Section 1

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MASTERING ADJUSTING ENTRIES
HOMEWORK EXERCISES AND PROBLEMS
A. EXERCISES
Section 1 WHY WE USE ACCRUALS, DEFERRALS AND OTHER ADJUSTMENTS
1. On October 1, 20X0, Espree Co. takes out a $10,000 loan and agrees to pay interest
twice each year for the life of the loan: $300 on April 1 and $300 on October 1. How
much interest expense will Espree report on its income statement for the year ended
December 31, 20X0 if:
a. it is on a cash basis?
$0. No interest was paid during 20X0
b. it is on the accrual basis?
$150 interest accrued for October, November and December
2. Near the end of 20X0, JNT Enterprises completes services for a customer and sends an
invoice for $500. As of JNT’s year end, no payment has been received. If JNT reports 20X0
revenue of $500, it must be using accrual basis accounting.
3. On December 2, 20X1, P&T pays $1,000 to an exterminator for work that will start in
January. If P&T reports on its income statement $1,000 for exterminating expense for
20X1, it must be using cash basis accounting.
4. For each of the following unrelated scenarios, show how much revenue is reported on
the income statement for 20X0 under the cash basis v. accrual basis.
Cash Basis
On November 1, 20X0, Alexi Inc. receives $1,800
in rental payments for November, December,
and January ($600 per month).
MNM caters six lunches in December 20X0.
Each of the six customers is invoiced $100, but
as of December 31, 20X0, only one has paid.
A musician accepts $200 for 8 upcoming
weddings. As of December 31, 20X0, the
musician has performed at 2 of the 8.
Accrual Basis
$1,800
$1,200
($600 × 2)
$100
$600
($100 x 6)
$1,600
($200 × 8)
$400
($200 × 2)
5. For each of the following unrelated scenarios, show total expenses reported on the
income statement for 20X0 under the cash basis v. accrual basis.
Cash Basis
In December 20X0, ByCo runs ads costing
$30,000. ByCo receives the invoice but does not
pay it until January 20X1.
On December 1, 20X0, KPT pays $2,400 for the
next 12 months’ property insurance.
In December 20X0, Andre’s pays $400 to Pest
Control for 4 months’ service. The first treatment
will be in January 20X1.
$0
$2,400
Accrual Basis
$30,000
$200
($2,400/12 × 1)
$400
$0
© American Institute of Professional Bookkeepers, 2010
Homework Solutions
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Mastering Adjusting Entries
Section 2 ACCRUED REVENUE
1. Select the term on the right that best completes the statement on the left. Terms may be
used once, more than once, or not at all.
Failing to make the entry to accrue revenue __d__ net income.
The entry to record accrued revenue __a__ assets.
Accrued revenue is revenue that is __e__ but not collected
Failing to make the entry to accrue revenue __d__ assets.
The entry to record accrued revenue __a__ net income.
a. increases
b. decreases
c. overstates
d. understates
e. earned
f. unearned
2. Kurtz Rentals rents equipment to Ditka on February 1. Lease terms require Ditka to
make payments to Kurtz of $2,000 each quarter: April 30, July 31, October 31, and
January 31. Kurtz receives payments for April, July, and October.
a. What journal entry should Kurtz record on December 31?
Rent Receivable
Rent Revenue
1,333
1,333
b. If this entry is not recorded, how will it affect Kurtz’s financial statements?
Net income will be understated because too little revenue is reported. Assets will be
understated as well.
3. Intell licenses technologies to a manufacturer. The agreement calls for Intell to receive
$3 for each unit manufactured with licensing fees remitted quarterly. As of December 31,
Intell has received the following payments:
Period
1/1 to 3/31
4/1 to 6/30
7/1 to 9/30
10/1 to 12/31
Units Manufactured
475
350
525
600
Licensing Fees
$1,425
$1,050
$1,575
$1,800
Intell has received checks for the first two quarters, but not the third; the fourthquarter check is not due until January.
a. If Intell is on the accrual basis, what adjusting entry should it record at year end to
recognize revenue earned from this manufacturer?
Licensing Fees Receivable
Licensing Fees Revenue
3,375
3,375
Under the accrual method, revenue is recognized in the year earned. Thus, revenue
of $3,375 ($1,575 + $1,800 = $3,375) earned from July 1–December 31 is recognized,
even though it has not been received
b. If this entry is not recorded, how will it affect Intell’s financial statements?
Net income will be understated on the income statement. Assets will be understated
on the balance sheet.
Homework Solutions
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Mastering Adjusting Entries
4. Your firm holds a $15,000, 8% note receivable issued on August 1, 20X0. Interest is paid
once a year on July 31. On July 31, 20X6, you receive the normal interest payment.
a. What adjusting entry must you record December 31, 20X6?
Interest Receivable
Interest Revenue
500
500
$15,000 × 8% = $1,200 annual interest × 5/12 = $500
b. If this entry is not recorded, how will it affect your company’s financial statements?
Net income will be understated on the income statement. Assets will be understated
on the balance sheet.
5. Your company, which has a fiscal year ending October 31, sells scented bars of soap for
a 12% commission. As of October 31, total sales are $400,000. Your company has
received $30,000, which you credited to Revenue.
a. How much additional revenue must you record for the fiscal year?
$18,000 ($400,000 × 12% = $48,000 revenue earned  $30,000 revenue booked)
b. What is the journal entry to record the additional revenue?
Commissions Receivable
Commissions Revenue
18,000
18,000
Section 3 ACCRUED EXPENSES (ACCRUED LIABILITIES)
1. DillCo borrows $200,000 on September 1, 20X0, from First Bancorp. Monthly interest is
$1,200. The loan agreement requires DillCo to pay the interest every 6 months. The first
interest payment is due February 28, 20X1.
a. What adjusting entry must DillCo make on December 31, 20X0 to recognize the
accrued interest?
Interest Expense
Interest Payable
4,800
4,800
$1,200 × 4 months (SeptemberDecember) = $4,800
b. Explain the impact on the financial statements if this entry is not recorded.
Because too little interest expense has been recognized net income will be overstated
on the income statement. Liabilities will be understated on the balance sheet.
2. Salary expense at QuickDinner Inc. is $7,500 per week for a Monday–Friday workweek.
Employees are paid each Friday.
a. If the company’s year ends on a Wednesday, what adjusting entry must it record?
Salaries Expense
Salaries Payable
4,500
4,500
$7,500/5 = $1,500 for each workday × 3 = $4,500
b. Explain the impact on the financial statements if this entry is not recorded.
Because too little salaries expense has been recognized, net income will be overstated
on the income statement. Liabilities will be understated on the balance sheet.
Homework Solutions
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Mastering Adjusting Entries
3. Salary expense at SlowCooker is $6,000 per week for a Tuesday–Sunday workweek.
Employees are paid on Sunday.
a. If the company’s year ends on a Tuesday, what adjusting entry must it make?
Salaries Expense
Salaries Payable
1,000
1,000
$6,000/6 = $1,000 for each workday × 1 = $1,000
b. Explain the impact on the financial statements if this entry is not recorded.
Because too little salaries expense has been recognized, net income will be overstated
on the income statement. Liabilities will be understated on the balance sheet.
4. Rojo Equipment, which has an October 31 fiscal year, reports income of $200,000 for the
year ended 10/31/20X7. On October 31, Rojo discovers the following:

A $2,000 utility bill booked on October 30, 20X7, was not paid.

Rojo has a $10,000 note payable with a 12% annual interest rate. Payments are
due every six months. The last interest payment was made on June 30, 20X7.

Rojo’s has 4 salaried employees, each paid $800 a week for a Monday–Friday
workweek. Paychecks are distributed on Fridays. October 31 is a Thursday.
a. Prepare the adjusting entries required for the year ended October 31, 20X7.
Utilities Expense
Utilities Payable
2,000
Interest Expense
Interest Payable
400
2,000
400
$10,000 × 12% = $1,200 annual interest/12 × 4 months = $400
Salaries Expense
Salaries Payable
2,560
2,560
$800 × 4 = $3,200 weekly salaries/5 × 4 = $2,560
b. What Rojo’s net income for 20X7?
$195,040 ($200,000  $2,000  $400  $2,560)
Homework Solutions
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Mastering Adjusting Entries
Section 4 REVENUE COLLECTED IN ADVANCE (UNEARNED REVENUE)
1. At year end, Bijou records an adjusting entry for unearned revenue.
a. If the adjusting entry increases liabilities, what journal entry was recorded when the
cash was received?
If the AJE increases liabilities, then the entry is:
Revenue
xxxx
Unearned Revenue
xxxx
Therefore, the original journal entry recorded when cash was received was:
Cash
xxxx
Revenue
xxxx
b. If the adjusting entry increases revenues, show the journal entry that was recorded
when the cash was received.
If the AJE increases revenues, then it is:
Unearned Revenue
xxxx
Revenue
xxxx
Therefore, the original journal entry recorded when cash was received was:
Cash
xxxx
Unearned Revenue
xxxx
2. WyCo’s fiscal year ends September 30. On September 10, it collects $30,000 for a painting
job and credits Unearned Painting Revenue. As of September 30, 60% of the work has
been done. What adjusting entry must WyCo record on September 30?
Unearned Painting Revenue
Painting Revenue
18,000
18,000
$30,000 × 60% = $18,000 painting revenue is recognized for the year. Thus, $18,000
must be transferred from Unearned Painting Revenue to Painting Revenue.
3. On August 1, InsureCo writes a 2-year policy for a total of $12,000 and receives the entire
payment in advance. If InsureCo credits Revenue, what adjusting entry must it record on
December 31?
Revenue
Unearned Revenue
9,500
9,500
The original entry must have been:
Cash
Revenue
$12,000
$12,000
On December 31, InsureCo recognizes 5 months’ revenue, or $2,500 ($12,000/24 × 5).
The remaining $9,500 ($12,000  $2,500) must be transferred to Unearned Revenue.
Homework Solutions
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Mastering Adjusting Entries
4. On November 1 ATD enters a 1-year contract to provide security for CorpCo’s warehouses
for $12,000 a year and receives the first 3 months’ payment at signing.
a. If ATD books the payment as revenue, what adjusting entry must it record at year
end? How will its financial statements be misstated if the entry is not recorded?
The original entry for 3 months’ service ($12,000/12 × 3 = $3,000) would have been:
Cash
Revenue
3,000
3,000
At year end, 2 months’ revenue has been earned, so it must record the following AJE:
Revenue
Unearned Revenue
1,000
1,000
If ATD does not record this AJE, revenue will be understated by $1,000, causing net
income to be understated by this amount. Liabilities will be understated by $1,000.
b. If ATD books the payment as a liability, what adjusting entry must it record at year
end? How will its financial statements be misstated if the entry is not recorded?
The original journal entry would have been:
Cash
Unearned Revenue
3,000
3,000
To recognize 2 months’ revenue earned as of year end, ATD records the following AJE:
Unearned Revenue
Revenue
2,000
2,000
If ATD does not record this AJE, revenue will be understated by $2,000 and net
income overstated by this amount. Liabilities will be overstated by $2,000.
5. The following table shows subscription revenue for three unrelated companies:
Beginning balance in Unearned Subscription Revenue
Payments received during the year
Ending balance in Unearned Subscription Revenue
Subscription revenue earned during the year
I
$ 2,400
Company
II
III
$ 3,000 $ 4,500
40,000
25,000
?
4,000
39,000
?
?
2,000
25,000
a. Fill in the missing amounts.
I. As of the beginning of the year, ATD has on its books $2,400 for services it had not
yet performed. During the year, ATD receives an additional $40,000. If ATD earns
$39,000 revenue for the year, then $3,400 remains unearned, as follows:
Beginning balance in Unearned Subscription Revenue
+ Payments received during the year
= Ending balance in Unearned Subscription Revenue
 Subscription revenue earned during the year
= Ending balance in Unearned Subscription Revenue
$ 2,400
40,000
$42,400
(39,000)
$ 3,400
II. $3,000 + $25,000 = $28,000  $24,000 (Subscription Revenue) = $4,000
III. $4,500 + $22,500 (payments received) = $27,000  $25,000 = $2,000
Homework Solutions
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Mastering Adjusting Entries
b. Ignoring dollar amounts, what journal entries may have recorded the payments?
The payments may have been recorded as a liability:
Cash
Unearned Revenue
or as revenue:
Cash
Revenue
xxxx
xxxx
xxxx
xxxx
6. On February 1, Alta’s collects $60,000 for a job and credits Revenue. As of April 30, Alta’s
year end, 45% of the work is completed. What adjusting entry does Alta record on April 30?
Revenue
Unearned Revenue
33,000
33,000
$60,000 × 45% = $27,000 revenue must be recognized for the year. Before recording the
AJE, Alta’s Revenue account shows a balance of $60,000. Therefore, $33,000 ($60,000 
$27,000) must be transferred to Unearned Revenue.
Section 5—PREPAID (DEFERRED) EXPENSES
1. On December 1, 20X7, your company pays an annual insurance premium of $3,600 that
covers December 1, 20X7, to November 30, 20X8.
a. Show the adjusting entry on December 31, 20X7, if the $3,600 payment was recorded
in Prepaid Insurance.
Insurance Expense
Prepaid Insurance
300
300
As of December 31, 20X7, 1 month’s insurance has been used up, so the AJE must
transfer $300 ($3,600/12 × 1) from Prepaid Insurance to Insurance Expense.
b. Show the adjusting entry on December 31, 20X7, if the $3,600 payment was recorded
in Insurance Expense.
Prepaid Insurance
Insurance Expense
3,300
3,300
As of December 31, 20X7, 1 month’s insurance has been used up, so the ending balance
in Insurance Expense must be $300 (the amount that will be reported on the 20X7
income statement). This requires transferring $3,300 to Prepaid Insurance.
2. GilCo pays $900 for office supplies in April and debits Office Supplies. On May 31,
GilCo’s year end, a physical count, finds $200 in supplies.
a. What is the adjusting entry?
Supplies Expense
Supplies
700
700
If $900 in office supplies was purchased and $200 of supplies are on hand at year
end, $700 of supplies were used up during the year. The AJE must transfer $700 to
Supplies Expense
b. If this entry is not recorded, how will it affect GilCo’s financial statements?
Both net income and total assets will be overstated
Homework Solutions
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Mastering Adjusting Entries
3. The following table shows insurance premiums paid by three unrelated companies:
I
$ 500
4,000
?
3,000
Beginning balance in Prepaid Insurance
Premiums paid during the Year
Ending balance in Prepaid Insurance
Insurance used up during the year
Case
II
$ 300
2,500
400
?
III
$4,500
?
200
5,500
a. Fill in the missing information.
I.
$1,500
Beginning balance in Prepaid Insurance + premiums paid during the year 
insurance expense used up as of year end = ending balance in Prepaid Insurance.
To compute: $500 + $4,000  $3,000 = $1,500
II. $2,400
$300 + $2,500  $X = $400
III. $1,200
$4,500 + $X  $5,500 = $200
b. Ignoring dollar amounts, give all possible journal entries to record the premium payments.
If the payments were recorded as an asset, the original journal entry would have been:
Prepaid Insurance
xxxx
Cash
xxxx
If the payments were recorded as an expense, the original journal entry would have been:
Insurance Expense
xxxx
Cash
xxxx
4. On September 1, BarCo signs a 2-year rental agreement paying $6,000 rent in advance.
a. If the prepayment was booked as prepaid rent, what is the year-end adjusting entry?
Rent Expense
Prepaid Rent
1,000
1,000
[$6,000/24 months × 4 months = $1,000]
b. If the prepayment was booked as rent expense, what is the year-end adjusting entry?
Prepaid Rent
Rent Expense
5,000
5,000
$6,000/24 months × 4 months = $1,000 of rent expense used up during the year.
That leaves $5,000 of prepaid rent to be used up in the future.
5. In August, JemCo, which has an October 31 year end, pays $1,200 for office supplies and
records it in Supplies Expense. On October 31, a physical count reveals $440 of supplies unused.
a. What adjusting entry must JemCo record on October 31?
Supplies
Supplies Expense
440
440
Because $440 of supplies had not been used up by year end, the AJE must transfer
this amount out of Supplies Expense and into the Supplies account.
b. If this entry is not recorded, how will it affect JemCo’s financial statements?
Supplies expense will be overstated by $440 and net income will be understated by
the same amount. Total Assets will be understated by the same $440
Homework Solutions
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Mastering Adjusting Entries
Section 6 OTHER END-OF-PERIOD ENTRIES
1. GoCo purchases a building for $350,000. If the building has an estimated life of 30 years
and a residual value of $50,000, what is the adjusting entry in the year of purchase?
Depreciation Expense
Accumulated Depreciation
10,000
10,000
[$350,000  $50,000)/30 = $10,000]
2. For 20X9, PyCo has credit sales of $200,000. Based on past experience, Pylo estimates
that 3% of credit sales will be uncollectible. At year end, the balance in Allowance for
Doubtful Accounts is $4,000. What is the adjusting entry to record 20X9 bad debt
expense?
Bad Debt Expense
6,000
Allowance for Doubtful Accounts
6,000
$200,000 × 3% = $6,000. Under the percentage of credit sales method, the current
balance in the Allowance account is not used to compute the AJE.
3. At the end of 20X9, Spend Co has accounts receivable of $70,000, of which it estimates
10% will be bad debt. Allowance for Doubtful Accounts has a debit balance of $4,000.
a. What does the debit balance in Allowance for Doubtful Accounts imply about 20X8?
Too little bad debt expense was recorded in 20X8.
b. What is the 20X9 adjusting entry for bad debt?
Bad Debt Expense
11,000
Allowance for Doubtful Accounts
11,000
$70,000 × 10% = $7,000. To obtain a credit balance of $7,000 in the Allowance
account the AJE must be for $11,000.
c. What is the term for the difference between the closing balances in Accounts
Receivable and Allowance for Doubtful Accounts?
Net realizable value
4. Match the terms in the lefthand column below with the descriptions on the right.
1. Percentage of credit
sales method
a. Required to recognize bad debt under GAAP
2. Direct write-off method
b. Estimate of bad debt expense based on the age
of outstanding receivables
3. Allowance method
c. Estimate of bad debt based on credit sales
4. Percentage of accounts
receivable method
d. Required to recognize bad debt under tax law
1. c.
2. d
Homework Solutions
3. a.
4. b.
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Mastering Adjusting Entries
5. Below are PruCo’s entries to two accounts for the year.
a. What do the debits to the Allowance account represent? Show the three journal entries
that led to the three debits in the Allowance account.
Each debit to the Allowance account represents a specific accounts receivable being
written off during the year.
Allowance for Doubtful Accounts
Accounts Receivable
Allowance for Doubtful Accounts
Accounts Receivable
Allowance for Doubtful Accounts
Accounts Receivable
200
100
400
200
100
400
b. Pruco uses the percentage of credit sales method. If it estimates that 2% of its $250,000
in credit sales will not be collected, what adjusting entry does PruCo record to recognize
bad debt expense for the year?
Bad Debt Expense
Allowance for Doubtful Accounts
5,000
5,000
$250,000 × 2% = $5,000
c. Now assume that Pruco uses the percentage of accounts receivable method. If it
estimates that $4,000 of its receivables will not be collectable, what adjusting entry does
PruCo record to recognize bad debt expense for the year?
Bad Debt Expense
Allowance for Doubtful Accounts
3,450
3,450
$4,000  $550 current balance = $3,450 required adjustment
Homework Solutions
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Mastering Adjusting Entries
Section 7 FROM UNADJUSTED TRIAL BALANCE TO FINANCIAL STATEMENTS
1. For each account listed below, fill in the normal balance as “debit” or “credit.”
Account
Accounts Payable
Accounts Receivable
Accumulated Depreciation—Equipment
Normal balance
CREDIT
DEBIT
CREDIT
Advertising Expense
DEBIT
Cash
DEBIT
Depreciation Expense—Automobiles
DEBIT
Depreciation Expense—Equipment
DEBIT
Equipment
DEBIT
Fees Earned
CREDIT
Interest Earned
CREDIT
Interest Expense
DEBIT
Interest Payable
CREDIT
Interest Receivable
DEBIT
B. Anders, Capital
CREDIT
B. Anders, Withdrawals
DEBIT
Land
DEBIT
Long-term Notes Payable
CREDIT
Notes Receivable
DEBIT
Office Supplies
DEBIT
Office Supplies Expense
DEBIT
Repairs Expense
DEBIT
Salaries Expense
DEBIT
Salaries Payable
CREDIT
Unearned Fees
CREDIT
Wages Expense
DEBIT
Homework Solutions
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Mastering Adjusting Entries
2. Shown below, in alphabetical order, are the accounts of A-Plus, Inc. Use the worksheet
on the following page to set up a trial balance for the fiscal year ending June 30, 20X7.
Accounts Payable
$ 49,000
Accumulated Depreciation—Building
75,000
Accumulated Depreciation—Equipment
33,000
Building
110,000
Cash
155,000
Depreciation Expense—Building
4,000
Depreciation Expense—Equipment
5,000
Equipment
72,000
Insurance Expense
1,000
Interest Expense
1,100
Interest Payable
9,000
Land
Long-term Notes Payable
Postage Expense
Prepaid Insurance
Professional Fees
Property Taxes Payable
J. Crow, Capital
75,000
107,000
200
4,000
142,000
9,000
193,900
J. Crow, Withdrawals
49,000
Rent Expense
35,000
Rent Payable
3,400
Repairs Expense
18,900
Short-term Investments
27,000
Supplies
2,700
Supplies Expense
3,400
Telephone Expense
900
Unearned Professional Fees
500
Utilities Expense
1,300
Wage Expense
68,000
Wages Payable
11,700
Homework Solutions
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Mastering Adjusting Entries
A-Plus, Inc.
Trial balance
June 30, 20X7
Cash
Short-term Investments
Supplies
Prepaid Insurance
Equipment
Accum. Depreciation—Equipment
Building
Accum. Depreciation—Building
Land
Accounts Payable
Interest Payable
Rent Payable
Wages Payable
Property Taxes Payable
Unearned Professional Fees
Long-term Notes Payable
J. Crow, Capital
J. Crow, Withdrawals
Professional Fees
Depreciation Expense—Building
Depreciation Expense—Equipment
Wage Expense
Interest Expense
Insurance Expense
Rent Expense
Supplies Expense
Postage Expense
Repairs Expense
Telephone Expense
Utilities Expense
Totals
Homework Solutions
Debit
155,000
27,000
2,700
4,000
72,000
Credit
33,000
110,000
75,000
75,000
49,000
9,000
3,400
11,700
9,000
500
107,000
193,900
49,000
142,000
4,000
5,000
68,000
1,100
1,000
35,000
3,400
200
18,900
900
1,300
633,500
633,500
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Mastering Adjusting Entries
Important—the following question is optional: Neither certification nor the certification
exam requires presentation of the financial statements, but only through the adjusted trial
balance. Recommended: Focus on the adjustments and adjusted trial balance.
3. Below is the adjusted trial balance for Shady’s Illusions. Use this information to prepare
Shady’s income statement and balance sheet for the year.
Debit
Credit
No.
Account title
101
Cash
109
Office Supplies
25,000
111
Equipment
80,000
112
Accumulated Depreciation—Equipment
44,000
200
Accounts Payable
33,000
201
Wages Payable
12,000
300
S. Shady, Capital
301
S. Shady, Withdrawals
400
Entertainment Revenue
510
Rent Expense
511
Gas and Oil Expense
512
Wages Expense
513
Depreciation Expense—Equipment
12,500
514
Legal Expense
11,400
Totals
Homework Solutions
158,000
129,700
25,000
228,000
26,800
3,000
105,000
446,700
446,700
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Mastering Adjusting Entries
Shady’s Illusions
Income Statement
For the year ended December 31, 20X4
Entertainment revenue
$228,000
Less:
Rent expense
$ 26,800
Gas and oil expense
3,000
Wage expense
105,000
Depreciation expense
12,500
Legal expense
11,400
Net income
158,700
$ 69,300
Shady’s Illusions
Balance Sheet
December 31, 20X4
Assets
Cash
$158,000
Office supplies
25,000
Equipment (net)
36,000
Total assets
$219,000
Liabilities and Capital
Accounts payable
Wages payable
S. Shady, Capital*
Total liabilities and capital
$33,000
12,000
174,000
$219,000
* S. Shady, Capital = $129,700 + $69,300  $25,000
Homework Solutions
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Mastering Adjusting Entries
Section 8 APPLYING YOUR KNOWLEDGE TO THE TRIAL BALANCE
Important—the following question is optional: Neither certification nor the certification
exam requires presentation of the financial statements, but only through the adjusted trial
balance. Recommended: Focus on the adjustments and adjusted trial balance.
1. Using Thorne’s unadjusted trial balance below and facts ah, complete the following
worksheet by filling in the adjustments, adjusted trial balance and financial statements.
Thorne Construction
Unadjusted trial balance
For the year ended July 31, 20X8
Debit
Cash
12,500
Accounts Receivable
40,000
Allowance for Doubtful Accounts
Office Supplies
1,850
Prepaid insurance
6,500
Prepaid Rent
Equipment
154,000
Accum. Depreciation  Equipment
Accounts Payable
Interest Payable
Wages Payable
Long-term Notes Payable
W. Thorne, Capital
W. Thorne, Drawing
25,000
Constuction Revenues
Bad Debt Expense
Depreciation Expense–Equipment
Wage Expense
29,400
Interest Expense
900
Insurance Expense
Rent Expense
10,800
Office Supplies Expense
Repairs Expense
100
Utilities Expense
6,750
Totals
287,800
a.
b.
c.
d.
e.
f.
g.
h.
Credit
2,000
38,500
23,000
30,000
82,300
112,000
287,800
A physical count of office supplies as of July 31, 20X8 shows $800 in supplies on hand.
On March 1, 20X7, Thorne Construction prepaid $9,000 for an 18-month insurance policy
of which 5 months ($2,500) was used up during fiscal year 20X7.
The equipment has a 28-year life and no salvage value. Thorne uses straight-line depreciation.
July’s eletric bill for $420 is not included because it arrived after the worksheet was prepared.
There are $1,800 of accrued wages as of the fiscal year end.
Thorne’s rent of $800 a month is payable quarterly, in advance. Its most recent payment
was $2,400 on June 30, 20X8 to cover July, August, and September 20X8.
Thorne estimates bad debt at 2% of credit sales.
The long-term note payable bears interest at 1% a month payable by the 10th of the
following month. The interest for July has neither been paid nor recorded.
Homework Solutions
16
a. Supplies Expense
Office Supplies
1,050
1,050
$1,850  $800 supplies on hand = $1,050 supplies expense
b. Insurance Expense
Prepaid Insurance
6,000
6,000
$9,000/18 = $500 a month × 12 months = $6,000
c. Depreciation Expense  Equipment
5,500
Accumulated Depreciation—Equipment
5,500
($154,000  $0)/28 = $5,500
d. Utilities Expense
Utilities Payable
420
e. Wage Expense
Wages Payable
1,800
f. Prepaid Rent
Rent Expense
1,600
420
1,800
1,600
$800 × 2 months (August amdSeptember) was not used up as of year end.
g. Bad Debt Expense
Allowance for Doubtful Accounts
2,240
2,240
$112,000 × 2% = $2,240
h. Interest Expense
Interest Payable
300
300
$30,000 × 1% = $300
Homework Solutions
17
Mastering Adjusting Entries
Unadjusted
trial balance
Cash
Accounts Receivable
Allow. for Doubtful Accts
Office Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Accum. Depr.– Equip.
Accounts Payable
Interest Payable
Utilities Payable
Wages Payable
Long-term Notes Payable
W. Worthington, Capital
W. Worthington, Drawings
Constuction Revenues
Bad Debt Expense
Depr. Exp.– Equipment
Wage Expense
Interest Expense
Insurance Expense
Rent Expense
Supplies Expense
Repairs Expense
Utilities Expense
Totals
Dr
12,500
40,000
Cr
Thorne Construction Worksheet
July 31, 20X8
Adjusted
Adjustments
trial balance
Dr
2,000
1,850
6,500
1,600
Cr
2,240
1,050
6,000
154,000
5,500
38,500
23,000
Dr
12,500
40,000
800
500
1,600
154,000
300
420
1,800
30,000
82,300
25,000
25,000
112,000
2,240
5,500
1,800
300
6,000
29,400
900
10,800
1,600
1,050
100
6,750
287,800
Net Income
Homework Solutions
287,800
420
18,910
18,910
2,240
5,500
31,200
1,200
6,000
9,200
1,050
100
7,170
298,060
Cr
Income
statement
Dr
Cr
800
500
1,600
154,000
44,000
23,000
300
420
1,800
30,000
82,300
298,060
18
Dr
12,500
40,000
4,240
112,000
Balance
sheet
2,240
5,500
31,200
1,200
6,000
9,200
1,050
100
7,170
63,660
48,340
112,000
112,000
Cr
4,240
44,000
23,000
300
420
1,800
30,000
82,300
25,000
112,000
234,400
112,000
234,400
186,060
48,340
234,400
B. PROBLEMS FOR SECTIONS 1–8
1. Danza Inc. reported income of $440,000 for the year ended June 30, 20X8. However, the
records show that at year end, the following items had not been recorded:

On May 1, 20X8, Danza received a $12,000 advance for a six-month job and credited
Revenue for $12,000.

Interest on a $12,000 note payable bearing a 10% interest rate is paid quarterly. The
last payment was made at the end of May 20X8.

Danza’s payroll is 14 salaried employees, each earning $900 a week for a 5-day
workweek. Friday is payday. June 30 was a Tuesday.
a. Prepare the adjusting entries necessary for the year ended June 30, 20X8.
Revenue
Unearned Revenue
8,000
8,000
$12,000/6 = $2,000 earned each month × 2 = $4,000 earned for the year
$12,000  $4,000 = $8,000 of unearned revenue as of June, 30, 20X8.
Interest Expense
Interest Payable
100
100
$12,000 × 10% = $1,200 annual interest/12 months × 1 month = $100
Salaries Expense
Salaries Payable
5,040
5,040
$900 × 14 = $12,600 weekly salaries/5 × 2 = $5,040
b. What is Danza’s net income for 20X8?
$426,860 ($440,000  $8,000  $100  $5,040)
2. Mikado Co. reported income of $224,000 for the year ended December 31, 20X9. However, a
review of the books shows the following items unaccounted for at year end:

On August 1, 20X9, Mikado received a $27,000 advance for a 9-month job, recording
the payment in Unearned Revenue.

Interest on a $20,000 note payable with a 12% interest rate is paid every 3 months,
the last interest payment having been at the end of June 20X9.

Mikado’s payroll is 7 salaried employees, each earning $1,000 a week for a
Monday–Friday workweek. Payday is Friday. December 31 was a Thursday.
Homework Solutions
19
Mastering Adjusting Entries
a. Prepare the adjusting entries for the year ended June 30, 20X8.
Unearned Revenue
Revenue
15,000
15,000
$27,000/9 = $3,000 earned each month × 5 = $15,000 revenue for 20X9.
Interest Expense
Interest Payable
1,200
1,200
$20,000 × 12% = $2,400 annual interest/12 months × 6 months = $1,200
Salaries Expense
Salaries Payable
5,600
5,600
$1,000 × 7 = $7,000 weekly salaries/5 × 4 = $5,600
b. What is Mikado’s net income for 20X9?
$232,200 ($224,000 + $15,000  $1,200  $5,600)
3. You are handed the following unadjusted trial balance:
Champion Professional Services
Unadjusted trial balance
December 31, 20X7
Debit
Cash
Accounts receivable
25,000
-0-
Supplies
3,800
Prepaid insurance
9,800
Prepaid rent
Equipment
500
60,000
Accumulated depreciation—Equipment
22,900
Accounts payable
6,000
Salaries payable
-0-
Unearned Fees
4,000
F. Mercury, Capital
F. Mercury, Withdrawals
51,000
14,000
Fees Earned
Depreciation Expense—Equipment
Salaries Expense
Insurance Expense
Rent Expense
Supplies Expense
Credit
71,900
-024,800
-05,500
-0-
Advertising Expense
6,000
Utilities Expense
6,400
_______
155,800
155,800
Totals
Homework Solutions
20
Mastering Adjusting Entries
Using the data below, complete the worksheet on the following page by filling in the
adjustments and adjusted trial balance for Champion for the year ended December 31, 20X7.
a. 8 employees are paid weekly. At year end, 3 days’ wages have accrued at $120 a day for
each employee.
b. A physical count shows $600 of office supplies on hand at year end.
c. $2,600 of prepaid insurance coverage has expired.
d. Annual depreciation on the equipment is $8,450.
e. On November 1, Champion contracted for a new job for which it is paid $1,000 a month. It
received a 4-month advance and booked it as unearned fees.
f.
A client renewed its contract for 3 months at $1,300 a month, starting on November 1.
The first payment is due on February 28th.
g. The balance in Prepaid Rent is December’s rent.
a. Salaries Expense
Salaries Payable
2,880
2,880
$120  8 employees  3 days = $2,880
b. Supplies Expense
Supplies
3,200
3,200
$3,800 beginning balance  $600 ending balance = $3,200 used up during the year
c. Insurance Expense
Prepaid Insurance
2,600
d. Depreciation Expense
Accumulated Depreciation
8,450
e. Unearned Fees
Fees Earned
2,000
2,600
8,450
2,000
$1,000 monthly fee  2 months (JanuaryFebruary 20X8) unearned as of year end
f. Accounts Receivable
Fees Earned
2,600
2,600
$1,300  2 months earned as of year end
g. Rent Expense
Prepaid Rent
Homework Solutions
500
500
21
Mastering Adjusting Entries
Champion Professional Services
trial balance
December 31, 20X7
Unadjusted trial
balance
Adjustments
Dr
Cr
Dr
Cr
Cash
Adjusted trial
balance
Dr
Cr
25,000
25,000
Accounts Receivable
(f) 2,600
-0-
2,600
Supplies
3,800
(b) 3,200
600
Prepaid Insurance
9,800
(c) 2,600
7,200
Prepaid Rent
Equipment
(d) 8,450
31,350
6,000
6,000
Salaries Payable
(a) 2,880
-0-
Unearned Fees
4,000
F. Mercury, Capital
2,880
(e) 2,000
2,000
51,000
51,000
14,000
(e) 2,000
(f) 2,600
71,900
-0-
14,000
24,800
(d) 8,450
(a) 2,880
8,450
27,680
-0-
(c) 2,600
2,600
(g)
500
6,000
(b) 3,200
3,200
Insurance Expense
Rent Expense
0
60,000
22,900
Accounts Payable
Depreciation Exp.—
Equipment
Salaries Expense
500
60,000
Acc. Depreciation—
Equipment
F. Mercury,
Withdrawals
Fees Earned
(g)
500
5,500
Supplies Expense
-0-
Advertising Expense
6,000
6,000
Utilities Expense
6,400
6,400
Total
155,800
Homework Solutions
155,800
22,230
22,230
169,730
76,500
169,730
22
Mastering Adjusting Entries
Important—the following question is optional: Neither certification nor the certification
exam requires presentation of the financial statements, but only through the adjusted
trial balance. Recommended: Focus on the adjustments and adjusted trial balance.
4. Using the adjusted trial balance from Problem 3, complete the Income Statement and Balance
Sheet columns of the worksheet for Champion. When the worksheet is complete, prepare
Champion’s financial statements.
Champion Professional Services.Worksheet
December 31, 20X7
Adjusted trial
balance
Dr
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Salaries Payable
Unearned Fees
F. Mercury, Capital
Insurance Expense
Rent Expense
Supplies Expense
Advertising Expense
Utilities Expense
Totals
Net Income
Homework Solutions
Dr
31,350
6,000
2,880
2,000
51,000
14,000
76,500
8,450
27,680
2,600
6,000
3,200
6,000
6,400
169,730
Cr
25,000
2,600
600
7,200
0
60,000
14,000
Fees Earned
Salaries Expense
Cr
Balance
sheet
31,350
6,000
2,880
2,000
51,000
Accounts Payable
Depreciation Expense– Equipment
Dr
25,000
2,600
600
7,200
0
60,000
Acc. Depreciation–Equipment
F. Mercury, Withdrawals
Cr
Income
statement
169,730
76,500
8,450
27,680
2,600
6,000
3,200
6,000
6,400
60,330
16,170
76,500
76,500
109,400
76,500
109,400
23
93,230
16,170
109,400
Mastering Adjusting Entries
Champion Professional Services
Income Statement
For the year ended December 31, 20X7
Revenue
$76,500
Less:
Salaries expense
$27,680
Insurance expense
2,600
Rental expense
6,000
Supplies expense
3,200
Advertising expense
6,000
Utilities expense
6,400
Depreciation expense
8,450
Net income
60,330
$16,170
Champion Professional Services
Balance Sheet
December 31, 20X7
Assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment (net)
Total assets
$25,000
2,600
600
7,200
28,650
$64,050
Liabilities and Capital
Accounts payable
$ 6,000
Salaries payable
2,880
Unearned fees
2,000
F. Mercury, capital*
Total liabilities and capital
*
53,170
$64,050
F. Mercury, capital = $51,000 + $16,170 net income  $14,000 withdrawals
Homework Solutions
24
Mastering Adjusting Entries
5. Below are the 20X8 unadjusted and adjusted trial balances for Olympic Consulting.
Analyze the differences between the unadjusted and adjusted trial balances,
determine each adjustment that Olympic must have made at year end and insert it in
the Adjustments column. Label each adjustment “(a)”, “ (b),” etc., then put the same
letter in the corresponding worksheet cell with a brief explanation of the adjustment.
Cash
Accounts Receivable
Office Supplies
Prepaid Rent
Office Equipment
Accum. Depreciation—
Office Equipment
Accounts Payable
Salaries Payable
Utilities Payable
Unearned Consulting
Fees
Texiera, Capital
Texiera, Withdrawals
Consulting Fees
Earned
Depreciation
Expense—Office
Equipment
Salaries Expense
Supplies Expense
Rent Expense
Utilities Expense
Total
Homework Solutions
Olympic Consulting
Trial balance
December 31, 20X8
Unadjusted
trial balance
Adjustments
Dr
Cr
Dr
Cr
2,500
10,000
(a) 1,000
4,000
(b) 1,800
1,800
(c) 700
15,900
4,100
4,000
0
0
2,200
30,500
(d)
500
(e)
(f)
600
400
Adjusted trial
balance
Dr
Cr
2,500
11,000
2,200
1,100
15,900
4,600
4,000
600
400
(a) 1,400
800
30,500
2,100
2,100
(a) 2,400
42,000
0
32,000
0
6,700
7,800
82,800 82,800
(d)
44,400
500
500
(e) 600
(b) 1,800
(c) 700
(f) 400
6,400
32,600
1,800
7,400
8,200
85,300
6,400
85,300
25
Mastering Adjusting Entries
(a) Accounts Receivable
1,000
Unearned Consulting Fees
1,400
Consulting Fees Earned
2,400
The firm must have recorded this adjustment because at some point during the year
$1,400 was received for services not yet performed. The initial entry debited Cash and
credited Unearned Consulting Fees. As of year end, $2,400 of consulting services had
been completed, but not recorded. Of this amount, $1,000 has not yet been paid.
(b) Supplies Expense
Office Supplies
1,800
1,800
When the office supplies were purchased the entry must have debited Office Supplies
and credited Cash. At year end, $2,200 of supplies were on hand, so Olympic must have
recorded an AJE to account for supplies used up during the year.
(c)
Rent Expense
Prepaid Rent
700
700
Based on the trial balance, Olympic prepaid the rent debiting Prepaid Rent and
crediting Cash. At year end, $700 of rent had been used up, so Olympic had to have
recorded an AJE to reduce the balance in Prepaid Rent by crediting it $700 and
transferring this amount to Rent Expense, which it debited for $700.
(d) Depreciation Expense
500
Accumulated Depreciation
500
Based on the information, Olympic must have debited Depreciation Expense for $500
and credited Accumulated Depreciation for the same amount in order to record
depreciation expense on the equipment for the year.
(e) Salaries Expense
Salaries Payable
600
600
Olympic must debited Salary Expense for $600 and credited Salaries Payable for the
same amount to accrue salaries owed but not paid as of year end.
(f)
Utilities Expense
Utilities Payable
400
400
The firm apparently debited Utilities Expense for $400 and credited Utilities Payable
for the same $400 to accrue utilities expense incurred, but not paid as of year end.
Homework Solutions
26
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