Accrual Accounting Concepts ♦ 135
50. An increase in unearned revenue will be added to net income to determine the net cash flows from
operating activities.
51. A decrease in current assets from operations will be subtracted from net income to determine the
net cash flows from operations.
ESSAY
1. Describe the accrual basis of accounting.
2. Describe the end-of-the-period adjustment process. Why is it necessary, and what does it
accomplish?
3. Describe deferrals and accruals.
136 ♦ Chapter 3
4. Define/discuss each of the following accrual terms:
Expense Deferrals
Revenue Deferrals
Accrued Expenses
Accrued Revenues
5. Under the balance sheet classification of property, plant and equipment, some accounts need
adjustment and others do not. Which do and why? Which do NOT and why?
6. Is there normally a difference between the supplies account before adjustment and the account
balance based upon the physical count of supplies?
Accrual Accounting Concepts ♦ 137
7. Describe a classified balance sheet.
8. When are sales recognized under the cash basis of accounting? When are expenses recognized?
138 ♦ Chapter 3
9. Describe the accounting cycle and identify the steps involved.
PROBLEM
1. Classify the following items as:
a.
deferred expense (prepaid expense)
b.
deferred revenue (unearned revenue)
c.
accrued expense (accrued liability)
d.
accrued revenue (accrued asset)
(1)
Three months rent paid in advance
(2)
Rental income for 6 months received in advance
(3)
Supplies on hand
(4)
Interest payable accrued on a note, but not yet paid
(5)
Telephone bill owed but not yet paid
(6)
A three-year premium paid on your auto fleet insurance policy
(1)
a
(2)
(3)
a
(4)
c
(5)
(6)
a
Hints
Hint #1: The adjustment falls into one of four categories:
(1)
Accrued expense
(2)
Accrued revenue
(3)
Deferred revenue
(4)
Deferred expense
Hint #2: The beginning balance is provided. You must record the adjustment.
(1)
Identifying, analyzing, and recording the effects of transactions on the accounting equation.
(2)
Identifying, analyzing, and recording adjustment data.
(3)
Preparing the financial statements
(4)
Preparing the accounting records for the next accounting period.
Accrual Accounting Concepts ♦ 139
2. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that on October 1, 2004, JVC Investment Corp. had received $1,600 rent in advance for
rental property for 4 months. The transaction would affect the following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Prepaid
Rent
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
3. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that on October 1, 2004, JPropedia, Inc. paid $1,800 insurance premium on an 18 month
general business policy.The transaction would affect the following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Prepaid
Insurance
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
Assets = Liabilities + Stockholders’ Equity
Cash
Prepaid
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
Transaction
1,600
Bal.
2,960
2,000
25,000
1,540
20,000
140 ♦ Chapter 3
4. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that an additional $4,000 of capital stock was issued in exchange for cash.The transaction
would affect the following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Prepaid
Insurance
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
Assets = Liabilities + Stockholders’ Equity
Cash
Prepaid
Office
Equipment
Payable
Capital
Stock
Retained
Earnings
4,560
400
25,000
1,540
20,000
4,000
Bal.
8,560
400
25,000
1,540
24,000
Assets = Liabilities + Stockholders’ Equity
Cash
Prepaid
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
20,000
1,800
Bal.
2,760
2,200
25,000
1,540
20,000
Accrual Accounting Concepts ♦ 141
5. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that supplies for $320 was purchased on account.The transaction would affect the
following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Supplies
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
6. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that office equipment was purchased for $1,200 with a down payment of $200 and a note
payable fro the remainder.The transaction would affect the following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Note
Payable
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
Transaction
320
Bal.
4,560
720
25,000
1,860
20,000
142 ♦ Chapter 3
7. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that $2,400 of services were provided to customers for cash .The transaction would affect
the following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Note
Payable
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Note
Payable
Accounts
Payable
Capital
Stock
Retained
Earnings
4,560
25,000
400
1,540
20,000
Bal.
6,960
25,000
400
1,540
20,000
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Note
Payable
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
25,000
400
1,540
20,000
(200)
1,200
1,000
Bal.
4,360
26,200
1,400
1,540
20,000
Accrual Accounting Concepts ♦ 143
8. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that $820 of expenses for rent, utilities, and wages were paid.The transaction would affect
the following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Note
Payable
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
9. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that $120 was paid on account for the supplies purchased on account earlier.The
transaction would affect the following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Supplies
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Payable
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
25,000
400
1,540
20,000
Transaction
(820)
Bal.
3,740
25,000
400
1,540
20,000
144 ♦ Chapter 3
10. Identify the accounts affected and record the transaction for the event. Make sure to include the
ending balances.
Assume that a $1000 dividend was paid to stockholders. The transaction would affect the
following accounts:
Assets = Liabilities + Stockholders’ Equity
Cash
Supplies
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
8,420
Transaction
Bal.
Assets = Liabilities + Stockholders’ Equity
Cash
Supplies
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
4,560
400
25,000
1,540
20,000
Bal.
3,560
400
25,000
1,540
20,000
Assets = Liabilities + Stockholders’ Equity
Cash
Supplies
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
4,560
400
25,000
1,540
20,000
(120)
Bal.
4,560
400
25,000
1,420
20,000
Accrual Accounting Concepts ♦ 145
11. Refer to Hints. Identify the type of adjustment necessary (the type of item involved) and record the
transaction for the event. Make sure to include the ending balances.
Assume that on June 1, 2004, Jimmy Jack’s Sausage Corp. had paid $1,200 in advance for a 6-
month insurance policy. The June 30 adjustment is:
Assets = Liabilities + Stockholders’ Equity
Cash
Prepaid
Insurance
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
(1,200)
1,200
Adjustment
Bal.
12. Refer to Hints. Identify the type of adjustment necessary (the type of item involved) and record the
transaction for the event. Make sure to include the ending balances.
Assume that on June 1, 2004, Jimmy Jack’s Sausage Corp. has $100 in supplies. On June 6 it
purchased $600 in supplies for cash. On June 30, at the end of the accounting period, there are
$200 of supplies on hand.
Assets = Liabilities + Stockholders’ Equity
Cash
Supplies
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
(100)
100
Adjustment
(600)
600
Bal.
(700)
700
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
(1,200)
1,200
Adjustment
Bal.
(1,200)
1,000
146 ♦ Chapter 3
13. Refer to Hints. Identify the type of adjustment necessary (the type of item involved) and record the
transaction for the event. Make sure to include the ending balances after adjustment.
Assume Jimmy Jack’s pays salaries on the 28th of each month. Sausage stuffers earn $200/day
with a 7 day work week. June 30th is the end of the accounting period. Sausage stuffers have
worked on the 29th and 30th but have not yet been paid for those days.
Assets = Liabilities + Stockholders’ Equity
Cash
Office
Equipment
Accumulated
Depreciation
Salaries
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
Adjustment
Bal.
Assets = Liabilities + Stockholders’ Equity
Assets = Liabilities + Stockholders’ Equity
Beg. Bal.
Bal.
Accrual Accounting Concepts ♦ 147
14. Refer to Hints. Identify the type of adjustment necessary (the type of item involved) and record the
transaction for the event. In addition, show the portion of the balance sheet for the equipment after
the adjustment has been made. Make sure to include the ending balances.
Assume that on June 1, 2004, Jimmy Jack’s Sausage Corp. bought equipment for $50,000 cash.
The estimated useful life of the equipment is 10 years. Depreciation for the equipment for June is
$417.
Assets = Liabilities + Stockholders’ Equity
Cash
Equipment
Accumulated
Depreciation
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
(50,000)
50,000
Bal.
Jimmy Jack’s Sausage Corp.
Balance Sheet
June 30, 2004
Assets
Cash, etc.
$XXXX
Equipment
50,000
Assets = Liabilities + Stockholders’ Equity
Equipment
Accumulated
Depreciation
Accounts
Payable
Capital
Stock
Retained
Earnings
Beg. Bal.
50,000
Adjustment
Bal.
50,000
Assets
Cash, etc.
Equipment
Less: Accumulated Depreciation