Chapter 4 Solution Manual Financial Accounting Tools For Business Decision Making 6th Canadian Ed

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-1 Chapter 4

CHAPTER 4

Accrual Accounting Concepts

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief

Exercises

A

Problems

B

Problems

BYP

*1. Explain when

revenue and

expenses are

recognized and how

this forms the basis of

accrual accounting.

1, 2, 3, 4

1, 2

1A, 6A

1B, 6B

5, 6

*2. Describe the types of

adjusting entries and

prepare adjusting

entries for

prepayments.

5, 6, 7, 8, 9,

10, 11, 12,

16

3, 4, 5

3, 4, 6, 7,

8

2A, 4A, 5A,

6A, 7A, 8A,

1

1A

2B, 4B, 5B,

6B, 7B

, 8B,

1

1B

1, 2,

3,

4,

5

, 7

*3. Prepare adjusting

entries for accruals.

10, 11, 12,

13, 14, 16

5, 6, 7, 8, 9

5, 6, 7, 8

3A, 4A, 5A,

6A, 7A, 8A,

11A

3B, 4B, 5B,

6B, 7B, 8B,

11B

1, 2,

3,

4,

5, 7

*4. Prepare an adjusted

trial balance.

15, 17, 18

10, 11

8, 9, 10

6A, 7A, 8A,

10A, 11A,

6B, 7B, 8B,

10B, 11B

3, 7

*5. Prepare closing

entries and a post–

closing trial balance.

16, 17, 18,

19, 20, 21,

22

12, 13, 14

11

9A, 10A,

1

2A

9B, 10B,

1

2B

1, 3

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-2 Chapter 4

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Number

Description

Difficulty

Level

Time

Allotted (min.)

1A

Calculate profit on cash and accrual bases.

Moderate

25–35

2A

Prepare transaction and adjusting entries for

prepayments.

Simple

20–30

3A

Prepare adjusting and subsequent entries for

accruals.

Simple

20–30

4A

Prepare transaction and adjusting entries.

Simple

20–30

5A

Prepare adjusting entries.

Simple

20–30

6A

Convert cash to accrual basis; prepare financial

statements.

Complex

40–50

7A

Prepare and post adjusting entries; prepare adjusted

trial balance.

Moderate

30–40

8A

Complete accounting cycle through to preparation of

financial statements.

Moderate

70

9A

Prepare and post closing entries; prepare post–

closing trial balance.

Simple

25–35

10A

Prepare adjusted trial balance, closing entries and

post–closing trial balance.

Moderate

40–50

11A

Prepare and post adjusting entries; prepare adjusted

trial balance and financial statements; assess

financial performance.

Moderate

40–50

12A

Prepare and

post closing entries; prepare post–

closing trial balance.

Simple

25–35

1B

Calculate profit on cash and accrual bases.

Moderate

25–35

2B

Prepare transaction and adjusting entries for

prepayments.

Simple

20–30

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-3 Chapter 4

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem

Number

Description

Difficulty

Level

Time

Allotted (min.)

3B

Prepare adjusting and subsequent entries for

accruals.

Simple

20–30

4B

Prepare transaction and adjusting entries.

Simple

20–30

5B

Prepare adjusting entries.

Simple

20–30

6B

Convert cash to accrual basis; prepare financial

statements.

Complex

40–50

7B

Prepare and post adjusting entries; prepare adjusted

trial balance.

Moderate

30–40

8B

Complete accounting cycle through to preparation of

financial statements.

Moderate

70

9B

Prepare and post closing entries; prepare post–

closing trial balance.

Simple

25–35

10B

Prepare adjusted trial balance, closing entries and

post–closing trial balance.

Moderate

40–50

11B

Prepare and post adjusting entries; prepare adjusted

trial balance and financial statements; assess

financial performance.

Moderate

40–50

12B

Prepare and post closing

entries; prepare post–

closing trial balance.

Simple

25–35

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-4 Chapter 4

ANSWERS TO QUESTIONS

1. Adjusting entries are made to adjust the accounts at the end of the period to ensure

revenues and expenses are recorded when they are earned or incurred.

When revenues and expenses should be recognized in the accounting records is

dictated by recognition criteria. Revenue is recognized or recorded when, due to

ordinary activities, an increase in future economic benefits arising from an increase in

an asset or a decrease in a liability has occurred. In general, revenue recognition

occurs when the sales or performance effort is substantially complete, the amount is

determinable (measurable), and collection is reasonably assured. In a service

company, revenue is considered to be earned when the service is provided. In a

merchandising company, revenue is considered to be earned when the merchandise

is sold (normally at the point of sale).

Expenses are recognized in the income statement when, due to an ordinary activity,

there is a decrease in future economic benefits related to a decrease in an asset or an

increase in a liability and this change can be measured reliably.

2. The law firm should recognize the revenue in April because that is when it was earned;

the work was performed during that month.

3. Expenses of $4,500 should be deducted from the revenues in April because that is

when the expenses were incurred and the revenues earned.

4. Under the cash basis of accounting, events are only recognized in the period that cash

is paid or received. Under the accrual basis, revenue is recognized when the goods or

services are delivered or performed and expenses are recognized when incurred.

Information presented on an accrual basis is more useful because it records events

when they actually occurred and the timing of their recognition cannot be manipulated

by delaying or speeding up the time at which the related cash flow occurs. Because of

this, accrual basis information is better at predicting future performance.

5. (a) Prepaid expenses are assets because they have a future benefit since they were

paid for before they are used or consumed.

(b) As the benefit of the prepayment expires (often with the passage of time) the asset

must be reduced and an expense recognized. This requires an adjustment at the

end of each accounting period, to expense the portion of the prepaid that has

expired (been used up) during the period.

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-5 Chapter 4

Answers to Questions (Continued)

6. (a) Unearned revenue arises when cash is received for goods or services to be

provided in the future. It represents a liability because the cash has not yet been

earned—the company has a future obligation to provide the goods or services.

(b) Unearned revenues must be adjusted at the end of an accounting period to reflect

any revenues that have been earned.

7. No. Depreciation is the process of allocating the cost of a long–lived asset to expense

over its useful life. Depreciation results in the presentation of the carrying amount (cost

less accumulated depreciation) of the asset, not its fair value.

8. (a) Depreciation expense is an expense account with a normal debit balance and is

reported on the income statement as part of the operating expenses. This account

shows the portion of the cost of a long–lived asset that has expired during the

current accounting period.

Accumulated depreciation is a contra asset account with a normal credit balance

that is reported on the statement of financial position as a reduction of a

depreciable asset (such as building and equipment). The balance in the

accumulated depreciation account is the total depreciation that has been

recognized from the date of acquisition to the statement of financial position date.

(b) Cost is the original cost of the asset when purchased.

The carrying amount (also known as net book value) is the original cost of the

asset less its related accumulated depreciation, and represents the portion of the

asset that has not yet been depreciated.

9. A contra asset account is an account with a credit balance that is deducted from the

related asset account on the statement of financial position. Using a contra asset

account discloses both the original cost of the asset and the total estimated cost which

has expired or been used up to date. This information is useful to the financial

statement user.

10. Yes, I agree. A “simple” adjusting entry affects one statement of financial position

account and one income statement account. An adjusting entry reallocates amounts

between a statement of financial position account and an income statement account.

For example: to record the expiration of insurance the following entry would be

recorded; a debit to Insurance Expense (an income statement account) and a credit to

Prepaid Insurance (a statement of financial position account). Compound adjusting

journal entries are also possible which would affect more accounts, but at least one

statement of financial position account and one income statement account is always

affected whether a simple adjusting entry or a compound adjusting entry is made.

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-6 Chapter 4

Answers to Questions (Continued)

11. Disagree. Adjusting entries never involve the Cash account. In making adjusting

entries for prepayments, the cash has already been paid or received and recorded.

The adjusting journal entry is prepared to reflect the fact that a portion of the unearned

revenue or prepaid expense arising in the past when the cash flow occurred is now

earned or incurred, respectively. In making adjusting entries for accruals, we record

the fact that although the cash has not been paid or received, revenue has been

earned or an expense has been incurred. Again, there is no impact on the Cash

account because cash has not yet been received or paid.

12. To ensure that the adjusting entry is properly calculated and prepared, the preparer of

the adjusting entry must first properly understand the original cash payment

transaction that lead to the recording of the prepayment. On the other hand, in the

case of an accrual, there is no cash payment to look up in the accounts. Consequently

no original entry can be examined in the process of preparing an adjusting entry

related to an accrual.

13. Before the recording of adjusting entries to accrued revenues in the amount of $780

and accrued expenses in the amount of $510, the profit would be understated by the

net of the amount of unrecorded revenue of $780, less unrecorded expense of $510 or

$270.

14. Reactor should recognize the expense in the period that it was incurred—December—

and set up the corresponding liability to the utility company. On December 31, Utility

Expense should be debited and an accrued liability account such as Accounts Payable

should be credited.

15. Financial statements are prepared from an adjusted trial balance because the

balances of all accounts have been adjusted to show the effects of all financial events

that have occurred during the accounting period. An unadjusted trial balance is not up

to date for prepayments and accruals.

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-7 Chapter 4

Answers to Questions (Continued)

16. Adjusting entries are only recorded at the end of the accounting period, prior to the

preparation of the financial statements. Transaction entries are made throughout the

accounting period when transactions arise. As well, adjusting entries never affect the

Cash account and always result in an adjustment to a statement of financial position

account and an income statement account. Transaction entries often result in a debit

or credit to Cash and can affect any account on the statement of financial position or

the income statement (or both).

Closing entries are required to reset the revenue and expense (income statement) and

dividend accounts to zero and to update the balance in Retained Earnings to the

closing balance per the statement of changes in equity. Unlike adjusting entries, which

are prepared before the financial statements and could be prepared more than once

per year, closing entries are only prepared and posted after the year–end financial

statements have been completed.

17. The unadjusted, adjusted, and post–closing trial balances are similar in that they prove

the equality of the total debit and total credit balances. Another similarity between the

unadjusted and adjusted trial balances is that they are prepared at the end of an

accounting period. Where trial balances differ is that the unadjusted trial balance is

prepared before any adjusting entries have been recorded or posted. An adjusted trial

balance is prepared after the adjusting entries have been posted to the accounts. The

financial statements are prepared from the adjusted trial balance. After the financial

statements have been prepared, closing entries are prepared and posted. The post–

closing trial balance is then prepared and used to form the basis of the opening

balances for the next accounting period. Unlike the adjusted trial balance which will list

temporary (revenue, expense, dividend) account balances prior to recording the

closing entries, a post–closing trial balance will not list temporary account balances as

these have now been closed out to the Retained Earnings account. Unadjusted and

adjusted trial balances are prepared whenever financial statements are prepared but a

post–closing trial balance is prepared only at the end of the year.

18. The retained earnings balance on the unadjusted and adjusted trial balances are often

the same since the account does not yet reflect the changes that arise from the

recording of closing entries. After the adjusted trial balance and financial statements

are prepared, closing entries are recorded. These will change the retained earnings

balance by updating it for the effect of any profit or loss and dividends. Consequently,

the retained earnings balance on the post–closing trial balance will be different from

the balance shown on the adjusted trial balance.

19. Closing entries are prepared to transfer temporary account balances to retained

earnings, a permanent account, so retained earnings will show an up–to–date amount.

Secondly, closing entries produce a zero balance in each temporary account so that

the temporary accounts are ready for the next accounting period, where only

transactions relating to that period are recorded in them.

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-8 Chapter 4

Answers to Questions (Continued)

20. The Dividends account is not closed with the expense accounts because it is not an

expense; it was not incurred for the purpose of generating revenue and does not

appear on the income statement. Dividends represent a distribution of retained

earnings and are reported on the statement of changes in equity. The Dividends

account is also a temporary account and therefore requires a closing entry.

21. (a) Profit:

(1) (Dr) Individual revenue accounts and (Cr) Income Summary

(2) (Dr) Income Summary and (Cr) Individual expense accounts

(3) (Dr) Income Summary and (Cr) Retained Earnings

(4) (Dr) Retained Earnings and (Cr) Dividends

(b) Loss:

(1) (Dr) Individual revenue accounts and (Cr) Income Summary

(2) (Dr) Income Summary and (Cr) Individual expense accounts

(3) (Dr) Retained Earnings and (Cr) Income Summary

(4) (Dr) Retained Earnings and (Cr) Dividends

Note that it is only step 3 that differs between the two situations.

22. Steps in the accounting cycle that may be done on a daily basis include:

1) Analyzing business transactions

2) Journalizing the transactions

Steps in the accounting cycle that are done on a periodic basis include:

3) Posting to the general ledger accounts

4) Preparing a trial balance

5) Journalizing and posting adjusting entries (prepayments and accruals)

6) Preparing an adjusted trial balance

7) Preparing the financial statements – income statement, statement of changes in

equity, statement of financial position, and statement of cash flows

Steps in the accounting cycle that are usually only done at the company’s year–end

include:

8) Journalizing and posting closing entries

9) Preparing a post–closing trial balance

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-9 Chapter 4

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-1

Cash

Profit

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

–$ 100

0

+800

–5,000

0

+1,000

0

+500

0

$ 0

–75

+1,000

0

–1,000

0

–50

0

+200

–250

BRIEF EXERCISE 4-2

(a) (b)

Accrual Cash

Basis Basis

1. Collected $200 cash from customers for

services provided in August. $ 0 $200

2. Collected $500 cash from customers

for services provided in September. 500 500

3. Billed customers $600 for services

provided in September. 600 0

4. Provided $100 services to customers

who paid in advance in August. 100 0

5. Received $100 from customers in advance

for services to be provided in October. 0 100

Total revenue $1,200 $800

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-10 Chapter 4

BRIEF EXERCISE 4-3

(a)

May 1 Supplies ………………………………………………………………. 4,800

Accounts Payable ………………………………………….. 4,800

(b)

Supplies Used = $1,500 + $4,800 – $2,300 = $4,000

(c)

Dec. 31 Supplies Expense ………………………………………………….. 4,000

Supplies ……………………………………………………….. 4,000

(d)

Supplies

Supplies Expense

Open. bal 1,500

May 1 4,800

Dec. 31 Adj. 4,000

Dec. 31 Bal. 2,300

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

Solutions Manual 4-11 Chapter 4

BRIEF EXERCISE 4-4

(a) Jan. 2 Vehicles …………………………………………………………….. 50,000

Cash …………………………………………………………….. 50,000

(b) The journal entry for the years 2015 and 2016 will be the same:

Dec. 31 Depreciation Expense …………………………………………. 10,000

Accumulated Depreciation—Vehicles ……………….. 10,000

($50,000 ÷ 5 = $10,000 per year)

(c)

CLAYMORE CORPORATION

Statement of Financial Position (partial)

December 31

2016

2015

Property, plant, and equipment

Vehicles

$50,000

Less: Accumulated depreciation

20,000

10,000

Carrying amount

$30,000

$40,000

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition

BRIEF EXERCISE 4-5

(a)

(1) Bere Ltd.

June 1 Prepaid Insurance ………………………………………………….. 6,000

Cash ……………………………………………………………. 6,000

(2) Marla Insurance Corp.

June 1 Cash ……………………………………………………………………. 6,000

Unearned Revenue ………………………………………… 6,000

(b) Expired in 2015 = $6,000 × 7/12 = $3,500

Unexpired at December 31, 2015 = $6,000 × 5/12 = $2,500

(c)

(1) Bere Ltd.

Dec. 31 Insurance Expense ………………………………………………… 3,500

Prepaid Insurance ………………………………………….. 3,500

(2) Marla Insurance Corp.