calculation
(a) Supplies balance = $800
Supplies expense
Add: Supplies (1/31/03)
Less: Supplies purchased
Supplies (12/31/02)
(b) Total premium = $4,800
Total premium = Monthly premium X
12; $400 X 12 = $4,800
Purchase date = Aug. 1, 2002
(c) Salaries payable = $1,500
Purchase date: On Jan. 31, there
are 6 months coverage remaining
($400 X 6). Thus, the purchase date
was 6 months earlier on Aug. 1,
2002.
Cash paid
Salaries payable (1/31/03)
Less: Salaries expense
Salaries payable (12/31/02)
(d) Unearned revenue = $1,150
$950)
700)
(850)
$800)
Service revenue
Unearned revenue (1/31/03)
$2,500
800
3,300
1,800
$1,500
$2,000
750
2,750
Cash received in Jan.
1,600
Unearned revenue (12/31/02) $1,150
3-16
EXERCISE 3-6
Item
(a)
Type of
Adjustment
(b)
Accounts
Before Adjustment
1.
Accrued
Revenues
Assets (Accounts Receivable) Understated
Revenues (Service Revenue) Understated
2.
Prepaid
Expenses
Assets (Store Supplies) Overstated
Expenses (Store Supplies Expenses) Understated
3.
Accrued
Expenses
Expenses (Utility Expense) Understated
Liabilities (Accounts Payable) Understated
4.
Unearned
Revenues
Liabilities (Unearned Service Revenue) Overstated
Revenues (Service Revenue) Understated
5.
Accrued
Expenses
Expenses (Salaries Expense) Understated
Liabilities (Salaries Payable) Understated
6.
Prepaid
Expenses
Assets (Prepaid Insurance) Overstated
Expenses (Insurance Expense) Understated
7.
Amortization
Assets (Capital Assets) Overstated
Expenses (Amortization Expense) Understated
3-17
EXERCISE 3-7
1.
2.
3.
4.
5.
Mar. 31
31
31
31
31
Amortization Expense ($400 × 3) ....................
Accumulated Amortization—
Equipment ..............................................
1,200
Unearned Rent Revenue ..................................
Rent Revenue ($9,300 × 1/3) ....................
3,100
Interest Expense ..............................................
Interest Payable ........................................
500
Supplies Expense ............................................
Supplies ($2,800 – $850) ..........................
1,950
Insurance Expense ($300 × 3) .........................
Prepaid Insurance ....................................
900
Accounts Receivable .......................................
Service Revenue .......................................
750
Utilities Expense ..............................................
Utilities Payable ........................................
520
Amortization Expense......................................
Accumulated Amortization—
Dental Equipment ..................................
1,000
Interest Expense ..............................................
Interest Payable ........................................
250
Insurance Expense ($12,000 ÷ 12) ..................
Prepaid Insurance ....................................
1,000
Supplies Expense ($1,600 – $500) ..................
Supplies ....................................................
1,100
1,200
3,100
500
1,950
900
EXERCISE 3-8
1.
2.
3.
Jan. 31
31
31
31
4.
5.
31
31
3-18
750
520
1,000
250
1,000
1,100
EXERCISE 3-9
1.
2.
3.
4.
5.
6.
7.
Oct. 31
31
31
31
31
31
31
Advertising Supplies Expense ........................
Advertising Supplies ($2,500 – $1,400) ..
1,100
Insurance Expense ..........................................
Prepaid Insurance ....................................
100
Amortization Expense......................................
Accumulated Amortization—
Office Equipment ...................................
50
Unearned Service Revenue .............................
Service Revenue .......................................
600
Accounts Receivable .......................................
Service Revenue .......................................
300
Interest Expense ..............................................
Interest Payable ........................................
70
Salaries Expense .............................................
Salaries Payable .......................................
1,500
3-19
1,100
100
50
600
300
70
1,500
EXERCISE 3-10
Aug. 31
31
31
31
31
31
Accounts Receivable ............................................
Service Revenue ............................................
600
Office Supplies Expense ......................................
Office Supplies ..............................................
1,600
Insurance Expense ...............................................
Prepaid Insurance .........................................
1,500
Amortization Expense...........................................
Accumulated Amortization—Office
Equipment ...................................................
1,200
Salaries Expense...................................................
Salaries Payable ............................................
1,100
Unearned Rent Revenue .......................................
Rent Revenue.................................................
800
3-20
600
1,600
1,500
1,200
1,100
800
EXERCISE 3-11
(a)
July 31
31
31
31
31
Insurance Expense ........................................
Prepaid Insurance ..................................
300
Supplies .........................................................
Supplies Expense ..................................
500
Amortization Expense ...................................
Accumulated Amortization— Equipment
150
Wages Expense .............................................
Wages Payable .......................................
300
Accounts Receivable .....................................
Service Revenue ....................................
900
300
500
150
300
900
(b)
VIRMANI CO.
Income Statement
For the Month Ended July 31, 2003
Revenues
Service revenue ($5,500 + $900) ....................
Expenses
Wages expense ($2,300 + $300).....................
Supplies expense ($1,200 – $500) .................
Utilities expense .............................................
Insurance expense .........................................
Amortization expense ....................................
Total expenses ........................................
Net income ..............................................................
3-21
$6,400
$2,600
700
600
300
0,150
04,350
$2,050
EXERCISE 3-12
LIM COMPANY
Income Statement
For the Year Ended August 31, 2003
Revenues
Service revenue ..........................................................................
Rent revenue ...............................................................................
Total revenues .....................................................................
Expenses
Salaries expense....................................................... $18,100
Rent expense ............................................................
15,000
Office supplies expense ...........................................
1,600
Insurance expense ...................................................
1,500
Amortization expense...............................................
01,200
Total expenses ....................................................................
Net income ..........................................................................................
$34,600
011,800
46,400
037,400
$ 9,000
LIM COMPANY
Statement of Owner's Equity
For the Year Ended August 31, 2003
E. Lim, Capital, August 1, 2002 ..........................................................
Add: Net income ................................................................................
E. Lim, Capital, August 31, 2003.........................................................
3-22
$15,600
009,000
$24,600
EXERCISE 3-12 (Continued)
LIM COMPANY
Balance Sheet
August 31, 2003
Assets
Cash ....................................................................................................
Accounts receivable...........................................................................
Office supplies ...................................................................................
Prepaid insurance ..............................................................................
Office equipment .............................................................
$14,000
Less: Accumulated amortization—office equipment...
004,800
Total assets .........................................................................
$10,400
9,400
700
2,500
009,200
$32,200
Liabilities and Owner's Equity
Liabilities
Accounts payable .......................................................................
Salaries payable ..........................................................................
Unearned rent revenue ...............................................................
Total liabilities .....................................................................
$05,800
1,100
700
7,600
Owner's equity
E. Lim, Capital .............................................................................
Total liabilities and owner's equity ....................................
024,600
$32,200
3-23
*EXERCISE 3-13
(a) Jan. 02
10
15
Insurance Expense ........................................
Cash ........................................................
2,400
Supplies Expense ..........................................
Cash ........................................................
1,700
Cash ................................................................
Service Revenue ....................................
5,100
Insurance Expense
1/2
2,400
5,100 1/2
1/10
(b) Jan. 31
31
31
1,700
5,100
Supplies Expense
1/10
Cash
1/15
2,400
1,700
Service Revenue
2,400
1,700
1/15
5,100
Prepaid Insurance ($200 × 11 months) .........
Insurance Expense ................................
2,200
Supplies ..........................................................
Supplies Expense ..................................
800
Service Revenue ............................................
Unearned Service Revenue ...................
3,600
3-24
2,200
800
3,600
*EXERCISE 3-13 (Continued)
(b) (Continued)
Cash
1/15
Service Revenue
5,100 1/2
1/10
1,000
Bal.
2,400
1,700
1/31
Insurance Expense
1/2
Bal.
2,400 1/31
1/31 2,200
1/10
200
Bal.
Supplies
1/31
5,100
Bal.
1,500
Supplies Expense
2,200
Prepaid Insurance
3,600 1/15
800
1,700 1/31
800
900
Unearned Service
Revenue
1/31 3,600
(c) Cash ..............................................................................................
Prepaid insurance........................................................................
Supplies........................................................................................
Unearned service revenue ..........................................................
Service revenue ...........................................................................
Insurance expense ......................................................................
Supplies expense ........................................................................
3-25
$1,000
2,200
800
3,600
1,500
200
900
SOLUTIONS TO PROBLEMS
PROBLEM 3-1A
3
4
5
4
(a)
(b)
(c)
(d)
2
(e)
3
1
(f)
(g)
(h)
Record interest on note payable.
Record interest on note receivable.
Allocate cost of capital asset over its useful life.
Record revenue that has been earned but not billed or
collected.
Record revenue that has been earned that was previously
received in advance.
Record hiring of employees.
Record salaries owed.
Record supplies used.
3-26
PROBLEM 3-2A
1.
Jan. 1
Dec. 31
2.
Sept. 1
Dec. 31
3.
Nov. 15
Dec. 31
4.
Dec. 15
Dec. 31
Office Supplies .............................................
Cash .......................................................
4,500
Supplies Expense ($4,500 – $900) ...............
Office Supplies ......................................
3,600
Prepaid Insurance ........................................
Cash .......................................................
3,600
Insurance Expense ($3,600 ÷ 12 x 4) ...........
Prepaid Insurance .................................
1,200
Cash ..............................................................
Unearned Service Revenue ..................
1,200
Unearned Service Revenue .........................
Service Revenue ...................................
1,200
Cash ..............................................................
Unearned Rent Revenue .......................
460
Unearned Rent Revenue ($460 ÷ 2) .............
Rent Revenue ........................................
230
3-27
4,500
3,600
3,600
1,200
1,200
1,200
460
230
PROBLEM 3-3A
Students may find this to be a fairly challenging problem, so here are a
few points that should help:
 Under the CASH BASIS, revenues are recorded when they are
collected (received in cash), even if they were earned (the sale was
made) earlier;
 Under the ACCRUAL BASIS of accounting, revenues are recorded
when they are earned (the sale is made)–even if the cash is not
collected until later, or is received prior to the revenue being
earned.
 Under the CASH BASIS, expenses are recorded when the cash is
paid out; and
 Under the ACCRUAL BASIS of accounting, expenses are recorded
when the cost has ―expired‖ or been ―used up‖, which is not
always in the same time period as when the cash is paid out.
For example,
 Under the CASH BASIS, Supplies are recorded as expenses as
soon as they are purchased and paid for;
 Under the ACCRUAL BASIS of accounting, Supplies are not
recorded as expenses until they have been used up. While the
supplies are still on hand, they are recorded as assets because
they have future benefits;
 Under the CASH BASIS, amounts such as Unpaid Wages Owing at
the end of 2002 would not be considered expenses until they are
actually paid out–in 2003; and
 Under the ACCRUAL BASIS of accounting, Unpaid Wages Owing at
the end of 2002 would be considered expenses in 2002, because
the cost was incurred or ―used up‖ during 2002–even though the
cash will not be paid out until 2003.
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PROBLEM 3-3A (Continued)
$35,190
Cash basis income
+3,400
Accounts Receivable arise from sales that have been
made, thus revenue must be recognized.
-2,500
Accounts Receivable collected in 2003 from sales that
were made (and revenue that was earned) in 2002.
+1,300
Supplies are not recorded as expenses until used up).
-1,160
Supplies from 2002 that were used up (and an expense
incurred) in 2003.
-1,200
Which is an expense because the cost was incurred
during 2003.
+2,400
For 2002 wages expense that were paid in 2003.
-1,440
Which is an expense because the cost was incurred
during 2003.
+1,600
For 2002 expenses that were paid in cash in 2003.
$37,590
Accrual basis income
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PROBLEM 3-4A
(a)
1. Cash.........................................................................
Fees Receivable ..............................................
9,000
9,000
2. Unearned Fees Revenue ........................................... 22,000
Fees Revenue ..................................................
22,000
3. Cash............................................................................ 30,000
Unearned Fees Revenue ................................
30,000
Unearned Fees Revenue ($30,000 – $17,000) .......... 13,000
Fees Revenue ..................................................
13,000
4. Fees Receivable ......................................................... 118,000
Fees Revenue ($153,000 – $22,000 – $13,000)
118,000
5. Cash............................................................................ 106,000
Fees Receivable ($118,000 – $12,000) ...........
106,000
(b) Cash received with respect to fees = $9,000 + $106,000 + $30,000 =
$145,000
T accounts (not required)
(4)
(3)
Fees Receivable
9,000
118,000
(1)
9,000
(5)
106,000
12,000
Fees Revenue
(2)
(3)
(4)
13,000
17,000
(1)
(3)
(5)
22,000
13,000
118,000
153,000
Unearned Fees Revenue
22,000
(2)
22,000 (3)
30,000
3-30
Cash
9,000
30,000
106,000
145,000
PROBLEM 3-5A
1. (a) July 1 Office Supplies ...........................................
Cash .......................................................
1,560
(b) Dec. 31 Supplies Expense ($1,560 + $640 – $740)
Office Supplies ......................................
1,460
2. (a) Jan. 1 Cash ............................................................
Note Payable .........................................
10,000
(b) Dec. 31 Interest Expense ........................................
Interest Payable ($10,000 X 6%) ...........
600
3. (b) Dec. 31 Telephone Expense ...................................
Accounts Payable .................................
400
4. (a) Jan. 1
1,560
1,460
10,000
600
400
Truck ...........................................................
Cash .......................................................
18,000
(b) Dec. 31 Amortization Expense ...............................
Accumulated Amortization–Truck .......
3,600
5. (a) Dec. 26 Wages Expense ..........................................
Cash .......................................................
3,000
(b) Dec. 31 Wages Expense ..........................................
Wages Payable ($3,000 ÷ 5 x 3) ............
1,800
18,000
3,600
3,000
1,800
Note to Instructors: The January 3, 2003 journal entry follows for
information:
Jan. 3 Wages Expense ..........................................
Wages Payable ...........................................
Cash .......................................................
3-31
1,200
1,800
3,000
PROBLEM 3-6A
1.
Dec. 31
Advertising Expense ........................................
Prepaid Advertising ..................................
A650 – $6,000 / 12 = $500 per month
for 8 months =
B974 – $7,200 / 24 = $300 per month
for 4 months =
0
2.
Dec. 31
5,200
5,200
$4,000
1,200
$5,200
Unearned Rent Revenue .................................. 108,000
Rent Revenue............................................
108,000
5 × $4,000 × 2 = $ 40,000
4 × $8,500 × 2 =
68,000
Total rent earned $108,000
Note that the $369,000 balance in Unearned Rent Revenue includes the
security deposits.
3.
Dec. 31
Interest Expense ..............................................
Interest Payable ........................................
3,733
3,733
$80,000 × 8% × 7/12 mos. = $3,733
4.
Dec. 31
Salaries Expense .............................................
Salaries Payable .......................................
5 x $700 x 2/5 days = $1,400
3 x $500 x 2/5 days =
600
Total
$2,000
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2,000
2,000
PROBLEM 3-2B
1.
Jan. 1
Dec. 31
2.
Aug. 1
Dec. 31
3.
Nov. 15
Dec. 31
4.
Dec. 15
Dec. 31
Office Supplies .............................................
Cash .......................................................
2,800
Supplies Expense ($2,800 – $500) ...............
Office Supplies ......................................
2,300
Prepaid Insurance ........................................
Cash .......................................................
3,600
Insurance Expense ($3,600 ÷ 12 x 5) ...........
Prepaid Insurance .................................
1,500
Cash ..............................................................
Unearned Service Revenue ..................
1,200
Unearned Service Revenue ($400 x 2) ........
Service Revenue ...................................
800
Prepaid Rent .................................................
Cash .......................................................
4,500
No entry required
3-33
2,800
2,300
3,600
1,500
1,200
800
4,500
BYP 3-5 COLLABORATIVE LEARNING ACTIVITY
(a)
RV WORLD
Income Statement
For the Quarter Ended March 31, 2003
Revenues
Rental fees ($95,000 – $30,000) ..........................................
Expenses
Wages expense [$29,800 + ($400 × 2)] ............... $30,600
Advertising expense ($5,200 + $110) .................
5,310
Supplies expense ($5,200 – $1,300) ...................
3,900
Repair expense ($4,000 + $260) .........................
4,260
Insurance expense ($7,200 × 3/12) .....................
1,800
Utilities expense ($900 + $180)...........................
1,080
Amortization expense .........................................
800
Interest expense ($12,000 × 8% × 3/12)..............
00,240
Total expenses.............................................................
Net income ..................................................................................
$65,000
047,990
$17,010
(b) (1) The generally accepted accounting principles pertaining to the
income statement that were not recognized by Michel were the
revenue recognition principle and the matching principle.
The revenue recognition principle states that revenue is
recognized when it is earned. The fees of $30,000 for summer
rentals have not been earned and, therefore, should not be
reported in income for the quarter ended March 31.
The matching principle dictates that efforts (expenses) be
matched with accomplishments (revenues). This means that the
expenses should include amounts incurred in March but not paid
until April, and any other costs related to the operations of the
business during the period January – March.
(2) The difference in expenses was $7,290 ($47,990 – $40,700). The
overstatement of revenues ($30,000) plus the understatement of
expenses ($7,290) equals the difference in reported income of
$37,290 ($54,300 – $17,010).
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