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Transaction I. (B) (5) was a deferred revenue as cash was received before the service was provided.
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230. Malco Tile Shop purchased insurance coverage for two years on July 1, 2017, for its retail shop for $3,600. Malco
recorded the prepayment as an asset. Malco prepares its adjusting entries at year-end December 31.
A.
What is the effect on the accounting equation of the adjusting journal entry necessary at December 31, 2017?
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’
Equity Revenues – Expenses = Net Income
B.
How much will be reported on the balance sheet at December 31, 2017, for prepaid insurance?
C.
How much will be reported on the income statement for the year ended
December 31, 2017, for insurance expense?
D.
If the adjustment in part A is not recorded, by what amount will net income be
over or understated at December 31, 2017?
E.
How much will be reported on the statement of cash flows for the year
ended December 31, 2017? In which activity (operating, investing, financing)?
F.
What adjusting journal entry is necessary at December 31, 2017?
G.
How much will be reported on the balance sheet at December 31, 2017 for prepaid insurance?
H.
How much will be reported on the income statement for the year ended
December 31, 2017, for insurance expense?
I.
How much will be reported on the statement of cash flows for the year ended December 31, 2017? In which activity
(operating, investing, financing)?
Chapter 4
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231. Fennel Flooring purchased office supplies for its showroom during the month of April for $2,600. The supplies were
paid for during April. On April 1, the Supplies account had a balance of $350. On April 30, supplies on hand amounted to
$200.
A.
What is the effect on the accounting equation of the adjusting journal entry necessary at April 30?
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’
Equity Revenues – Expenses = Net Income
B.
How much will be reported on the balance sheet at April 30 for Supplies?
C.
How much will be reported on the income statement for the month of April for supplies expense?
D.
If the adjustment in part A is not recorded, by what amount will net income be over- or understated at April 30?
Chapter 4
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232. Super Clean operates an automatic car wash business, The Ultimate Shine. The following amounts were taken from
the company’s unadjusted trial balance at December 31, 2017:
Wages Expense $82,000
Rent Collected in Advance 8,000
Determine the effect on the accounting equation of any adjusting entries necessary at December 31, 2017, for each of the
transactions that follow:
A.
The rent collected in advance represents rent for the period December 1, 2017, through January 31, 2018.
B.
In addition to the wages paid during the year, employees have not been paid for the last week of December which
amounts to $900.
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’
Equity Revenues – Expenses = Net Income
Chapter 4
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233. Agle Company purchased a dump truck at a cost of $48,000 on January 1, 2016. The truck has an estimated useful
life of six years and a $6,000 estimated residual value. Show how the truck and any related amounts would appear on the
December 31, 2017, balance sheet immediately after the adjustments are recorded and posted.
234. Union Company purchased a delivery van at a cost of $30,000 cash on January 1, 2016. The van has an estimated
useful life of six years and a $6,000 estimated residual value.
A. What is the effect on the accounting equation of the purchase of the van?
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’
Equity Revenues – Expenses = Net Income
B. How much depreciation expense should be reported for 2017?
C. What is the total amount of accumulated depreciation at December 31, 2017?
235. Marcus Roberts operates a small retail establishment. The following unadjusted amounts were taken from Roberts’
accounting records at December 31, 2017:
Accumulated Depreciation $ 5,000
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Machinery 50,000
Prepaid Advertising 1,200
Determine the effect on the accounting equation of the adjusting entries at December 31, 2017, for each of the transactions
that follow:
A.
The advertising costs are for television commercials to be aired equally throughout December 2017 and January and
February 2018.
B.
The machinery had an original cost of $50,000 and was purchased during 2016. The estimated useful life is six years
with an estimated salvage value equal to $8,000. Roberts uses the straight-line method of depreciation.
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’
Equity Revenues – Expenses = Net Income
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236. Quirin Corp. purchases office supplies once a month and prepares monthly financial statements. The asset account
Office Supplies on Hand has a balance of $1,850 on March 1. Purchases of supplies during March amount to $1,500.
Supplies on hand at March 31 amount to $1,020. Prepare the necessary adjusting entry on Quirin’s books on March 31.
What will be the effect on net income for March if this entry is not recorded?
Chapter 4
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237. On May 1, 2017, Meehan Inc. lends $125,000 to Solar Power Inc. The loan will be repaid in 90 days with interest at
12%.
Required
1. Prepare the journal entry on Meehan’s books on May 1, 2017.
2. Assume that Meehan prepares quarterly statements on May 30, 2017. Prepare the adjusting entry on Meehan’s books on
May 30, 2017, regarding the loan.
3. Prepare the entry on Meehan’s books on July 29, 2017, when Solar Power repays the principal and interest.
2.
May 30 Interest Receivable 1,250
3.
July 29 Cash 128,750
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239. On October 1, 2017, Winter Corp. buys a computer system for $270,000 in cash. Assume that the computer is
expected to have a five-year life and an estimated salvage value of $30,000 at the end of that time.
Required
1. Prepare the journal entry to record the purchase of the computer on October 1, 2017.
2. Compute the depreciable cost of the computer.
3. Using the straight-line method, compute the monthly depreciation.
4. Prepare the adjusting entry to record depreciation at the end of October 2017.
5. Compute the computer’s carrying value that will be shown on Winter’s balance sheet prepared on December 31, 2017.
2.
Purchase price $270,000
3.
Monthly Depreciation = Depreciable Cost/Estimated Life
4.
Oct. 31 Depreciation Expense 4,000
5.
Computer $270,000
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the accounts and their amounts that will be closed out when the closing process occurs at the end of 2017 for Treetop.
Cash Dividends Paid $ 104
Cost of Sales and Related Buying and Occupancy Costs 4,317
Credit Card Revenues 325
Income Tax Expense 207
Interest Expense, net 126
Other Income and Expense, net 13
Net Sales 7,172
Selling, General, and Administrative Expenses—Credit Segment 275
Selling, General, and Administrative Expenses—Retail Stores, Direct and Other Segments 2,228
Chapter 4
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242. Reconstruct the adjusting entries from the following T-accounts.
Prepaid Insurance Accounts Receivable Unearned Revenue Wages Payable
1,200 6,000 1,350 530
300 1,500 435 530
900 7,500 915
Retained Earnings Dividends Fees Earned
12,280 2,100 8,000
1,500
435
Wages Expense Rent Expense Insurance Expense Utilities Expense
2,600 1,145 300 180
530
0
Chapter 4
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Essay
243. What two choices must be made in the measurement process for a company that acquires a piece of equipment and
needs to record it in the accounting records? Explain.
244. Describe the benefit(s) of using the accrual process as compared to the cash basis.
245. Why does the accrual basis of accounting require adjustments, while the cash basis does not?
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246. Why is the cash-basis of accounting too limited for proper financial reporting?
247. What is the revenue recognition principle? Are there any exceptions to this rule? If so, what are they? If not, explain
why.
248. What is the matching principle? How does it relate to the revenue recognition process?
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249. What role do accounting records play in the adjustment process?
250. What is the significance of the timing in which cash is paid or received as it relates to the adjusting process?
251. Explain the differences between the cash basis and accrual basis of accounting and how the adjusting process fits in.
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252. Explain the purpose of a work sheet.
253. Answer each of the following questions (a–c) with a separate short paragraph per question.
(a) What is the difference between a real account and a nominal account? Give an example of each type of account. Why
is this distinction important for the closing process?
(b) What two purposes are served in making closing entries?
(c) Why is the Dividends account closed directly to Retained Earnings rather than to the Income Summary account?
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254. Assuming the use of a work sheet, are the formal adjusting entries recorded and posted to the accounts before or after
the financial statements are prepared? Explain your answer. Would your answer change if a work sheet was not prepared?
Explain.