Chapter 4: Income Measurement and Accrual Accounting
180. Motor Repair Shop uses the accrual basis of accounting, and had the following account balances on its financial
statements at December 31, 2014:
Rent Revenue
$34,000
Accounts Receivable
8,200
Utilities Payable
1,500
Rent Expense
2,100
Unearned Repair Revenue
700
Depreciation Expense
1,000
Salaries Expense
32,000
Salaries Payable
800
Retained Earnings, January 1
10,000
Dividends
500
Interest Revenue
4,000
On January 1, the Utilities Payable Account had a zero balance. Motor Repair paid cash for utilities totaling $45,000
during 2014. How much should Motor Repair report as utilities expense as of December 31, 2014?
181. Motor Repair Shop uses the accrual basis of accounting, and had the following account balances on its financial
statements at December 31, 2014:
Rent Revenue
$34,000
Accounts Receivable
8,200
Utilities Payable
1,500
Rent Expense
2,100
Unearned Repair Revenue
700
Depreciation Expense
1,000
Salaries Expense
32,000
Salaries Payable
800
Retained Earnings, January 1
10,000
Dividends
500
Interest Revenue
4,000
On January 1, there was a $0 balance in the salaries payable account. How much cash did Motor Repair pay for
salaries during the year?
Chapter 4: Income Measurement and Accrual Accounting
Scenic View Foods Corporation
The following is the consolidated statements of income for Scenic View Foods Corporation for the years ending
December 31, 2015 and 2016
Years Ended December 31,
(in millions of dollars)
2016
2015
Revenues
Sales by company-operated restaurants
$ 8,894.9
$ 8,136.5
Revenue from franchised restaurants
3,526.5
3,272.3
Total revenues
12,421.4
11,408.8
Operating costs and expenses
Company-operated restaurants
Food and packaging
2,997.4
2,772.6
Payroll and other employee benefits
2,220.3
2,025.1
Occupancy and other operating expenses
2,043.9
1,851.9
7,261.6
6,649.6
Franchised restaurants-occupancy expenses
678.0
613.9
General, administrative and selling expenses
1,458.5
1,450.5
Made for You and special charges
321.6
Other operating (income) expense
(60.2)
(113.5)
Total operating costs and expenses
9,659.5
8,600.5
Operating income
2,761.9
2,808.3
Interest expense
413.8
364.4
Nonoperating income (expense)
40.7
36.6
Income before provision for income taxes
2,307.9
2,407.3
Provision for income taxes
757.3
764.8
Net income
$ 1,550.1
$ 1,642.5
182. Refer to the consolidated statements of income for Scenic View Foods Corporation.
REQUIRED: Identify three specific accounts of Scenic View Foods that might include expenses accrued as a
result of adjustments. Discuss the ‘effects‘ of these on the accounting equation. Ignore amounts.
Chapter 4: Income Measurement and Accrual Accounting
183. Refer to the consolidated statements of income for Scenic View Foods Corporation.
Required:
(1) Notice that Scenic View Foods reported “Provision for income taxes.” What type of account is this? What
adjustment would have been made if this accrual were necessary at December 31, 2016?
(2) Scenic View Foods reported $3.1 million and $2.8 million of accrued interest in the liability section of its balance
sheet at December 31, 2016 and 2015, respectively. How much cash did it pay during 2016 for interest?
(3) Is Scenic View Foods income statement an “interim statement”? Explain.
184. Refer to the consolidated statements of income for Scenic View Foods Corporation.
Required: Identify three specific accounts of Scenic View Foods that might include expenses accrued as a result of
adjusting journal entries. Show what these entries would look like in journal format. Ignore amounts.
Chapter 4: Income Measurement and Accrual Accounting
185. Given below are the accounts from Surf Corporation’s ledger accounts after adjustments have been posted at
December 31, 2014.
Sales Revenue
$60,000
$ 8,200
Accounts Payable
1,500
2,100
Cash
25,600
1,500
Salaries Expense
2,900
800
Retained Earnings, Jan. 1
22,100
5,000
Depreciation Expense
1,000
900
Supplies Expense
2,200
40,000
Notes Payable
3,000
2,000
A) Identify which adjustments that Surf Corporation most likely made that are:
1) Accrued assets
2) Accrued liabilities
B) Which accounts listed above would not be used in a cash basis system?
186. At the end of 2015, the unadjusted accounting records for Coney Corporation contain the following selected
accounts and balances.
Interest Revenue
$ 3,600
Wage and Salary Expense
$15,600
Insurance Expense
6,500
Interest Expense
2,400
Depreciation Expense
12,000
Advertising Fees Earned
54,300
Utilities Expense
12,400
Income Tax Expense
5,800
Accounts Receivable
12,300
Dividends
3,000
A) Coney has not paid its employees for the final 3 days in 2015. The amount owed is $700. How
much wage and salary expense should Bacon report for its year ending December 31, 2015?
B) What adjustments would you expect Coney to make at year end that would result in
additional revenue as a result of the accounts listed?
Chapter 4: Income Measurement and Accrual Accounting
187. Tiva Solutions’ accounting records reflect the following account balances at December 31, 2014:
Building
$560,000
Accumulated Deprec.—Bldg
$112,000
Cash
90,000
Capital Stock
343,000
Supplies
5,000
Retained Earnings
200,000
During 2015, the following transactions occurred:
1) On March 1, purchased a one-year insurance policy for $1,200 cash.
2) On April 1, borrowed $10,000 cash from Rock City Bank. The interest rate on the note payable is 6%.
Principal and interest is due in cash in one year.
3) Employee salaries in the amount of $20,000 were paid in cash.
4) At the end of the year, $400 of the supplies remained on hand.
5) Earned $45,000 in tax consulting revenue during 2015 in cash.
6) At December 31, $5,000 in employee salaries were accrued.
7) On December 31, received $2,000 in cash representing advance payment for services to be provided in
February of 2016.
8) The building has a useful life of 25 years and no salvage value.
Required:
A) Determine the effect on the accounting equation of the preceding transactions including any
related year-end adjusting entries that may be required. Create a table to reflect the increases
and decreases in accounts.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B) Prepare an income statement for Tiva Solutions for 2015. Ignore income tax effects.
C) Prepare a classified balance sheet for Tiva Solutions at December 31, 2015.
Chapter 4: Income Measurement and Accrual Accounting
Chapter 4: Income Measurement and Accrual Accounting
188. Frannie‘s Dance Studio accounting records reflect the following account balances at January 1, 2015.
Cash
$100,000
Supplies
$ 4,000
Capital Stock
50,000
Retained Earnings
54,000
During 2015, the following transactions occurred:
1) On February 1, rented a small studio for a one year period of time. Paid $6,000 cash.
2) On November 1, received $1,200 cash for dance lessons to be provided evenly over
November, December, and January.
3) By December 31, used $3,000 of the supplies
4) At December 31, accrued $3,000 in wages and salaries.
5) During the year, paid cash for $20,000 in wages and salaries
6) During the year, earned $40,000 cash in dance lesson revenue.
Required:
A) Determine the effect on the accounting equation of the preceding transactions. Create a
table to reflect the increases and decreases in accounts.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B) Prepare an income statement for Frannie’s Dance Studio for 2015. Ignore income tax
effects.
C) Prepare a classified balance sheet for Frannie’s Dance Studio at December 31, 2015.
Chapter 4: Income Measurement and Accrual Accounting
Chapter 4: Income Measurement and Accrual Accounting
189. The Diva Design Group was organized on July 1, 2014 when the two principal owners each contributed $50,000 and
received shares of stock in exchange. Their year-end is December 31. The following events occurred during Diva
Design Group’s first year of operations.
1. On July 1, acquired a building by paying $50,000 in cash and borrowing $250,000 from the
Flores Bank.
Information regarding the building: The building has a useful life of 30 years and no salvage
value. Diva Design uses straight line depreciation.
Information regarding the note payable: The note payable will be due in full in five years.
Interest is payable annually. The interest rate on the note is 5%.
2. On July 1, paid cash in the amount of $1,200 for a one-year property insurance policy.
3. On August 1, purchased two computers for $4,000 cash each. The computers have a
useful life of 5 years and a $100 salvage value. The computers will be depreciated using
the straight line method.
4. On October 1, receives $120,000 in cash for services to be provided evenly during the
next six months.
Required:
I.(A) Determine the effect of each of the transactions on the accounting equation.
I.(B) Determine the effect on the accounting equation of the necessary adjustments at
December 31 for each of the following:
1) Depreciation on the building
2) Interest on the promissory note
3) Recognition of the expired portion of the insurance
4) Depreciation on the computers
5) Cash received in advance of services provided
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
II. For each of the adjusting entries, indicate which of the following type of entry was
recorded:
a. Accrued liability
b. Accrued asset
c. Deferred expense
d. Deferred revenue
III. Prepare an income statement at December 31, 2014. Diva Design has a tax rate of 30%.
Chapter 4: Income Measurement and Accrual Accounting
Chapter 4: Income Measurement and Accrual Accounting
Chapter 4: Income Measurement and Accrual Accounting
Expenses:
Insurance expense
Interest expense
Income tax expense
190. Malco Tile Shop purchased insurance coverage for two years on July 1, 2015, 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, 2015?
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, 2015 for prepaid
insurance?
C) How much will be reported on the income statement for the year ended December 31,
2015, 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, 2015?
E) How much will be reported on the statement of cash flows for the year ended December
31, 2015? In which activity? (operating, investing, financing)
F) What adjusting journal entry is necessary at December 31, 2016?
G) How much will be reported on the balance sheet at December 31, 2016 for prepaid
insurance?
H) How much will be reported on the income statement for the year ended December 31,
2016, for insurance expense?
I) How much will be reported on the statement of cash flows for the year ended December
31, 2016? In which activity? (operating, investing, financing)
Chapter 4: Income Measurement and Accrual Accounting
Chapter 4: Income Measurement and Accrual Accounting
191. 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 30th?
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?
Balance Sheet
=
+
Stockholders’
Revenues
–
Expenses
=
192. 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, 2014:
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, 2014, for each
of the transactions that follow.
A) The rent collected in advance represents rent for the period December 1, 2014 through
January 31, 2015.
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: Income Measurement and Accrual Accounting
Balance Sheet
Balance Sheet
193. Agle Company purchased a dump truck at a cost of $48,000 on January 1, 2014. The truck has an estimated useful
life of 6 years and a $6,000 estimated residual value. Show how the truck and any related amounts would appear on
the December 31, 2015, balance sheet immediately after the adjustments are recorded and posted.
Accumulated depreciation = ($48,000 – $6,000)/6 = $7,000 2 years = $14,000
Less Accumulated depreciation
194. Union Company purchased a delivery van at a cost of $30,000 cash on January 1, 2014. The van has an estimated
useful life of 6 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 2015?
C. What is the total amount of accumulated depreciation at December 31, 2015?
Balance Sheet
Income Statement
Stockholders’
Chapter 4: Income Measurement and Accrual Accounting
195. Marcus Roberts operates a small retail establishment. The following unadjusted amounts were taken from Roberts’
accounting records at December 31, 2015:
Accumulated Depreciation
$ 5,000
Machinery
50,000
Prepaid Advertising
1,200
Determine the effect on the accounting equation of the adjusting entries at December 31, 2015, for each of the
transactions that follow:
A. The advertising costs are for television commercials to be aired equally throughout
December, 2015, and January and February, 2016.
B. The machinery had an original cost of $50,000 and was purchased during 2010. The
estimated useful life is 6 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
=
+
Stockholders’
Revenues
–
Expenses
=