CHAPTER F3
THE MATCHING CONCEPT AND
THE ADJUSTING PROCESS
CLASS DISCUSSION QUESTIONS
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. 2003
b. 2002
3. a. 2003
b. 2002
4. The matching concept is related to the accrual basis (b).
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 the inventory of supplies 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 apply to the last day of the
fiscal period and hence are recorded as of
that date. The entries are actually journalized
and posted some time later, since it is generally not feasible to record them on the last
day of the period.
9. Adjusting entries bring the ledger up to date
as a normal part of the accounting cycle.
Correcting entries correct errors in the ledger.
10. Five different categories of adjusting entries
include deferred expenses (prepaid expen-
11.
12.
13.
14.
15.
16.
95
ses), deferred revenues (unearned revenues), accrued expenses (accrued liabilities), accrued revenues (accrued assets),
and fixed assets (depreciation).
Statement (b): Increases the balance of an
expense account.
Yes, because every adjusting entry affects
expenses or revenues.
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.
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.
Accumulated Depreciation—Equipment.
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.
EXERCISES
Ex. 3–1
1. (d) Accrued revenue (accrued asset)
2. (c) Accrued expense (accrued liability)
3. (c) Accrued expense (accrued liability)
4. (a) Deferred expense (prepaid expense)
5. (b) Deferred revenue (unearned revenue)
6. (c) Accrued expense (accrued liability)
7. (a) Deferred expense (prepaid expense)
8. (b) Deferred revenue (unearned revenue)
Ex. 3–2
Account
Dividends ..............................................
Accounts Receivable ...........................
Accumulated Depreciation ..................
Cash ......................................................
Interest Payable ....................................
Interest Receivable ..............................
Land.......................................................
Office Equipment .................................
Prepaid Insurance ................................
Supplies Expense ................................
Unearned Fees .....................................
Wages Expense ....................................
Answer
Does not normally require adjustment.
Normally requires adjustment (AR).
Normally requires adjustment (DE).
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 (DE).
Normally requires adjustment (DE).
Normally requires adjustment (DR).
Normally requires adjustment (AE).
Ex. 3–3
Supplies Expense ..........................................................
Supplies ....................................................................
96
1,234
1,234
Ex. 3–4
$2,361 ($418 + $1,943)
Ex. 3–5
a. Supplies expense (or expenses) will be understated. Net income will be overstated.
b. Supplies (or assets) will be overstated. Stockholders’ equity (retained earnings) will be overstated.
Ex. 3–6
a.
Insurance Expense ........................................................
Prepaid Insurance ....................................................
1,020
b. Insurance Expense ........................................................
Prepaid Insurance ....................................................
1,020
1,020
1,020
Ex. 3–7
a.
Insurance Expense ........................................................
Prepaid Insurance ....................................................
1,350
b. Insurance Expense ........................................................
Prepaid Insurance ....................................................
1,875
1,350
1,875
Ex. 3–8
Unearned Fees ...............................................................
Fees Earned ..............................................................
3,950
3,950
Ex. 3–9
a. Rent revenue (or revenues) will be understated. Net income will be understated.
b. Stockholders’ equity (retained earnings) at the end of the period will be understated. Unearned rent (or liabilities) will be overstated.
97
Ex. 3–10
a.
Salary Expense ..............................................................
Salaries Payable .......................................................
5,500
b. Salary Expense ..............................................................
Salaries Payable .......................................................
8,250
5,500
8,250
Ex. 3–11
$85,470 ($87,430 – $1,960)
Ex. 3–12
a. Salary expense (or expenses) will be understated. Net income will be overstated.
b. Salaries payable (or liabilities) will be understated. Stockholders’ equity (retained earnings) will be overstated.
Ex. 3–13
a. Salary expense (or expenses) will be overstated. Net income will be understated.
b. The balance sheet will be correct. This is because wages payable has been
satisfied, and the net income errors have offset each other. Thus, stockholders’ equity (retained earnings) is correct.
Ex. 3–14
a.
Taxes Expense ..............................................................
Prepaid Taxes ...........................................................
($1,020 ÷ 12) × 9 = $765
765
Taxes Expense ..............................................................
Taxes Payable ..........................................................
10,210
b. $10,975 ($765 + $10,210)
98
765
10,210
Ex. 3–15
$733,319,000 ($204,561,000 + $528,758,000)
Ex. 3–16
a. $530,100,000 ($139,100,000 + $138,700,000 + $252,300,000)
b. 85.7% ($530,100,000 ÷ $618,300,000)
Ex. 3–17
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 December 31 would be ..........
Liabilities at December 31 would be .....
Stockholders’ equity at December 31
would be ..................................................
Overstated
Understated
0
0
0
0
10,390
$10,390
0
10,390
0
0
0
10,390
$
Error (b)
Overstated
$
Understated
0
0
2,440
0
0
$
0
2,440
0
0
2,440
2,440
0
Ex. 3–18
$445,670 ($437,720 + $10,390 – $2,440)
Ex. 3–19
a.
Accounts Receivable.....................................................
Fees Earned ..............................................................
7,260
7,260
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.
99
Ex. 3–20
a.
Unearned Fees ...............................................................
Fees Earned ..............................................................
16,000
b. Accounts Receivable.....................................................
Fees Earned ..............................................................
7,500
16,000
7,500
Ex. 3–21
a. Fees earned (or revenues) will be understated. Net income will be understated.
b. Accounts (fees) receivable (or assets) will be understated. Stockholders’ equity (retained earnings) will be understated.
Ex. 3–22
Depreciation Expense ...................................................
Accumulated Depreciation ......................................
3,000
3,000
Ex. 3–23
a. $397,750 ($518,500 – $120,750)
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. 3–24
a. $1,903,000,000 ($3,321,000,000 – $1,418,000,000)
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.
100
Ex. 3–25
a.
Depreciation Expense ...................................................
Accumulated Depreciation ......................................
8,500
8,500
b. (1) Depreciation expense would be understated. Net income would be overstated.
(2) Accumulated depreciation would be understated, and total assets would
be overstated. Stockholders’ equity (retained earnings) would be overstated.
Ex. 3–26
1.
2.
3.
4.
5.
Accounts Receivable.....................................................
Fees Earned ..............................................................
2
Supplies Expense ..........................................................
Supplies ....................................................................
4
Insurance Expense ........................................................
Prepaid Insurance ....................................................
4
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ................
1
Wages Expense .............................................................
Wages Payable .........................................................
1
101
2
4
4
1
1
Ex. 3–27
1. The accountant debited Accounts Receivable for $4,500 but did not credit
Laundry Revenue. This adjusting entry represents accrued laundry revenue.
2. The accountant credited Laundry Equipment for the depreciation expense of
$4,720, instead of crediting the accumulated depreciation account.
3. The accountant credited the prepaid insurance account for $1,500 but only
debited the insurance expense account for $500.
4. The accountant did not debit Wages Expense for $850.
5. The accountant debited rather than credited Laundry Supplies for $1,910.
The corrected adjusted trial balance is shown below.
St. Elmo Laundry
Adjusted Trial Balance
October 31, 2003
Cash ............................................................................
Accounts Receivable .................................................
Laundry Supplies .......................................................
Prepaid Insurance ......................................................
Laundry Equipment....................................................
Accumulated Depreciation ........................................
Accounts Payable ......................................................
Wages Payable ...........................................................
Capital Stock ..............................................................
Retained Earnings ......................................................
Dividends ....................................................................
Laundry Revenue .......................................................
Wages Expense ..........................................................
Rent Expense .............................................................
Utilities Expense ........................................................
Depreciation Expense ................................................
Laundry Supplies Expense .......................................
Insurance Expense ....................................................
Miscellaneous Expense .............................................
102
3,790
12,500
1,840
1,325
85,600
...............
...............
...............
...............
...............
8,000
...............
25,350
15,575
8,500
4,720
1,910
1,500
910
...............
...............
...............
...............
...............
60,420
4,950
850
7,500
16,400
...............
81,400
...............
...............
...............
...............
...............
...............
...............
171,520
171,520
Ex. 3–28
a. (1) $645,000,000 increase ($2,668,000,000 – $2,023,000,000)
31.9% increase ($645,000,000 ÷ $2,023,000,000)
(2) 2000: 14.1% ($2,668,000,000 ÷ $18,928,000,000)
1999: 16.6% ($2,023,000,000 ÷ $12,173,000,000)
b. The net income increased during 2000 by 31.9%, a favorable trend. The percent of net income to net sales decreased from 16.6% to 14.1%, an unfavorable trend.
103
PROBLEMS
Prob. 3–1A
1.
a. Supplies Expense ....................................................
Supplies ...............................................................
1,505
b. Unearned Rent..........................................................
Rent Revenue ......................................................
2,250
c. Wages Expense ........................................................
Wages Payable ....................................................
1,800
d. Accounts Receivable ...............................................
Fees Earned ........................................................
10,600
e. Depreciation Expense ..............................................
Accumulated Depreciation.................................
3,100
1,505
2,250
1,800
10,600
3,100
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.
104
Prob. 3–2A
a. Accounts Receivable ...............................................
Fees Earned ........................................................
3,150
b. Supplies Expense ....................................................
Supplies ...............................................................
2,195
c. Rent Expense ...........................................................
Prepaid Rent........................................................
18,000
d. Depreciation Expense ..............................................
Accumulated Depreciation.................................
1,575
e. Unearned Fees .........................................................
Fees Earned ........................................................
4,300
f. Wages Expense ........................................................
Wages Payable ....................................................
875
105
3,150
2,195
18,000
1,575
4,300
875
Prob. 3–3A
a.
Accounts Receivable.....................................................
Fees Earned ..............................................................
1,100
b. Supplies Expense ..........................................................
Supplies ....................................................................
1,420
c.
Depreciation Expense ...................................................
Accumulated Depreciation ......................................
2,200
d. Unearned Fees ...............................................................
Fees Earned ..............................................................
800
e.
400
Wages Expense .............................................................
Wages Payable .........................................................
106
1,100
1,420
2,200
800
400
Prob. 3–4A
2003
April 30
30
30
30
30
30
30
Supplies Expense .................................................
Supplies ..........................................................
3,150
Insurance Expense ...............................................
Prepaid Insurance ..........................................
2,250
Depreciation Expense—Equipment ....................
Accumulated Depreciation—Equipment ......
9,020
Depreciation Expense—Automobiles .................
Accumulated Depreciation—Automobiles ...
4,650
Utilities Expense ...................................................
Accounts Payable ..........................................
1,080
Salary Expense .....................................................
Salaries Payable .............................................
1,800
Unearned Service Fees ........................................
Service Fees Earned ......................................
2,000
107
3,150
2,250
9,020
4,650
1,080
1,800
2,000
Prob. 3–5A
1.
2003
Dec. 31
31
31
31
31
31
31
Insurance Expense .............................................
Prepaid Insurance ........................................
2,600
Supplies Expense ...............................................
Supplies ........................................................
1,245
Depreciation Expense—Building ......................
Accumulated Depreciation—Building ........
1,620
Depreciation Expense—Equipment ..................
Accumulated Depreciation—Equipment ....
5,500
Unearned Rent ....................................................
Rent Revenue ...............................................
6,000
Salaries and Wages Expense ............................
Salaries and Wages Payable .......................
2,050
Accounts Receivable ..........................................
Fees Earned ..................................................
4,150
108
2,600
1,245
1,620
5,500
6,000
2,050
4,150
Prob. 3–5A
Concluded
2.
GUANTANAMO COMPANY
Adjusted Trial Balance
December 31, 2003
Cash ............................................................................
Accounts Receivable .................................................
Prepaid Insurance ......................................................
Supplies ......................................................................
Land.............................................................................
Building .......................................................................
Accumulated Depreciation—Building ......................
Equipment...................................................................
Accumulated Depreciation—Equipment ..................
Accounts Payable ......................................................
Salaries & Wages Payable .........................................
Unearned Rent ............................................................
Capital Stock ..............................................................
Retained Earnings ......................................................
Dividends ....................................................................
Fees Earned ................................................................
Rent Revenue .............................................................
Salaries & Wages Expense .......................................
Utilities Expense ........................................................
Advertising Expense ..................................................
Repairs Expense ........................................................
Depreciation Expense—Equipment..........................
Insurance Expense ....................................................
Depreciation Expense—Building ..............................
Supplies Expense ......................................................
Miscellaneous Expense .............................................
109
5,700
26,050
1,900
475
75,000
141,500
...............
90,100
...............
...............
...............
...............
...............
...............
10,000
...............
...............
112,630
28,250
20,200
11,500
5,500
2,600
1,620
1,245
4,050
...............
...............
...............
...............
...............
...............
93,320
...............
70,800
8,100
2,050
1,500
50,000
84,000
...............
222,550
6,000
...............
...............
...............
...............
...............
...............
...............
...............
...............
538,320
538,320
Prob. 3–6A
1.
a. Supplies Expense ....................................................
Supplies ...............................................................
1,125
b. Accounts Receivable ...............................................
Fees Earned ........................................................
10,200
c. Depreciation Expense ..............................................
Accumulated Depreciation.................................
2,500
d. Wages Expense ........................................................
Wages Payable ....................................................
850
1,125
10,200
2,500
850
2.
Reported amounts
Corrections:
Adjustment (a)
Adjustment (b)
Adjustment (c)
Adjustment (d)
Corrected amounts
Net
Income
Total
Assets
Total
Liabilities
Total
Stockholders’
Equity
$129,575
$275,600
$18,575
$257,025
– 1,125
+ 10,200
– 2,500
–
850
$135,300
– 1,125
+ 10,200
– 2,500
0
$282,175
0
0
0
+ 850
$19,425
– 1,125
+ 10,200
– 2,500
–
850
$262,750
110
Prob. 3–1B
1. a. Accounts Receivable.................................................
Fees Earned ..........................................................
6,300
b. Supplies Expense ......................................................
Supplies ................................................................
1,790
c. Wages Expense .........................................................
Wages Payable .....................................................
1,500
d. Unearned Rent ...........................................................
Rent Revenue .......................................................
1,300
e. Depreciation Expense ...............................................
Accumulated Depreciation ..................................
3,500
6,300
1,790
1,500
1,300
3,500
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.
111
Prob. 3–2B
a. Supplies Expense ....................................................
Supplies ...............................................................
1,370
b. Depreciation Expense..............................................
Accumulated Depreciation.................................
2,000
c. Rent Expense ...........................................................
Prepaid Rent........................................................
12,000
d. Wages Expense ........................................................
Wages Payable ....................................................
1,060
e. Unearned Fees .........................................................
Fees Earned ........................................................
3,500
f. Accounts Receivable ...............................................
Fees Earned ........................................................
7,180
112
1,370
2,000
12,000
1,060
3,500
7,180
Prob. 3–3B
a. Supplies Expense ....................................................
Supplies ...............................................................
1,020
b. Accounts Receivable ...............................................
Fees Earned ........................................................
2,750
c. Depreciation Expense ..............................................
Accumulated Depreciation .................................
1,500
d. Wages Expense ........................................................
Wages Payable ....................................................
450
e. Unearned Fees .........................................................
Fees Earned ........................................................
900
113
1,020
2,750
1,500
450
900
Prob. 3–4B
2003
Oct. 31
31
31
31
31
31
31
Supplies Expense ...............................................
Supplies ........................................................
4,850
Insurance Expense .............................................
Prepaid Insurance ........................................
1,600
Depreciation Expense—Buildings ....................
Accumulated Depreciation—Buildings ......
5,500
Depreciation Expense—Trucks .........................
Accumulated Depreciation—Trucks ...........
9,100
Utilities Expense .................................................
Accounts Payable ........................................
675
Salary Expense ...................................................
Salaries Payable ...........................................
960
Unearned Service Fees ......................................
Service Fees Earned ....................................
4,000
114
4,850
1,600
5,500
9,100
675
960
4,000
Prob. 3–5B
1.
2003
Dec. 31
31
31
31
31
31
31
Depreciation Expense—Building ......................
Accumulated Depreciation—Building ........
2,100
Depreciation Expense—Equipment ..................
Accumulated Depreciation—Equipment ....
4,000
Salaries and Wages Expense ............................
Salaries and Wages Payable .......................
3,170
Insurance Expense .............................................
Prepaid Insurance ........................................
2,100
Accounts Receivable ..........................................
Fees Earned ..................................................
6,350
Supplies Expense ...............................................
Supplies ........................................................
1,775
Unearned Rent ....................................................
Rent Revenue ...............................................
2,500
115
2,100
4,000
3,170
2,100
6,350
1,775
2,500
Prob. 3–5B
Concluded
2.
HUMVEE SERVICE CO.
Adjusted Trial Balance
December 31, 2003
Cash ............................................................................
Accounts Receivable .................................................
Prepaid Insurance ......................................................
Supplies ......................................................................
Land.............................................................................
Building .......................................................................
Accumulated Depreciation—Building ......................
Equipment...................................................................
Accumulated Depreciation—Equipment ..................
Accounts Payable ......................................................
Salaries and Wages Payable .....................................
Unearned Rent ............................................................
Capital Stock ..............................................................
Retained Earnings ......................................................
Dividends ....................................................................
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 .............................................
116
5,200
22,550
1,900
675
100,000
141,500
...............
90,100
...............
...............
...............
...............
...............
...............
5,000
...............
...............
93,970
28,200
19,000
13,500
4,000
2,100
2,100
1,775
4,050
...............
...............
...............
...............
...............
...............
97,800
...............
69,300
7,500
3,170
3,500
60,000
67,100
...............
224,750
2,500
...............
...............
...............
...............
...............
...............
...............
...............
...............
535,620
535,620
Prob. 3–6B
1.
a. Accounts Receivable ...............................................
Fees Earned ........................................................
13,800
b. Depreciation Expense ..............................................
Accumulated Depreciation .................................
5,000
c. Wages Expense ........................................................
Wages Payable ....................................................
1,300
d. Supplies Expense ....................................................
Supplies ...............................................................
3,105
13,800
5,000
1,300
3,105
2.
Reported amounts
Corrections:
Adjustment (a)
Adjustment (b)
Adjustment (c)
Adjustment (d)
Corrected amounts
Net
Income
Total
Assets
Total
Liabilities
Total
Stockholders’
Equity
$417,950
$771,500
$210,350
$561,150
+ 13,800
– 5,000
– 1,300
– 3,105
$422,345
+ 13,800
– 5,000
0
– 3,105
$777,195
0
0
+ 1,300
0
$211,650
+ 13,800
– 5,000
– 1,300
– 3,105
$565,545
117
CONTINUING PROBLEM
1.
JOURNAL
Date
12
41
6001
Supplies Expense ..........................
Supplies ......................................
56
14
375
31 Insurance Expense ........................
Prepaid Insurance ......................
57
15
702
Depreciation Expense....................
Accum. Depr.—Office Equip.. ...
58
18
50
Unearned Revenue.........................
Fees Earned ...............................
23
41
1,200
Wages Expense ..............................
Wages Payable ...........................
50
22
65
31
31
31
2
Debit
Accounts Receivable .....................
Fees Earned ...............................
31
1
Post.
Ref.
Description
2002
Dec. 31
Page 3
30 hours × $20 = $600
$1,680 ÷ 24 months = $70 per month
118
Credit
600
375
70
50
1,200
65
Continuing Problem
Continued
2.
Cash
Date
2002
Dec. 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.

1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
2
............
1,500
............
............
600
2,400
............
............
............
300
............
............
550
............
............
200
............
............
............
300
1,000
............
............
.............
.............
800
1,680
.............
.............
125
75
100
.............
250
600
.............
120
250
.............
280
600
85
.............
.............
300
1,000
Dr.
Balance
Cr.
3,080
4,580
3,780
2,100
2,700
5,100
4,975
4,900
4,800
5,100
4,850
4,250
4,800
4,680
4,430
4,630
4,350
3,750
3,665
3,965
4,965
4,665
3,665
Accounts Receivable
2002
Dec. 1
2
23
30
31
Balance ...................
.................................
.................................
.................................
Adjusting.................
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
12

1
2
2
3
............
............
580
300
600
119
.............
600
.............
.............
.............
600
—
580
880
1,480
.............
—
.............
.............
.............
Continuing Problem
Continued
Supplies
14
Date
2002
Dec. 1
18
31
Item
Balance ...................
.................................
Adjusting.................
Post.
Ref.
Dr.
Cr.

2
3
............
375
............
.............
.............
375
Dr.
Balance
Cr.
85
460
85
Prepaid Insurance
2002
Dec. 1
31
Balance ...................
Adjusting.................
15
1
3
1,680
............
.............
70
1,680
1,610
Office Equipment
2002
Dec. 5
.................................
Adjusting.................
1
2,500
.............
2,500
3
............
Balance ...................
.................................
.................................
.................................
50
............
Adjusting.................

1
1
2
............
125
............
............
.............
.............
2,500
375
............
—
............
............
.................................
Adjusting.................
125
—
2,500
2,875
22
3
............
65
............
Unearned Revenue
2002
Dec. 3
31
50
21
Wages Payable
2002
Dec. 31
.............
18
Accounts Payable
2002
Dec. 1
3
5
18
.............
.............
17
Accumulated Depreciation—Office Equipment
2002
Dec. 31
.............
.............
.............
65
23
1
3
............
1,200
120
2,400
.............
............
............
2,400
1,200
Continuing Problem
Continued
Capital Stock
Date
2002
Dec. 1
1
31
Item
Balance ...................
.................................
Post.
Ref.
Dr.
Cr.
Dr.
Balance
Cr.

1
............
............
.............
1,500
............
............
Retained Earnings
3,500
5,000
32
This account is not used in Chapter 3.
Dividends
2002
Dec. 1
31
33
Balance ...................
.................................

2
............
1,000
.............
.............
125
1,125
Income Summary
.............
.............
34
This account is not used in Chapter 3.
Fees Earned
2002
Dec. 1
11
16
23
30
31
31
31
Balance ...................
.................................
.................................
.................................
.................................
.................................
Adjusting.................
Adjusting.................
41

1
2
2
2
2
3
3
............
............
............
............
............
............
............
............
.............
300
550
780
600
1,000
600
1,200
............
............
............
............
............
............
............
............
Wages Expense
2002
Dec. 1
14
28
31
Balance ...................
.................................
.................................
Adjusting.................
2,375
2,675
3,225
4,005
4,605
5,605
6,205
7,405
50

1
2
3
............
600
600
65
121
.............
.............
.............
.............
200
800
1,400
1,465
.............
.............
.............
.............
Continuing Problem
Continued
Office Rent Expense
Date
2002
Dec. 1
1
Item
Balance ...................
.................................
51
Post.
Ref.
Dr.
Cr.

1
............
800
.............
.............
Dr.
500
1,300
Equipment Rent Expense
2002
Dec. 1
13
Balance ...................
.................................
Balance ...................
.................................

1
............
250
.............
.............
325
575
Balance ...................
.................................
.................................

2
............
...... 280
.............
.............
150
430
Balance ...................
.................................
.................................

2
2
............
120
300
.............
.............
.............
470
590
890
Balance ...................
Adjusting.................

1
2
............
100
250
.............
.............
.............
300
400
650
Adjusting.................
.............
.............
.............
56

3
............
375
.............
.............
90
465
Insurance Expense
2002
Dec. 31
.............
.............
.............
55
Supplies Expense
2002
Dec. 1
31
.............
.............
54
Advertising Expense
2002
Dec. 1
8
22
.............
.............
53
Music Expense
2002
Dec. 1
21
31
.............
.............
52
Utilities Expense
2002
Dec. 1
27
Balance
Cr.
.............
.............
57
3
70
122
.............
70
.............
Continuing Problem
Concluded
Depreciation Expense
Date
2002
Dec. 31
58
Post.
Ref.
Item
Adjusting.................
Dr.
3
50
Cr.
Dr.
.............
50
Miscellaneous Expense
2002
Dec. 1
4
29
Balance
Cr.
.............
59
Balance ...................
.................................
.................................

1
2
............
75
85
.............
.............
.............
75
150
235
.............
.............
.............
3.
DANCIN MUSIC
Adjusted Trial Balance
December 31, 2002
Cash ............................................................................
Accounts Receivable .................................................
Supplies ......................................................................
Prepaid Insurance ......................................................
Office Equipment .......................................................
Accumulated Depreciation—Office Equipment .......
Accounts Payable ......................................................
Wages Payable ...........................................................
Unearned Revenue .....................................................
Capital Stock ..............................................................
Dividends ....................................................................
Fees Earned ................................................................
Wages Expense ..........................................................
Office Rent Expense ..................................................
Equipment Rent Expense ..........................................
Utilities Expense ........................................................
Music Expense ...........................................................
Advertising Expense ..................................................
Supplies Expense ......................................................
Insurance Expense ....................................................
Depreciation Expense ................................................
Miscellaneous Expense .............................................
123
3,665
1,480
85
1,610
2,500
...............
...............
...............
...............
...............
1,125
...............
1,465
1,300
575
430
890
650
465
70
50
235
16,595
...............
...............
...............
...............
...............
50
2,875
65
1,200
5,000
...............
7,405
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
16,595
SPECIAL ACTIVITIES
Activity 3–1
It is acceptable for Stacey to prepare the financial statements for Nadu Real Estate on an accrual basis. The revision of the financial statements to include the
accrual of the $18,000 commissions as of December 31, 2002, is proper if there
remains no contingencies related to the 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 Nadu Real Estate and the commissions have been earned. If contingencies remain, then the
commission should not be accrued as of December 31, 2002. Indicating on the
loan application to First National Bank that Nadu 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, $610, should be recognized as an expense of
2003 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 (2003), Ford Motor Co. would estimate warranty costs and expenses
at the end of 2003. 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.
124
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 United 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 Instructor: 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.
125
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 Instructor: 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.
126