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Measuring Revenues and Expenses ♦ 109
For each of the following items, select the letter of the best answer and write it in the space
provided.
a.
Depreciation expense
b.
Interest expense
c.
Unearned revenue
d.
Accumulated depreciation
e.
Interest payable
f.
Retained earnings
11. Obligations arising from the receipts of advance payments from customers for goods or services to
be provided in the future.
12. An amount owed and not yet paid to creditors for the use of their money during a fiscal period.
13. The cost of fixed assets recognized as being consumed during a fiscal period.
14. Provides the linkage between revenues and expenses and owners' equity.
15. The cost associated with borrowing money during a fiscal period.
16. The portion of fixed asset costs allocated to expense since the assets were acquired.
110 ♦ Chapter 3
For each of the following items, select the letter of the best answer and write it in the space
provided
a.
Accounting cycle
b.
Journal
c.
Ledger
d.
Matching principle
e.
Adjusting entries
f.
Closing entries
17. The procedure by which all revenue and expense account balances are transferred
to retained earnings
18. A presentation of accounting information organized by individual account.
19. The process of reporting, summarizing and reporting accounting information
20. A chronological record of transactions
21. End-of-period entries to update account balances
22. Expenses incurred to generate revenues are recorded in the same period in which the revenues are
recorded
Measuring Revenues and Expenses ♦ 111
For each of the following items, select the letter of the type of account for the accounts listed.
a.
Temporary account
b.
Permanent account
23. Accounts Receivable
24. Cost of goods sold
25. Accounts Payable
26. Equipment
27. Wages Expense
28. Rent Revenue
29. Retained Earnings
30. Cash
31. Wages Payable
32. Prepaid Rent
112 ♦ Chapter 3
For each of the following items, select the letter of the answer that best describes the end-of-
period adjustment required for an item.
a.
Increase asset, increase revenue
b.
Decrease asset, increase expense
c.
Decrease liability, increase revenue
d.
Increase liability, increase expense
33. At the end of a month, employees are owed $2,300 for wages they have earned but will not receive
until paid next month
34. A landlord has not yet collected the past month’s rent from a tenent.
35. The firm has plant assets on which $5,000 depreciation must be recorded.
36. On October 1, the firm received an advance payment from a customer and recorded it as a
liability. One-fourth of the advance has been earned.
37. The Supplies account has a $1,200 balance. A physical count reveals that $400 of supplies are on
hand.
38. Income taxes for the period have not yet been recorded.
Measuring Revenues and Expenses ♦ 113
The eight steps in the accounting cycle are listed below. Indicate the order in which they occur.
a.
Prepare post-closing summary of account balances
b.
Post transactions to ledger accounts
c.
Record transactions in journals
d.
Prepare adjusting entries at end of period and post to ledger accounts
e.
Close revenue and expense accounts to retained earnings
f.
Prepare summary of account balances
g.
Prepare balance sheet and statement of cash flows
h.
Prepare income statement from revenue and expense account balances
39. Step 1
40. Step 2
41. Step 3
42. Step 4
43. Step 5
44. Step 6
45. Step 7
46. Step 8
114 ♦ Chapter 3
PROBLEM
1. Transport Corporation has just released its annual report for calendar year 2007. Disclosed therein
is a wide variety of financial information that has been captured and processed by the accounting
system. For each piece of information below, indicate on which financial statement it is reported
by putting a check mark in the appropriate column. If an item is sometimes reported on two
statements, choose the statement where it is ALWAYS reported.
Information Item
Income
Statement
Balance
Sheet
Statement of
Cash Flows
a.
New investments into the business
by owners during this period
b.
Credit sales (uncollected)
c.
Amount of profit earned during
the current accounting period
d.
Total amount of depreciation
taken on assets during current
period
e.
Total depreciation taken on an
asset since it was purchased
f.
Amount still owed to the bank at
the end of the period
g.
Total cash dividends paid to
owners this period
h.
Amount paid back to the bank
during the period
i.
Amount of inventory on hand at
end of the accounting period
j.
Amount paid in cash to buy
equipment during the period
Measuring Revenues and Expenses ♦ 115
2. Jaime’s Home Repair uses the following accounts in its accounting system. Place a mark in the
appropriate column to indicate the type of account.
Asset
Liability
Equity
Revenue
Expense
a.
Supplies Expense
b.
Owners' investment
c.
Cash
d.
Sales
e.
Utilities Expense
f.
Bonds Payable
g.
Depreciation Expense
h.
Cost of Goods Sold
i.
Equipment
j.
Retained earnings
116 ♦ Chapter 3
3. During February, its first month of operations, Sally Rides Company purchased merchandise for
$180,000 on credit. Of that merchandise, $150,000 was sold during February. During March, Sally
purchased $160,000 of merchandise on credit and sold merchandise that had cost her $164,000.
Sally paid suppliers $174,000 during March.
Required:
Determine (a) cost of goods sold for March, (b) merchandise inventory at March 31, and (c)
amounts owed creditors at March 31.
4. Best Cleaning Corporation had the following activities during April:
1.
Collected cash of $38,000 from customers for services provided in March.
2.
Incurred expenses of $30,000, of which 2/3 was paid during April.
3.
Provided $44,000 of services to customers on credit.
4.
Issued $200,000 of common stock.
5.
Borrowed $60,000.
6.
On April 30, purchased new equipment for $30,000, paying $10,000 down and
signing a note for the remainder.
7.
Paid $6,000 for expenses incurred during March.
Required:
For each item, indicate the amount of the effect on Best Cleaning’s net income for April. Indicate
revenues with a plus (+) and expenses with a minus (-). If an item as no income effect, enter $0.
Alternative requirement:
Prepare entries in spreadsheet format.
Measuring Revenues and Expenses ♦ 117
5. Ramirez & Sons Corporation had the following activities during July:
1.
Collected cash of $58,000 from customers for services provided in June.
2.
Incurred expenses of $50,000, of which 3/4 was paid during July.
3.
Provided $84,000 of services to customers on credit.
4.
Issued $120,000 of common stock.
5.
Borrowed $20,000.
6.
On July 31, purchased new equipment for $40,000, paying $8,000 and signing a note
for the remainder.
7.
Paid $10,000 for expenses incurred during June.
Required:
For each item, indicate the amount of the effect on Ramirez & Son's net income for July. Indicate
revenues with a plus (+) and expenses with a minus (-). If an item as no income effect, enter $0.
Alternative requirement:
Prepare entries in spreadsheet format.
118 ♦ Chapter 3
6. The following information is available on December 31, 2007, for Simmons Company:
a.
Employees are owed $6,400 for wages they have earned but will not receive until the
next regular payroll in ten days.
b.
On October 1, 2007, Simmons received a $9,000 check from a tenant to cover the
next six month's rent. It was recorded as unearned rent.
c.
The supplies account has a $3,800 balance. A physical count indicates that $800 is
on hand at year end.
d.
Simmons billed customers on December 31 for $5,000 for services performed during
the month.
Required:
For each situation above, indicate how it affects the accounting system by entering the proper
accounts and amounts using the spreadsheet format.
Measuring Revenues and Expenses ♦ 119
7. The following information is available on December 31, 2007, for Leonor Company:
a.
Employees are owed $5,200 for wages they have earned but will not receive until the
next regular payroll in ten days.
b.
The Prepaid Insurance account has a $4,800 balance. This represents the premium
paid on a 1-year policy on October 1, 2007.
c.
Allocation of equipment cost for use during the year is estimated at $25,000.
Required:
For each situation above, indicate which account balances need adjustment, by what amount and
in which direction. In each situation, list the appropriate income statement account first, followed
by the balance sheet account.
120 ♦ Chapter 3
8. The following information is available on December 31, 2007, for LaSalle Company:
a.
A $20,000 note payable incurring $1,200 of interest has been outstanding the entire
year. No interest has been paid or accrued to date.
b.
On November 1, 2007 LaSalle received a $6,000 check from a tenant to cover the
next three month's rent. It was recorded as unearned rent.
c.
The supplies account has a $2,000 balance. A physical count indicates that $500 is
on hand at year end.
Required:
For each situation above, indicate which account balances need adjustment, by what amount and
in which direction. In each situation, list the appropriate income statement account first, followed
by the balance sheet account.
9. The following information is available on December 31, 2007, for Levinson Enterprises:
a.
Employees are owed $3,400 for wages they have earned, but will not receive until
the next regular payroll in ten days.
b.
The Prepaid Insurance account has a $6,000 balance. This represents the premium
paid on a 1-year policy on September 1, 2007.
c.
Allocation of equipment cost for use during the year is estimated at $28,000.
Required:
For each situation above, indicate which account balances need adjustment, by what amount and
in which direction. In each situation, list the appropriate income statement account first, followed
by the balance sheet account.
Measuring Revenues and Expenses ♦ 121
10. The following information is available on December 31, 2007, for Sorensen Company:
a.
A $25,000 note payable incurring $2,000 interest has been outstanding the entire
year. No interest has been paid or accrued to date.
b.
On December 1, 2007, Sorensen received a $3,600 check from a tenant to cover the
next three month's rent. It was recorded as unearned rent.
c.
The supplies account has a $2,500 balance. A physical count indicates that $900 is
on hand at year end.
Required:
For each situation above, indicate which account balances need adjustment, by what amount and
in which direction. In each situation, list the appropriate income statement account first, followed
by the balance sheet account.
122 ♦ Chapter 3
11. The following information is available on December 31, 2007, for Malcolm Company:
a.
Employees are owed $10,800 for wages they have earned, but will not receive until
the next regular payroll in ten days.
b.
On November 1, 2007, Malcolm received a check for $8,400 from a tenant to cover
the next six month's rent. It had been recorded as unearned rent.
c.
The supplies account has a $1,800 balance. A physical count indicates that $400 is
on hand at year end.
d.
Malcolm performed $7,500 of services during December for which it has not billed
customers.
Required:
For each situation above, indicate how it affects the accounting system by entering the proper
accounts and amounts using the spreadsheet format.
Measuring Revenues and Expenses ♦ 123
12. Image Max Service recently began operations. Record each of the following transactions in
spreadsheet format.
a.
Peter Samuels started the firm by investing $40,000 in cash.
b.
A store was rented for $600 per month. The first month's rent was paid.
c.
A bank loan of $60,000 was received.
d.
Equipment costing $30,000 was purchased. Of this amount, $16,000 was paid in
cash with the balance due in 60 days.
e.
Services totaling $6,800 were performed during the month and paid for by customers
in cash.
13. Accounts balances from Millard Corporation's accounting system are reported below at the end of
June:
Cash
$10,000
Accounts receivable
4,200
Merchandise
8,600
Supplies
560
Accounts payable
1,800
Contributed capital
20,000
Retained earnings
1,560
New transactions for the month of July include the following:
a.
Paid $600 for supplies previously purchased on account.
b.
Received and paid utility bill for $300.
c.
Cash sales to customers totaled $1,400. The merchandise sold originally cost the
company $800.
d.
Used supplies totaling $240.
124 ♦ Chapter 3
Required:
Use the spreadsheet format of the general ledger. List each account and its balance at the end of
June. Record the transactions for July and calculate the account balances at the end of July.
Assume that income statement accounts are included under retained earnings.
ACCOUNT ASSETS = LIABILITIES + OWNERS’ EQUITY
Measuring Revenues and Expenses ♦ 125
14. Space Age Technologies has just completed its end-of-period analysis and adjustments. Account
balances as of December 31 are as follows:
Cash
$28,000
Owners' equity
$ 92,000
Accounts receivable
18,000
Sales revenue
124,000
Merchandise
46,000
Cost of goods sold
62,000
Equipment
34,000
Wages expense
24,000
Accounts payable
9,000
Utility expense
13,000
Required:
Prepare closing entries in spreadsheet format.
15. Ska Cola Bottling has just completed its end-of-period analysis and adjustments. Account balances
as of December 31, 2007 are as follows:
Cash
$39,000
Owners' equity
$ 88,000
Accounts receivable
16,000
Sales revenue
124,000
Merchandise
55,000
Cost of goods sold
62,000
Equipment
41,000
Wages expense
24,000
Accounts payable
10,000
Utility expense
13,000
Required:
Prepare an Income Statement.
