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133. Accounts Receivable was $750 at the end of November and $525 at the end of December. Revenue
totaled $4,775 for December. How much cash was received from revenues during December?
a.
$6,050
b.
$5,000
c.
$4,550
d.
$3,550
134. Office Supplies were $900 at the end of January and $1,140 at the end of February. During February,
Office Supplies Expense equaled $420. How much cash was paid for office supplies during February?
a.
$360
b.
$1,560
c.
$1,860
d.
$660
135. Unearned Revenue was $600 at the end of February and $750 at the end of March. Service Revenue
was $4,200 for the month of March. How much cash was received from revenue during March?
a.
$5,550
b.
$4,050
c.
$2,850
d.
$4,350
SHORT ANSWER
1. Which two broad account categories are used to determine net income? Define each category and list
two examples of each type.
2. How and why is the matching rule applied to the cost of a building?
ANS:
3. What is the purpose of adjusting entries?
4. Distinguish between a deferral and an accrual.
5. In the space below, state whether each situation is a deferral or an accrual.
______
a.
Unrecorded interest on savings bonds is $765.
______
b.
Property taxes that have been incurred but that have not yet been paid or
recorded amount to $1,034.
______
c.
Legal fees of $2,890 were collected in advance. By year end, 70 percent
were still unearned.
______
d.
Prepaid Insurance had a $900 balance prior to adjustment. By year end, 25
percent was still unexpired.
______
e.
Salaries earned by employees by year end but not yet paid or recorded
amounted to $1,655.
______
f.
Services totaling $690 have been performed but not yet recorded or billed.
6. In the space below, state whether each situation is a deferral or an accrual.
______
a.
Depreciation on machinery is $7,200 for the accounting period.
______
b.
Interest that has been incurred on a loan but that has not yet been paid or
recorded is $675.
______
c.
Office supplies of $965 were on hand at the beginning of the period.
Purchases of office supplies during the period totaled $640. At the end of the
period, $120 in office supplies remained.
______
d.
Commissions amounting to $975 were earned but not yet collected by year
end.
______
e.
Prepaid Rent had a $2,500 balance prior to adjustment. By year end, 50
percent had expired.
______
f.
Federal income taxes for the year were estimated to be $4,680.
7. Quality Heating Company has the following liabilities at year end:
Notes Payable
$20,000
Accounts Payable
15,000
Unearned Contract Revenue
9,000
Wages Payable
2,900
Interest Payable
700
Income Taxes Payable
1,500
a. Which of these accounts probably was created at the end of the fiscal year as a result of an accrual?
Which probably was adjusted at year end? Explain your answer.
b. Which adjustments probably reduced net income? Which probably increased net income? Explain
your answers.
8. For each of the following oversights, state whether total assets will be understated, overstated, or not
affected.
______ a. Failure to record revenue earned but not yet received
______ b. Failure to record expired rent
______ c. Failure to record accrued interest in the bank
______ d. Failure to record depreciation
______ e. Failure to record accrued wages
______ f. Failure to convert unearned revenue to earned revenue
9. For each of the following oversights, state whether stockholders' equity will be understated, overstated,
or not affected.
______ a. Failure to record depreciation
______ b. Failure to record accrued wages
______ c. Failure to convert unearned revenue to earned revenue
______ d. Failure to record accrued interest in the bank
______ e. Failure to record expired insurance
______ f. Failure to record revenue earned but not yet received
10. Rice Enterprises had supplies on hand costing $240 on December 31. During the same year, supplies
costing $500 were purchased, and $320 in supplies were consumed during the year. What was the cost
of supplies on hand on January 1 of that year?
11. Dowling Company had supplies on hand costing $1,000 at the beginning of the year and $2,400 at the
end of the year. During the year, supplies totaling $3,800 were consumed. How much was the total
cost of supplies purchased during the year?
12. Pierce & Company purchased equipment for $36,000. The equipment has an estimated useful life of
eight years and will be worthless at the end of that time. In the partial balance sheet below, show
exactly how the equipment should be disclosed after it has been used for five years. Also calculate
total assets.
Pierce & Company
Partial Balance Sheet
December 31, 2010
Cash
$18,000
Prepaid rent
6,000
Equipment
____ __
Total assets
$___ __
13. Antonio's Pizza has a delivery truck it purchased for $30,000. The truck has an estimated useful life of
six years and will be worthless at the end of that time. In the partial balance sheet below, show exactly
how the truck would be disclosed after it has been used for two years. Also calculate total assets.
Antonio's Pizza
Partial Balance Sheet
December 31, 2010
Cash
$10,000
Prepaid rent
3,000
Truck
______
Total assets
$___ __
14. An examination of the Prepaid Insurance account shows a debit balance of $3,670 at the end of the
accounting period before adjustment. Prepare journal entries to record the insurance expense for the
period under each of the following independent assumptions:
a. An examination of insurance policies shows that insurance costing $1,200 has expired during the
period.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
b. An examination of insurance policies shows unexpired insurance of $2,640 at the end of the period.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
15. Erwin Press pays wages of $6,000 every Friday for a five-day workweek. June 30, the last day of the
fiscal year, falls on a Tuesday. In the journal provided, prepare the June 30 adjusting entry as well as
the July 3 follow-up entry when the wages are paid. Omit explanations.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
16. On December 12, Roger Kent, a painter, received $1,800 in advance for performing a service that
would extend into the following calendar year. By December 31, he still had three-fourths of the
service remaining to perform. In the journal provided, prepare the December 12 entry, the December
31 end-of-period adjustment, as well as the entry on January 29 when the job was completed. Omit
explanations.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
17. Answer the following questions. (Show your work.)
a. Equipment is purchased for $48,000, to be used for eight years. Assuming zero value at the end of
eight years, what is the equipment's carrying value after two years and three months?
b. Prepaid Insurance has an $800 balance prior to adjustment. By year end, one-fourth has expired.
What will be the balance in Prepaid Insurance after the adjusting entry has been made?
c. A company purchased $210 in supplies during the year, recorded $120 in Supplies Expense, and
ended with $350 of supplies. What was the beginning balance of Supplies?
18. In the journal provided, prepare adjusting entries for the following items. Omit explanations.
a. Depreciation on machinery is $940 for the accounting period.
b. Interest incurred on a loan but not paid or recorded is $635.
c. Office supplies of $600 were on hand at the beginning of the period. Purchases of office supplies
during the period totaled $200. At the end of the period, $140 in office supplies remained.
d. Commissions amounting to $540 were earned but not recorded or collected by year end.
e. Prepaid Rent had an $8,000 normal balance prior to adjustment. By year end, 50 percent had
expired.
f. Federal income taxes for the year are estimated to be $3,250.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
19. In the journal provided, prepare adjusting entries for the following items. Omit explanations.
a. Unrecorded interest on savings bonds is $680.
b. Property taxes incurred but not paid or recorded amount to $540.
c. Legal fees of $5,000 were collected in advance. By year end, 80 percent were still unearned.
d. Prepaid Insurance had a $1,600 debit balance prior to adjustment. By year end, 25 percent was still
unexpired.
e. Salaries incurred by year end but not yet paid or recorded amounted to $1,375.
f. Services totaling $900 have been performed but not yet recorded or billed.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
20. During the performance of the steps in the accounting cycle, trial balances are prepared at three key
points. Using specific names where applicable, discuss the time of preparation and the purpose served
by each of these trial balances.
21. The following steps in the accounting cycle are presented out of order below. Arrange the steps in
proper order by placing a number from 1 through 5 in the blanks provided. Also identify each step as
either a recurring activity (RA)—one that would be repeated during the fiscal period—or an
end-of-period activity (EOP)—one performed at the end of the accounting period.
______ a. Record entries in a journal.
______ b. Adjust the accounts and prepare an adjusted trial balance.
______ c. Close the accounts and prepare a post-closing trial balance.
______ d. Analyze business transactions from source documents.
______ e. Post entries to the ledger and prepare a trial balance.
22. Distinguish between adjusting and closing entries.
23. What broad purposes are accomplished by closing entries?
24. Indicate with an X in the appropriate column the type of entry to be made to close the following
accounts:
Debit
Credit
Not Closed
a.
Fees Earned
b.
Telephone Expense
c.
Dividends paid
d.
Cash
e.
Depreciation Expense–Equipment
f.
Income Summary
(assuming a net income)
g.
Retained Earnings
25. The Retained Earnings, Dividends, and Income Summary accounts for Gegor's Repair Shop, Inc., for
the accounting period are presented below in T account form after the recording and posting of closing
entries.
From the T accounts, determine the following:
a. Revenue for the period
b. Net income (or net loss)
c. Dividends for the period
d. Ending balance of Retained Earnings
26. Presented below are the Retained Earnings, Dividends, and Income Summary accounts for Happy
Puppy Pet Grooming Boutique for the year ended December 31, 20xx.
In the journal provided, prepare the closing entries that resulted in the T accounts above. Assume that
the only revenue is Revenue from Services and the only expense is Advertising Expense (omit
explanations).
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
27. Why will the Income Summary account never appear on any financial statement?
28. Below are the adjusted accounts of DeMay Realtors, Inc., for the month ended July 31, 20xx, listed in
alphabetical order:
Accounts Payable
$1,200
Dividends
$ 3,000
Accounts Receivable
10,800
Income Taxes Expense
300
Accumulated Depreciation–
Income Taxes Payable
300
Office Equipment
12,000
Land
4,500
Cash
3,450
Office Equipment
30,000
Commissions Revenue
22,500
Salaries Expense
6,900
Common Stock
24,000
Utilities Expense
450
Depreciation Expense–
Office Equipment
600
Prepare a post-closing trial balance.
29. The 20xx income statement for Newton Company showed rent expense of $10,800 and salaries
expense of $7,200. The related balance sheet account balances at year end for last year and this year
were as follows:
This Year
Last Year
Prepaid rent
$1,200
$ 0
Salaries payable
400
800
a. Compute cash paid for rent during the year.
b. Compute cash paid for salaries during the year.
30. The following amounts are taken from the balance sheets of Baltic Corporation:
December 31, 2010
December 31, 2009
Accrued liabilities
$44,000
$37,500
Prepaid expenses
14,000
18,500
During 2010, expenses related to accrued liabilities were $30,500, and expenses related to prepaid
expenses were $21,000.
a. Compute cash payments related to accrued liabilities.
b. Compute cash payments related to prepaid expenses.
31. Susan Kane won the mayoral election in the City of Ashley partly on the basis of her charge that Allen
Ross, the former mayor, was responsible for the budget deficit. After taking office, she hired a major
international accounting firm to straighten things out. This excerpt appeared in an article from a
leading business publication, West End Business Review:
[A riddle] Q: When is a budget deficit not a deficit?
A: When it is a surplus, of course.
Ashley Mayor Susan Kane was once again caught with egg on her face last week as she and her
financial advisers tried to defend that riddle. On one hand, Comptroller Jim Guan [a Kane appointee],
explaining $75 million in assets the mayor [Kane] hopes to hold in reserve in the 2007 Ashley city
budget, testified in hearings that the city had actually ended 2005 with a $6 million surplus, not the
much-reported deficit. He said further that the modest surplus grew to $54 million as a result of
tax-enrichment supplements to the 2005 balance sheet.
On the other hand, the mayor stuck by the same guns she used last year on her predecessor. The city
had ended 2005, under the Allen Ross administration, not merely without a surplus, but with a deficit.
The apparent discrepancy can be explained.
Like most U.S. cities, Ashley operates under a modified accrual accounting basis. This is a
combination of the cash basis and the accrual basis. The modified accrual basis differs from the
accrual basis in that revenue is recorded when it is collected. The collection of Ashley's parking tax,
which is assessed on all city parking lots and garages, is an example.
The tax is assessed and collected on a quarterly basis but the city doesn't collect the amount due for the
last quarter of 2006 until the first quarter of 2007. Under ideal accrual methods, the parking revenues
should be recorded in the 2006 financial statements. Under a cash approach, the revenues would be
recorded in the 2007 budget. What the city did before was to record the money whenever it was
advantageous politically. That, combined with the infamous revolving funds, allowed the city to hide
the fact it was running large deficits under [former] Mayor Ross. That also means that no one really
knew where the city stood.
The auditors are now reallocating the parking revenues to the 2007 budget but are accruing other
revenues by shifting the period of collection from a year in the past. Overall, more revenues were
moved into earlier fiscal years than into later years, inflating those budgets. Thus, the 2007 deficit is a
surplus.
The article concluded:
The upshot is that both Mayor Kane and Mr. Guan [the comptroller] were correct. There was a deficit
in the 2005 corporate or checkbook fund, but because of corrections taking place now, a surplus exists.
a. Do you agree with the way the auditors handled parking revenues? Support your answer by
explaining which method of accounting you think a city should use.
b. Comment on the statement, “Systematically applied accounting principles will allow all to know
exactly where the city stands.”
