Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
122. For each of the following transactions, indicate the amounts and direction of effects of
the adjusting entry on the elements of the balance sheet and income statement. Using the
following format, indicate + for increase, and – for decrease, and NE for no effect.
Transactions:
A. Wages of $5,800 have been earned, but not paid to employees at the end of the year.
B. Supplies in the amount of $2,000 were used during the year, which are currently recorded
in the office supplies inventory account.
C. Interest has accrued on a bank loan.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
123. Explain how adjusting entries provide for potential manipulation by managers. In
addition, discuss how compensation arrangements may result in incentives for such
manipulation to occur.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
124. On September 1, 2011, Fast Track, Inc. was started with $30,000 invested by the owners
as contributed capital. On September 30, 2011, the accounting records contained the
following amounts:
Prepare an income statement for September for the first month of Fast Track’s operation.
Ignore income taxes.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
125. On September 1, 2011, Fast Track, Inc. was started with $30,000 invested by the owners
as contributed capital. On September 30, 2011, the accounting records contained the
following amounts:
Prepare a statement of stockholders’ equity for September, the first month of operation. Ignore
income taxes.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
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126. On September 1, 2011, Fast Track, Inc. was started with $30,000 invested by the owners
as contributed capital. On September 30, 2011, the accounting records contained the
following amounts:
Prepare a balance sheet for Fast Track, Inc. as of September 30, 2011.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
127. A. Describe how the income statement is related to the statement of stockholders’ equity.
B. Describe how the statement of stockholders’ equity is related to the balance sheet.
C. Describe how the statement of cash flows is related to the balance sheet.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
128. Modern Mother Magazine has received cash subscriptions on April 1, 2011 in the
amount of $3,600,000 for the next three years. Their year-end is December 31, 2011.
Magazine delivery occurs monthly and started on April 1, 2011. These were the only
subscription sales for the year.
Answer the following questions for the year ended December 31, 2011:
a. What amount of cash should be reported for the year on the statement of cash flows?
b. What amount of subscriptions revenue should be reported on the income statement?
c. What amount would be reported as unearned subscriptions revenue on the balance sheet as
of December 31, 2011?
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
129. Toy Shop Inc. has provided the following income statements:
Requirements:
1. Compute net profit margin for each year.
2. Discuss some of the events which could have caused the changes to the net profit margin
based on the income statement information above.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
130. The following income statement was reported for Bauer Inc. for the first year of
operations ending December 31, 2010 reported (in thousands of dollars):
Requirements:
A. Calculate net profit margin
B. Calculate earnings per share if there are 200,000 shares of common stock outstanding
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
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131. The adjusted trial balance of Tahoe Company at the end of the accounting year,
December 31, 2010, showed the following:
Requirements:
A. Prepare all the required closing entries for Tahoe Company at December 31, 2010.
B. Calculate the 2010 ending balance in retained earnings.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
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132. Air Cargo Company recorded the following adjusting entries at the end of the accounting
year, December 31, 2010:
Before these adjusting entries were recorded, a partial unadjusted trial balance reflected the
following:
Prepare the closing entries for Air Cargo Company at December 31, 2010.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
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133. At December 31, 2010, the following adjusting entries were recorded in the accounts of
CPA Company:
There were no other accrued receivables or payables on CPA’s books in 2010.
Calculate the balances in the following accounts immediately after the closing entries were
posted.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
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134. Determine the effect of the following errors on the financial statements. Code your
answers as follows:
A. If the error results in an overstatement of the financial statement component.
B. If the error results in an understatement of the financial statement component.
C. If the error does not affect the financial statement component.
Error 1: A company failed to record accrued wage expense at year-end.
Revenues_____
Expenses_____
Net income_____
Assets_____
Liabilities_____
Stockholders’ equity_____
Error 2: A company failed to accrue revenue earned at year-end.
Revenues_____
Expenses_____
Net income_____
Assets_____
Liabilities_____
Stockholders’ equity_____
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Error 3: A company recorded revenue when cash was received from a customer for services to
be provided in the future.
Revenues_____
Expenses_____
Net income_____
Assets_____
Liabilities_____
Stockholders’ equity_____
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
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135. Determine the effect of the following errors on the financial statements. Code your
answers as follows:
A: If the error results in an overstatement of the financial statement component.
B: If the error results in an understatement of the financial statement component.
C. If the error does not affect the financial statement component.
Error 1: A company failed to adjust the prepaid insurance account for insurance which
expired during the period.
Revenues_____
Expenses_____
Net income_____
Assets_____
Liabilities_____
Stockholders’ equity_____
Error 2: A company failed to record depreciation expense at year-end.
Revenues_____
Expenses_____
Net income_____
Assets_____
Liabilities_____
Stockholders’ equity_____
Error 3: A company did not adjust the unearned revenue account for revenue earned during
the year.
Revenues_____
Expenses_____
Net income_____
Assets_____
Liabilities_____
Stockholders’ equity_____
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings