chapter 3 the adjusting process
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CHAPTER 3 THE ADJUSTING PROCESS QUESTION INFORMATION Number EO3-1 EO3-2 EO3-3 EO3-4 EO3-5 EO3-6 EO3-7 EO3-8 EO3-9 EO3-10 EO3-11 EO3-12 EO3-13 EO3-14 EO3-15 PE3-1A Objective 3-1 3-1 3-1 3-1 3-3 3-3 3-1 3-1 3-2 3-2 3-2 3-3 3-2 3-2 3-2 3-1 PE3-1B 3-1 PE3-2A PE3-2B PE3-3A 3-1 3-1 3-2 PE3-3B 3-2 PE3-4A 3-2 PE3-4B 3-2 PE3-5A 3-2 PE3-5B 3-2 PE3-6A 3-2 PE3-6B 3-2 PE3-7A 3-2 PE3-7B 3-2 PE3-8A 3-3 PE3-8B 3-3 PE3-9A 3-4 PE3-9B 3-4 Ex3-1 3-1 Description Accounts requiring adjustment Accounts requiring adjustment Type of adjustment Type of adjustment Adjustment for supplies used Adjustment for insurance expired Adjustment for unearned fees Adjustment for unearned rent Adjustment for accrued fees Adjustment for accrued fees Adjustment for salaries payable Adjustment for salaries payable Adjustment for depreciation Adjustment for depreciation Effect of omitting adjustments Effect of omitting adjustments Effect of errors on adjusted trial balance Effect of errors on adjusted trial balance Classifying types of adjustments Difficulty Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Time 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min AACSB Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic AICPA FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement Easy 5 min Analytic FN-Measurement Easy Easy Easy 5 min 5 min 5 min Analytic Analytic Analytic FN-Measurement FN-Measurement FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement 121 SS GL Number Ex3-2 Objective 3-1 Ex3-3 3-2 Ex3-4 3-2 Ex3-5 3-2 Ex3-6 3-2 Ex3-7 3-2 Ex3-8 3-2 Ex3-9 3-2 Ex3-10 3-2 Ex3-11 3-2 Ex3-12 3-3 Ex3-13 3-2 Ex3-14 3-2 Ex3-15 3-2 Ex3-16 3-2 Ex3-17 3-2 Ex3-18 3-2 Ex3-19 3-2 Ex3-20 3-2 Ex3-21 3-2, 3-3 Ex3-22 3-2, 3-3 Ex3-23 3-2, 3-3 Ex3-24 3-2, 3-3 Ex3-25 3-2, 3-3 Ex3-26 3-4 Ex3-27 3-4 Pr3-1A 3-2 Description Classifying types of adjustments Adjusting entry for supplies Determining supplies purchased Effect of omitting adjusting entry Adjusting entries for prepaid insurance Adjusting entries for prepaid insurance Adjusting entries for unearned fees Effect of omitting adjusting entry Adjusting entry for accrued fees Adjusting entries for unearned and accrued fees Effect on financial statements of omitting adjusting entry Adjusting entries for accrued salaries Determining wages paid Effect of omitting adjusting entry Effect of omitting adjusting entry Adjusting entries for prepaid and accrued taxes Adjustment for depreciation Determining fixed asset's book value Book value of fixed assets Effects of errors on financial statements Effects of errors on financial statements Effects of errors on financial statements Effects of errors on financial statements Adjusting entries for depreciation; effect of error Adjusting entries from trial balance Adjusting entries from trial balance Adjusting entries Pr3-2A Pr3-3A 3-2 3-2 Adjusting entries Adjusting entries Difficulty Easy Time 5 min AACSB Analytic AICPA FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 5 min Analytic FN-Measurement Moderate 5 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 10 min Analytic FN-Measurement Difficult 15 min Analytic FN-Measurement Moderate Analytic FN-Measurement Moderate Moderate 30 min 45 min 1 hr Analytic Analytic FN-Measurement FN-Measurement 122 SS GL KA Number Pr3-4A Pr3-5A Pr3-6A Pr3-1B Pr3-2B Pr3-3B Pr3-4B Pr3-5B Objective 3-2, 3-3, 3-4 3-2, 3-3, 3-4 3-3 3-2 3-2 3-2 3-2, 3-3, 3-4 3-2, 3-3, 3-4 Pr3-6B 3-3 DM-3 SA3-1 3-1 SA3-2 SA3-3 SA3-4 3-1 3-1 3-3, 3-4 SA3-5 1-1 Description Adjusting entries Difficulty Moderate Time 45 min AACSB Analytic AICPA FN-Measurement SS GL KA Adjusting entries and adjusted balances Adjusting entries and errors Adjusting entries Adjusting entries Adjusting errors Adjusting entries Difficult 1 hr Analytic FN-Measurement Exl KA Difficult 1 hr Analytic FN-Measurement Exl Moderate Moderate Moderate Moderate 30 min 45 min 1 hr 45 min Analytic Analytic Analytic Analytic FN-Measurement FN-Measurement FN-Measurement FN-Measurement Adjusting entries and adjusted trial balances Adjusting entries and errors Continuing Problem Ethics and professional conduct in business Accrued expense Accrued revenue Adjustments and financial statements Code of ethics Difficult 1 hr Analytic FN-Measurement Exl Difficult 1 hr Analytic FN-Measurement Exl Moderate 15 min Ethics BB-Industry Easy Easy Moderate 5 min 5 min 15 min Analytic Analytic Analytic FN-Measurement FN-Measurement FN-Measurement Easy 15 min Ethics BB-Critical Thinking KA KA KA KA 123 EYE OPENERS 1. a. Under cash-basis accounting, revenues are reported in the period in which cash is received and expenses are reported in the period in which cash is paid. b. Under accrual-basis accounting, revenues are reported in the period in which they are earned and expenses are reported in the same period as the revenues to which they relate. 2. a. 2008 b. 2007 3. a. 2008 b. 2007 4. The matching concept is related to the accrual basis. 5. Yes. The cash amount listed on the trial balance is normally the amount of cash on hand and needs no adjustment at the end of the period. 6. No. The amount listed on the trial balance, before adjustments, normally represents the cost of supplies on hand at the beginning of the period plus the cost of the supplies purchased during the period. Some of the supplies have been used; therefore, an adjustment is necessary for the supplies used before the amount for the balance sheet is determined. 7. Adjusting entries are necessary at the end of an accounting period to bring the ledger up to date. 8. Adjusting entries bring the ledger up to date as a normal part of the accounting cycle. Correcting entries correct errors in the ledger. 9. Four different categories of adjusting entries include prepaid expenses (deferred expenses), unearned revenues (deferred revenues), accrued expenses (accrued liabilities), and accrued revenues (accrued assets). 10. Statement (b): Increases the balance of an expense account. 11. Statement (a): Increases the balance of a revenue account. 12. Yes, because every adjusting entry affects expenses or revenues. 13. a. The balance is the sum of the beginning balance and the amount of the insurance premiums paid during the period. b. The balance is the unexpired premiums at the end of the period. 14. a. The rights acquired represent an asset. b. The justification for debiting Rent Expense is that when the ledger is summarized in a trial balance at the end of the month and statements are prepared, the rent will have become an expense. Hence, no adjusting entry will be necessary. 15. a. The portion of the cost of a fixed asset deducted from revenue of the period is debited to Depreciation Expense. It is the expired cost for the period. The reduction in the fixed asset account is recorded by a credit to Accumulated Depreciation rather than to the fixed asset account. The use of the contra asset account facilitates the presentation of original cost and accumulated depreciation on the balance sheet. b. Depreciation Expense—debit balance; Accumulated Depreciation—credit balance. c. No, it is not customary for the balances of the two accounts to be equal in amount. d. Depreciation Expense appears in the income statement; Accumulated Depreciation appears on the balance sheet. 124 PRACTICE EXERCISES PE 3–1A a. Yes b. No c. No e. Yes d. Yes f. Yes c. e. Yes f. No PE 3–1B a. No b. No Yes d. No PE 3–2A a. Unearned revenue b. Accrued expense c. Prepaid expense d. Accrued revenue PE 3–2B a. Accrued expense b. Accrued revenue c. Prepaid expense d. Unearned revenue PE 3–3A Supplies Expense .......................................................... Supplies .................................................................... Supplies used ($1,245 + $2,860 – $1,349). 2,756 2,756 PE 3–3B Insurance Expense ........................................................ Prepaid Insurance .................................................... Insurance expired ($4,800 + $5,850 – $4,125). 125 6,525 6,525 PE 3–4A Unearned Fees ............................................................... Fees Earned .............................................................. Fees earned ($23,676 – $7,388). 16,288 16,288 PE 3–4B Unearned Rent ............................................................... Rent Revenue ........................................................... Rent earned [($6,900/12) × 5 months]. 2,875 2,875 PE 3–5A Accounts Receivable..................................................... Fees Earned .............................................................. Accrued fees. 7,234 7,234 PE 3–5B Accounts Receivable..................................................... Fees Earned .............................................................. Accrued fees. 1,772 1,772 PE 3–6A Salaries Expense ........................................................... Salaries Payable ....................................................... Accrued salaries [($11,875/5 days) × 2 days]. 4,750 4,750 PE 3–6B Salaries Expense ........................................................... Salaries Payable ....................................................... Accrued salaries [($24,840/6 days) × 4 days]. 126 16,560 16,560 PE 3–7A Depreciation Expense ................................................... Accumulated Depreciation—Equipment ................ Depreciation on equipment. 6,450 6,450 PE 3–7B Depreciation Expense ................................................... Accumulated Depreciation—Equipment ................ Depreciation on equipment. 1,820 1,820 PE 3–8A a. Revenues were understated by $9,638. b. Expenses were understated by $3,056 ($2,276 + $780). c. Net income was understated by $6,582 ($9,638 – $3,056). PE 3–8B a. Revenues were understated by $6,481. b. Expenses were understated by $8,534 ($1,034 + $7,500). c. Net income was overstated by $2,053 ($8,534 – $6,481). PE 3–9A a. The totals are equal since the adjusting entry was omitted. b. The totals are unequal. The debit total is higher by $9 ($2,565 – $2,556). PE 3–9B a. The totals are unequal. The credit total is higher by $180 ($640 – $460). b. The totals are equal even though the credit should have been to Wages Payable instead of Accounts Payable. 127 EXERCISES Ex. 3–1 1. Accrued revenue 5. Prepaid expense 2. Accrued expense 6. Unearned revenue 3. Accrued expense 7. Prepaid expense 4. Accrued expense 8. Unearned revenue Ex. 3–2 Account Accounts Receivable ........................... Cash ...................................................... Charmaine Hollis, Drawing .................. Interest Payable .................................... Interest Receivable .............................. Land....................................................... Office Equipment ................................. Prepaid Rent ......................................... Supplies ................................................ Unearned Fees ..................................... Wages Expense .................................... Answer Normally requires adjustment (AR). Does not normally require adjustment. Does not normally require adjustment. Normally requires adjustment (AE). Normally requires adjustment (AR). Does not normally require adjustment. Does not normally require adjustment. Normally requires adjustment (PE). Normally requires adjustment (PE). Normally requires adjustment (UR). Normally requires adjustment (AE). Ex. 3–3 Supplies Expense .......................................................... Supplies .................................................................... Supplies used ($2,975 – $614). Ex. 3–4 $1,540 ($279 + $1,261) 128 2,361 2,361 Ex. 3–5 a. Insurance expense (or expenses) will be understated. Net income will be overstated. b. Prepaid insurance (or assets) will be overstated. Owner’s equity will be overstated. Ex. 3–6 a. Insurance Expense ........................................................ Prepaid Insurance .................................................... Insurance expired ($6,175 – $1,995). 4,180 b. Insurance Expense ........................................................ Prepaid Insurance .................................................... Insurance expired ($6,175 – $1,995). 4,180 4,180 4,180 Ex. 3–7 a. Insurance Expense ........................................................ Prepaid Insurance .................................................... Insurance expired ($3,600 + $4,800 – $2,950). 5,450 b. Insurance Expense ........................................................ Prepaid Insurance .................................................... Insurance expired ($3,600 + $4,800 – $2,950). 5,450 5,450 5,450 Ex. 3–8 Unearned Fees ............................................................... Fees Earned .............................................................. Fees earned ($49,500 – $27,180). 129 22,320 22,320 Ex. 3–9 a. Rent revenue (or revenues) will be understated. Net income will be understated. b. Owner’s equity at the end of the period will be understated. Unearned rent (or liabilities) will be overstated. Ex. 3–10 a. Accounts Receivable..................................................... Fees Earned .............................................................. Accrued fees. 17,600 17,600 b. No. If the cash basis of accounting is used, revenues are recognized only when the cash is received. Therefore, earned but unbilled revenues would not be recognized in the accounts, and no adjusting entry would be necessary. Ex. 3–11 a. Unearned Fees ............................................................... Fees Earned .............................................................. Unearned fees earned during year. 12,300 b. Accounts Receivable..................................................... Fees Earned .............................................................. Accrued fees earned. 7,100 12,300 7,100 Ex. 3–12 a. Fees earned (or revenues) will be understated. Net income will be understated. b. Accounts (fees) receivable (or assets) will be understated. Owner’s equity will be understated. 130 Ex. 3–13 a. Salary Expense .............................................................. Salaries Payable ....................................................... Accrued salaries [($20,625/5 days) × 3 days]. 12,375 b. Salary Expense .............................................................. Salaries Payable ....................................................... Accrued salaries [($20,625/5 days) × 4 days]. 16,500 12,375 16,500 Ex. 3–14 $65,670 ($72,150 – $6,480) Ex. 3–15 a. Salary expense (or expenses) will be understated. Net income will be overstated. b. Salaries payable (or liabilities) will be understated. Owner’s equity will be overstated. Ex. 3–16 a. Salary expense (or expenses) will be overstated. Net income will be understated. b. The balance sheet will be correct. This is because salaries payable has been satisfied, and the net income errors have offset each other. Thus, owner’s equity is correct. 131 Ex. 3–17 a. Taxes Expense .............................................................. Prepaid Taxes ........................................................... Prepaid taxes expired [($3,000/12) × 9 months]. 2,250 Taxes Expense .............................................................. Taxes Payable .......................................................... Accrued taxes. 16,425 2,250 16,425 b. $18,675 ($2,250 + $16,425) Ex. 3–18 Depreciation Expense ................................................... Accumulated Depreciation ...................................... Depreciation on equipment. 3,275 3,275 Ex. 3–19 a. $416,750 ($678,950 – $262,200) b. No. Depreciation is an allocation of the cost of the equipment to the periods benefiting from its use. It does not necessarily relate to value or loss of value. Ex. 3–20 a. $2,223,000,000 ($6,078,000,000 – $3,855,000,000) b. No. Depreciation is an allocation method, not a valuation method. That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which may vary significantly from year to year. Ex. 3–21 $324,755,000 ($95,789,000 + $228,966,000) 132 Ex. 3–22 a. $606,000,000 b. 58.8% ($606,000,000/$1,030,000,000) Ex. 3–23 Error (a) 1. 2. 3. 4. 5. 6. Revenue for the year would be .............. Expenses for the year would be ............ Net income for the year would be ......... Assets at August 31 would be ............... Liabilities at August 31 would be .......... Owner’s equity at August 31 would be .................................................. Error (b) Overstated Understated 0 0 0 0 12,450 $12,450 0 12,450 0 0 0 12,450 $ Overstated $ Understated 0 0 7,280 0 0 $ 0 7,280 0 0 7,280 7,280 0 Ex. 3–24 $267,970 ($262,800 + $12,450 – $7,280) Ex. 3–25 a. Depreciation Expense ................................................... Accumulated Depreciation ...................................... Depreciation on equipment. 18,100 18,100 b. (1) Depreciation expense would be understated. Net income would be overstated. (2) Accumulated depreciation would be understated, and total assets would be overstated. Owner’s equity would be overstated. 133 Ex. 3–26 1. 2. 3. 4. 5. Accounts Receivable..................................................... Fees Earned .............................................................. 12 Supplies Expense .......................................................... Supplies .................................................................... 9 Insurance Expense ........................................................ Prepaid Insurance .................................................... 24 Depreciation Expense ................................................... Accumulated Depreciation—Equipment ................ 15 Wages Expense ............................................................. Wages Payable ......................................................... 3 134 12 9 24 15 3 Ex. 3–27 1. The accountant debited Accounts Receivable for $3,750, but did not credit Laundry Revenue. This adjusting entry represents accrued laundry revenue. 2. The accountant credited Laundry Equipment for the depreciation expense of $6,000, instead of crediting the accumulated depreciation account. 3. The accountant credited the prepaid insurance account for $3,800, but only debited the insurance expense account for $800. 4. The accountant did not debit Wages Expense for $1,200. 5. The accountant debited rather than credited Laundry Supplies for $1,750. The corrected adjusted trial balance is shown below. Sweetwater Laundry Adjusted Trial Balance October 31, 2008 Debit Balances Cash ............................................................................ Accounts Receivable ................................................. Laundry Supplies ....................................................... Prepaid Insurance ...................................................... Laundry Equipment.................................................... Accumulated Depreciation ........................................ Accounts Payable ...................................................... Wages Payable ........................................................... Mattie Ivy, Capital ....................................................... Mattie Ivy, Drawing ..................................................... Laundry Revenue ....................................................... Wages Expense .......................................................... Rent Expense ............................................................. Utilities Expense ........................................................ Depreciation Expense ................................................ Laundry Supplies Expense ....................................... Insurance Expense .................................................... Miscellaneous Expense ............................................. 7,500 22,000 2,000 1,400 140,000 54,000 9,600 1,200 60,300 28,775 185,850 50,400 25,575 18,500 6,000 1,750 3,800 3,250 310,950 135 Credit Balances 310,950 PROBLEMS Prob. 3–1A 1. a. Supplies Expense .................................................... Supplies ............................................................... Supplies used ($1,975 – $625). 1,350 b. Unearned Rent.......................................................... Rent Revenue ...................................................... Rent earned ($3,750/3). 1,250 c. Wages Expense ........................................................ Wages Payable .................................................... Accrued wages. 1,000 d. Accounts Receivable ............................................... Fees Earned ........................................................ Accrued fees earned. 12,275 e. Depreciation Expense .............................................. Accumulated Depreciation................................. Depreciation expense. 850 1,350 1,250 1,000 12,275 850 2. Adjusting entries are a planned part of the accounting process to update the accounts. Correcting entries are not planned, but arise only when necessary to correct errors. 136 Prob. 3–2A a. Accounts Receivable ............................................... Fees Earned ........................................................ Accrued fees earned. 1,650 b. Supplies Expense .................................................... Supplies ............................................................... Supplies used ($2,050 – $200). 1,850 c. Rent Expense ........................................................... Prepaid Rent........................................................ Prepaid rent expired. 5,000 d. Depreciation Expense .............................................. Accumulated Depreciation................................. Equipment depreciation. 1,150 e. Unearned Fees ......................................................... Fees Earned ........................................................ Fees earned ($8,500 – $1,500). 7,000 f. Wages Expense ........................................................ Wages Payable .................................................... Accrued wages. 3,150 137 1,650 1,850 5,000 1,150 7,000 3,150 Prob. 3–3A a. Accounts Receivable..................................................... Fees Earned .............................................................. Accrued fees earned. 1,775 b. Supplies Expense .......................................................... Supplies .................................................................... Supplies used ($5,400 – $1,200). 4,200 c. Depreciation Expense ................................................... Accumulated Depreciation ...................................... Equipment depreciation. 4,100 d. Unearned Fees ............................................................... Fees Earned .............................................................. Fees earned. 1,750 e. Wages Expense ............................................................. Wages Payable ......................................................... Accrued wages. 138 1,775 4,200 4,100 1,750 600 600 Prob. 3–4A 2008 Apr. 30 30 30 30 30 30 30 Supplies Expense ............................................... Supplies ......................................................... Supplies used ($3,750 – $900). 2,850 Insurance Expense ............................................. Prepaid Insurance ......................................... Insurance expired ($4,750 – $1,500). 3,250 Depreciation Expense—Equipment .................. Accumulated Depreciation—Equipment ..... Equipment depreciation ($34,000 – $31,500). 2,500 Depreciation Expense—Automobiles ............... Accumulated Depreciation—Automobiles Automobile depreciation ($20,400 – $18,250). 2,150 Utilities Expense ................................................. Accounts Payable .......................................... Accrued utilities expense ($8,800 – $8,310). 490 Salary Expense ................................................... Salaries Payable ............................................ Accrued salary ($174,300 – $172,300). 2,000 Unearned Service Fees ...................................... Service Fees Earned ..................................... Service fees earned ($6,000 – $2,900). 3,100 139 2,850 3,250 2,500 2,150 490 2,000 3,100 Prob. 3–5A 1. a. b. c. d. e. f. g. Insurance Expense ................................................ Prepaid Insurance ............................................ Insurance expired ($7,200 – $2,700). 4,500 Supplies Expense .................................................. Supplies ............................................................ Supplies used ($1,980 – $480). 1,500 Depreciation Expense—Building ......................... Accumulated Depreciation—Building ............ Building depreciation. 1,600 Depreciation Expense—Equipment ..................... Accumulated Depreciation—Equipment ........ Equipment depreciation. 4,400 Unearned Rent ....................................................... Rent Revenue ................................................... Rent revenue earned ($6,750 – $3,250). 3,500 Salaries and Wages Expense ............................... Salaries and Wages Payable ........................... Accrued salaries and wages. 2,800 Accounts Receivable ............................................ Fees Earned ...................................................... Accrued fees earned. 6,200 140 4,500 1,500 1,600 4,400 3,500 2,800 6,200 Prob. 3–5A Concluded 2. CAMBRIDGE COMPANY Adjusted Trial Balance December 31, 2008 Debit Balances Cash ............................................................................ Accounts Receivable ................................................. Prepaid Insurance ...................................................... Supplies ...................................................................... Land............................................................................. Building ....................................................................... Accumulated Depreciation—Building ...................... Equipment................................................................... Accumulated Depreciation—Equipment .................. Accounts Payable ...................................................... Salaries and Wages Payable ..................................... Unearned Rent ............................................................ Dave Maier, Capital .................................................... Dave Maier, Drawing .................................................. Fees Earned ................................................................ Rent Revenue ............................................................. Salaries and Wages Expense .................................... Utilities Expense ........................................................ Advertising Expense .................................................. Repairs Expense ........................................................ Depreciation Expense—Equipment.......................... Insurance Expense .................................................... Depreciation Expense—Building .............................. Supplies Expense ...................................................... Miscellaneous Expense ............................................. 141 Credit Balances 5,550 34,550 2,700 480 112,500 212,250 139,150 135,300 102,350 12,150 2,800 3,250 201,000 15,000 300,800 3,500 146,170 42,375 22,800 17,250 4,400 4,500 1,600 1,500 6,075 765,000 765,000 Prob. 3–6A 1. a. Supplies Expense .................................................... Supplies ............................................................... Supplies used. 1,800 b. Accounts Receivable ............................................... Fees Earned ........................................................ Accrued fees earned. 11,600 c. Depreciation Expense .............................................. Accumulated Depreciation................................. Equipment depreciation. 4,950 d. Wages Expense ........................................................ Wages Payable .................................................... Accrued wages. 2,250 1,800 11,600 4,950 2,250 2. Reported amounts Corrections: Adjustment (a) Adjustment (b) Adjustment (c) Adjustment (d) Corrected amounts Net Income Total Assets Total Liabilities Total Owner’s Equity $155,000 $350,000 $120,000 $230,000 – 1,800 + 11,600 – 4,950 – 2,250 $157,600 – 1,800 + 11,600 – 4,950 0 $354,850 0 0 0 + 2,250 $122,250 – 1,800 + 11,600 – 4,950 – 2,250 $232,600 142 Prob. 3–1B 1. a. Accounts Receivable................................................. Fees Earned .......................................................... Accrued fees earned. 11,385 b. Supplies Expense ...................................................... Supplies ................................................................ Supplies used ($2,973 – $740). 2,233 c. Wages Expense ......................................................... Wages Payable ..................................................... Accrued wages. 1,500 d. Unearned Rent ........................................................... Rent Revenue ....................................................... Rent earned ($9,450/3). 3,150 e. Depreciation Expense ............................................... Accumulated Depreciation .................................. Depreciation expense. 2,650 11,385 2,233 1,500 3,150 2,650 2. Adjusting entries are a planned part of the accounting process to update the accounts. Correcting entries are not planned, but arise only when necessary to correct errors. 143 Prob. 3–2B a. Supplies Expense .................................................... Supplies ............................................................... Supplies used ($2,145 – $500). 1,645 b. Depreciation Expense .............................................. Accumulated Depreciation................................. Depreciation for year. 1,375 c. Rent Expense ........................................................... Prepaid Rent........................................................ Rent expired. 4,525 d. Wages Expense ........................................................ Wages Payable .................................................... Accrued wages. 2,200 e. Unearned Fees ......................................................... Fees Earned ........................................................ Fees earned ($6,175 – $1,500). 4,675 f. Accounts Receivable ............................................... Fees Earned ........................................................ Accrued fees. 6,780 144 1,645 1,375 4,525 2,200 4,675 6,780 Prob. 3–3B a. Supplies Expense .................................................... Supplies ............................................................... ($1,820 – $300). 1,520 b. Accounts Receivable ............................................... Fees Earned ........................................................ 2,310 c. Depreciation Expense .............................................. Accumulated Depreciation................................. 1,500 d. Wages Expense ........................................................ Wages Payable .................................................... 475 e. Unearned Fees ......................................................... Fees Earned ........................................................ 1,000 145 1,520 2,310 1,500 475 1,000 Prob. 3–4B 2008 July 31 31 31 31 31 31 31 Supplies Expense ............................................... Supplies ........................................................ Supplies used ($3,600 – $975). 2,625 Insurance Expense ............................................. Prepaid Insurance ........................................ Insurance expired ($5,650 – $1,200). 4,450 Depreciation Expense—Buildings .................... Accumulated Depreciation—Buildings ...... Depreciation ($53,100 – $49,500). 3,600 Depreciation Expense—Trucks ......................... Accumulated Depreciation—Trucks ........... Depreciation ($13,300 – $11,800). 1,500 Utilities Expense ................................................. Accounts Payable ........................................ Accrued utilities expense ($7,520 – $6,920). 2,625 4,450 3,600 1,500 600 600 Salary Expense ................................................... Salaries Payable ........................................... Accrued salaries ($74,780 – $73,600). 1,180 Unearned Service Fees ...................................... Service Fees Earned .................................... Service fees earned ($154,980 – $152,680). 2,300 146 1,180 2,300 Prob. 3–5B 1. a. b. c. d. e. f. g. Depreciation Expense—Building ......................... Accumulated Depreciation—Building ............ Building depreciation. 3,500 Depreciation Expense—Equipment ..................... Accumulated Depreciation—Equipment ........ Equipment depreciation. 2,300 Salaries and Wages Expense ............................... Salaries and Wages Payable ........................... Accrued salaries and wages. 1,100 Insurance Expense ................................................ Prepaid Insurance ............................................ Insurance expired ($3,000 – $750). 2,250 Accounts Receivable ............................................ Fees Earned ...................................................... Accrued fees earned. 3,250 Supplies Expense .................................................. Supplies ............................................................ Supplies used ($1,725 – $525). 1,200 Unearned Rent ....................................................... Rent Revenue ................................................... Rent earned ($3,600 – $1,500). 2,100 147 3,500 2,300 1,100 2,250 3,250 1,200 2,100 Prob. 3–5B Concluded 2. LINCOLN SERVICE CO. Adjusted Trial Balance December 31, 2008 Debit Balances Cash ............................................................................ Accounts Receivable ................................................. Prepaid Insurance ...................................................... Supplies ...................................................................... Land............................................................................. Building ....................................................................... Accumulated Depreciation—Building ...................... Equipment................................................................... Accumulated Depreciation—Equipment .................. Accounts Payable ...................................................... Salaries and Wages Payable ..................................... Unearned Rent ............................................................ Molly Jordan, Capital ................................................. Molly Jordan, Drawing ............................................... Fees Earned ................................................................ Rent Revenue ............................................................. Salaries and Wages Expense .................................... Utilities Expense ........................................................ Advertising Expense .................................................. Repairs Expense ........................................................ Depreciation Expense—Equipment.......................... Insurance Expense .................................................... Depreciation Expense—Building .............................. Supplies Expense ...................................................... Miscellaneous Expense ............................................. 148 Credit Balances 2,100 13,550 750 525 50,000 80,750 41,350 44,000 19,950 3,750 1,100 1,500 83,550 2,500 131,850 2,100 52,000 14,100 7,500 6,100 2,300 2,250 3,500 1,200 2,025 285,150 285,150 Prob. 3–6B 1. a. Accounts Receivable ............................................... Fees Earned ........................................................ Accrued fees earned. 8,000 b. Depreciation Expense .............................................. Accumulated Depreciation ................................. Depreciation for October. 5,500 c. Wages Expense ........................................................ Wages Payable .................................................... Accrued wages. 2,500 d. Supplies Expense .................................................... Supplies ............................................................... Supplies used. 1,725 8,000 5,500 2,500 1,725 2. Reported amounts Corrections: Adjustment (a) Adjustment (b) Adjustment (c) Adjustment (d) Corrected amounts Net Income Total Assets Total Liabilities Total Owner’s Equity $ 99,480 $400,000 $100,000 $300,000 + 8,000 – 5,500 – 2,500 – 1,725 $ 97,755 + – 0 0 + 2,500 0 $102,500 + 8,000 – 5,500 – 2,500 – 1,725 $298,275 8,000 5,500 0 – 1,725 $400,775 149 CONTINUING PROBLEM 1. JOURNAL Date Post. Ref. Description 2008 May 31 31 31 31 31 31 Page 3 Debit Accounts Receivable .......................... Fees Earned ................................... Accrued fees earned (35 hours × $40 = $1,400). 12 41 1,400 Supplies Expense ............................... Supplies ......................................... Supplies used ($920 – $160). 56 14 760 Insurance Expense ............................. Prepaid Insurance ......................... Insurance expired ($3,360/12 months = $280 per month). 57 15 280 Depreciation Expense ........................ Accum. Depr.—Office Equipment Office equipment depreciation. 58 18 100 Unearned Revenue ............................. Fees Earned ................................... Fees earned ($4,800/2). 23 41 2,400 Wages Expense ............................. Wages Payable ......................... Accrued wages. 50 22 200 150 Credit 1,400 760 280 100 2,400 200 Continuing Problem Continued 2. Cash Date 2008 May 1 1 1 1 2 3 3 4 8 11 13 14 16 21 22 23 27 28 29 30 31 31 31 11 Item Balance ................... ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. ................................. Post. Ref. Dr. Cr. Dr. Balance Cr. 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 ............ 2,500 ............ ............ 1,350 4,800 ............ ............ ............ 750 ............ ............ 1,500 ............ ............ 750 ............ ............ ............ 400 2,800 ............ ............ ............. ............. 1,600 3,360 ............. ............. 250 300 180 ............. 500 1,000 ............. 325 800 ............. 560 1,000 150 ............. ............. 900 1,000 9,160 11,660 10,060 6,700 8,050 12,850 12,600 12,300 12,120 12,870 12,370 11,370 12,870 12,545 11,745 12,495 11,935 10,935 10,785 11,185 13,985 13,085 12,085 Accounts Receivable 2008 May 1 2 23 30 31 Balance ................... ................................. ................................. ................................. Adjusting................. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. 12 1 2 2 3 ............ ............ 1,750 1,100 1,400 151 ............. 1,350 ............. ............. ............. 1,350 — 1,750 2,850 4,250 ............. — ............. ............. ............. Continuing Problem Continued Supplies 14 Date 2008 May 1 18 31 Item Balance ................... ................................. Adjusting................. Post. Ref. Dr. Cr. 2 3 ............ 750 ............ ............. ............. 760 Dr. Balance Cr. 170 920 160 Prepaid Insurance 2008 May 1 31 ................................. Adjusting................. 15 1 3 3,360 ............ ............. 280 3,360 3,080 Office Equipment 2008 May 5 ................................. Adjusting................. 1 5,000 ............. 5,000 3 ............ Balance ................... ................................. ................................. ................................. 100 ............ Adjusting................. 1 1 2 ............ 250 ............ ............ ............. ............. 5,000 750 ............ — ............ ............ ................................. Adjusting................. 250 — 5,000 5,750 22 3 ............ 200 ............ Unearned Revenue 2008 May 3 31 100 21 Wages Payable 2008 May 31 ............. 18 Accounts Payable 2008 May 1 3 5 18 ............. ............. 17 Accumulated Depreciation—Office Equipment 2008 May 31 ............. ............. ............. 200 23 1 3 ............ 2,400 152 4,800 ............. ............ ............ 4,800 2,400 Continuing Problem Continued Kris Payne, Capital Date 2008 May 1 1 Item Balance ................... ................................. 31 Post. Ref. Dr. Cr. Dr. Balance Cr. 1 ............ ............ ............. 2,500 ............ ............ Kris Payne, Drawing 2008 May 1 31 Balance ................... ................................. 10,000 12,500 32 2 ............ 1,000 ............. ............. 300 1,300 Income Summary ............. ............. 33 This account is not used in Chapter 3. Fees Earned 2008 May 1 11 16 23 30 31 31 31 Balance ................... ................................. ................................. ................................. ................................. ................................. Adjusting................. Adjusting................. 41 1 2 2 2 2 3 3 ............ ............ ............ ............ ............ ............ ............ ............ ............. 750 1,500 2,500 1,500 2,800 1,400 2,400 ............ ............ ............ ............ ............ ............ ............ ............ Wages Expense 2008 May 1 14 28 31 Balance ................... ................................. ................................. Adjusting................. 50 1 2 3 ............ 1,000 1,000 200 ............. ............. ............. ............. 400 1,400 2,400 2,600 Office Rent Expense 2008 May 1 1 Balance ................... ................................. 5,700 6,450 7,950 10,450 11,950 14,750 16,150 18,550 ............. ............. ............. ............. 51 1 ............ 1,600 153 ............. ............. 1,000 2,600 ............. ............. Continuing Problem Continued Equipment Rent Expense Date 2008 May 1 13 Item Balance ................... ................................. 52 Post. Ref. Dr. Cr. 1 ............ 500 ............. ............. Dr. 800 1,300 Utilities Expense 2008 May 1 27 Balance ................... ................................. Balance ................... ................................. ................................. 2 ............ 560 ............. ............. 350 910 Balance ................... ................................. ................................. 2 2 ............ 325 900 ............. ............. ............. 1,340 1,665 2,565 Balance ................... Adjusting................. 1 2 ............ 180 800 ............. ............. ............. 750 930 1,730 Adjusting................. 3 ............ 760 ............. ............. 180 940 Adjusting................. ............. ............. 57 3 280 ............. 280 Depreciation Expense 2008 May 31 ............. ............. ............. 56 Insurance Expense 2008 May 31 ............. ............. ............. 55 Supplies Expense 2008 May 1 31 ............. ............. 54 Advertising Expense 2008 May 1 8 22 ............. ............. 53 Music Expense 2008 May 1 21 31 Balance Cr. ............. 58 3 100 154 ............. 100 ............. Continuing Problem Concluded Miscellaneous Expense Date 2008 May 1 4 29 59 Item Balance ................... ................................. ................................. Post. Ref. Dr. Cr. 1 2 ............ 300 150 ............. ............. ............. Dr. 150 450 600 Balance Cr. ............. ............. ............. 3. DANCIN MUSIC Adjusted Trial Balance May 31, 2008 Debit Balances Cash ............................................................................ Accounts Receivable ................................................. Supplies ...................................................................... Prepaid Insurance ...................................................... Office Equipment ....................................................... Accumulated Depreciation—Office Equipment ....... Accounts Payable ...................................................... Wages Payable ........................................................... Unearned Revenue ..................................................... Kris Payne, Capital ..................................................... Kris Payne, Drawing .................................................. Fees Earned ................................................................ Wages Expense .......................................................... Office Rent Expense .................................................. Equipment Rent Expense .......................................... Utilities Expense ........................................................ Music Expense ........................................................... Advertising Expense .................................................. Supplies Expense ...................................................... Insurance Expense .................................................... Depreciation Expense ................................................ Miscellaneous Expense ............................................. 155 Credit Balances 12,085 4,250 160 3,080 5,000 100 5,750 200 2,400 12,500 1,300 18,550 2,600 2,600 1,300 910 2,565 1,730 940 280 100 600 39,500 39,500 SPECIAL ACTIVITIES Activity 3–1 It is acceptable for Annette to prepare the financial statements for Harre Real Estate on an accrual basis. The revision of the financial statements to include the accrual of the $10,000 commissions as of December 31, 2007, is proper if there remain no contingencies related to the signed, unconditional contract of sale. That is, if the closing and title transfer is not contingent upon an appraisal, obtaining a loan, etc., then the earnings process has been completed from the perspective of Harre Real Estate and the commissions have been earned. If contingencies remain, then the commission should not be accrued as of December 31, 2007. Indicating on the loan application to First National Bank that Harre Real Estate has not been rejected previously for credit is unethical and unprofessional. In addition, intentionally filing false loan documents is illegal. Activity 3–2 The cost of the warranty repairs, $1,560, should be recognized as an expense of 2008 in order to properly match revenues from the sale of the Expedition with the related expenses. Since the cost of the actual repairs will not be known at the time of sale (2008), Ford Motor Company would estimate warranty costs and expenses at the end of 2008. This estimate would be recorded in the accounts through use of an adjusting entry. The adjusting entry would debit Warranty Expense and credit Estimated Warranty Payable, a liability account. 156 Activity 3–3 Revenue is normally recorded when the services are provided or when the goods are delivered (title passes) to the buyer. By waiting until after the services are provided, the expenses of providing the services can be more accurately measured and matched against the related revenues. Also, at this point, the provider of the services has a right to demand payment for the services if payment hasn’t already been received. Airlines, such as American Airlines, normally record revenue from ticket sales after completing a flight. At this point, the boarding passes, which have been collected from the passengers, represent revenue to the airline. In addition, the expenses related to each flight, such as landing fees and fuel, would have been incurred and would be accurately measured. Note to Instructors: You might point out to students the following points related to the discussion of the adjusting process in this chapter. (1) The receipt of revenue from customers in advance of a flight represents unearned revenues to the airline. For example, the purchase of discount tickets, which often requires prepayment months in advance of the actual flight, is unearned revenue to the airline. (2) At the end of the airline’s accounting period, it would have adjusting entries related to such items as the following: Accrued wages for employees Depreciation on airplanes, terminal buildings, etc. Unearned revenues (described above) Accrued income from transporting freight, etc. Accrued income from other airlines (When a flight is delayed or canceled, airlines often accept passengers from other airlines and then later collect the revenue from the other airline.) Prepaid expenses related to insurance, etc. 157 Activity 3–4 a. There are several indications that adjusting entries were not recorded before the financial statements were prepared, including: 1. All expenses on the income statement are identified as “paid” items and not as “expenses.” 2. No expense is reported on the income statement for depreciation, and no accumulated depreciation is reported on the balance sheet. 3. No supplies, accounts payable, or wages payable are reported on the balance sheet. b. Likely accounts requiring adjustment include: 1. Truck (for depreciation). 2. Supplies (paid) expense for supplies on hand. 3. Insurance (paid) expense for unexpired insurance. 4. Wages accrued. 5. Utilities accrued. Activity 3–5 Note to Instructors: The purpose of this activity is to familiarize students with behaviors that are common in codes of conduct. In addition, this activity addresses an actual ethical dilemma for students. 158
