Chapter 4: Income Measurement and Accrual Accounting
196. Quirin Corp. purchases office supplies once a month and prepares monthly financial statements. The asset account
Office Supplies on hand has a balance of $1,850 on March 1. Purchases of supplies during March amount to $1,500.
Supplies on hand at March 31 amount to $1,020. Prepare the necessary adjusting entry on Quirin’s books on March
31. What will be the effect on net income for March if this entry is not recorded?
Chapter 4: Income Measurement and Accrual Accounting
197. On May 1, 2014, Meehan Inc. lends $125,000 to Solar Power Inc. The loan will be repaid in 90 days with interest at
12%.
REQUIRED:
1. Prepare the journal entry on Meehan’s books on May 1, 2014.
2. Assume that Meehan prepares quarterly statements on May 30, 2014. Prepare the adjusting entry on Meehan’s
books on May 30, 2014 regarding the loan.
3. Prepare the entry on Meehan’s books on July 29, 2014, when Solar Power repays the principal and interest.
Chapter 4: Income Measurement and Accrual Accounting
198. Marion Construction owns property in Polk County. Marion’s 2014 property taxes amounted to $85,000. Polk
County will send out the 2015 property tax bills to property owners during April 2016. Taxes must be paid by June
1, 2016. Assume that Marion prepares adjusting entries only once a year, on December 31 for the entire year’s
taxes, and that property taxes for 2015 are expected to increase by 9% over those for 2014.
REQUIRED:
1. Prepare the adjusting entry required to record the 2015 property taxes payable on December 31, 2015.
2. Prepare the journal entry to record the payment of the 2015 property taxes on June 1, 2016.
Chapter 4: Income Measurement and Accrual Accounting
199. Brooke Accounting Services collected $15,000 from a customer on June 1 and agreed to provide accounting
services during the next six months. Brooke expects to provide an equal amount of services each month.
REQUIRED:
1. Prepare the journal entry for the receipt of the customer deposit on June 1.
2. Prepare the adjusting entry on June 30.
3. What will be the effect on net income for June if the entry in (2) is not recorded?
Chapter 4: Income Measurement and Accrual Accounting
200. On October 1, 2014, Winter Corp. buys a computer system for $270,000 in cash. Assume that the computer is
expected to have a five-year life and an estimated salvage value of $30,000 at the end of that time.
REQUIRED:
1. Prepare the journal entry to record the purchase of the computer on October 1, 2014.
2. Compute the depreciable cost of the computer.
3. Using the straight-line method, compute the monthly depreciation.
4. Prepare the adjusting entry to record depreciation at the end of October 2014.
5. Compute the computer’s carrying value that will be shown on Winter’s balance sheet prepared on December 31,
2014.
Chapter 4: Income Measurement and Accrual Accounting
5. Computer $270,000
Less: Accumulated depreciation (3 months × $4,000/month) (12,000)
Carrying value $258,000
201. Morgan Realty reported the following accounts on its income statement:
Commissions Earned
$83,000
Travel and Entertainment
4,500
Real Estate Board Fees Paid
8,000
Insurance Expired
780
Computer Line Charge
765
Advertising Expense
1,460
Depreciation on Computer
450
Office Supplies Used
940
Car Expenses
2,200
REQUIRED:
1. Prepare the necessary entries to close the temporary accounts.
2. Explain why the closing entries are necessary and when they should be recorded.
Closing entries:
Commissions Earned
Income Summary
Chapter 4: Income Measurement and Accrual Accounting
Net Sales
Credit card Revenues
Other Income and Expense, net*
202. The following accounts appear on Treetop Inc. 2014 financial statements. The accounts are listed in alphabetical
order, and the balance in each account is the normal balance for that account. All amounts are in millions of dollars.
Prepare closing entries for Treetop for 2014.
Cash Dividends Paid
$ 104
Cost of Sales and Related Buying and Occupancy Costs
4,317
Credit Card Revenues
325
Income Tax Expense
207
Interest Expense, net
126
Other Income and Expense, net
13
Net Sales
7,172
Selling, General and Administrative Expenses—Credit Segment
275
Selling, General and Administrative Expenses—Retail Stores,
Direct and Other Segments 2,228
Chapter 4: Income Measurement and Accrual Accounting
203. Reconstruct the adjusting and closing entries from the following T-Accounts.
Prepaid
Insurance
Accounts
Receivable.
Unearned
Revenues
Wages
Payable
1,200
6,000
1,350
530
300
1,500
435
530
900
7,500
915
Retained
Earnings
Dividends
Income
Summary
Fees Earned
12,280
2,100
9,935
8,000
2,100
5,180
2,100
4,655
1,500
15,360
0
5,280
435
0
9,935
0
Wages
Expense
Rent Expense
Insurance
Expense
Utilities
Expense
2,600
1,145
300
180
530
1,145
300
180
3,130
0
0
0
0
Chapter 4: Income Measurement and Accrual Accounting
204. Complete the following work sheet for Residential Enterprises.
Residential Enterprises
Worksheet
For the Year Ended December 31, 2014
Adjusted Trial Balance
Income Statement
Balance Sheet
Account Title
Debit
Credit
Debit
Credit
Debit
Credit
Cash
14,500
Accounts Receivable
7,500
Supplies
500
Equipment
20,500
Accumulated Depr-
Equip
15,000
Accounts Payable
9,500
Wages Payable
3,060
Capital Stock
13,240
Retained Earnings,
1/1/14
5,000
Dividends
1,000
Fees Earned
34,000
Wages Expense
18,000
Rent Expense
9,300
Depreciation Expense
8,500
Totals
79,800
79,800
Net Income (Loss)
Credit
Cash
14,500
Accounts Receivable
Supplies
500
Equipment
20,500
Accumulated Depr-Equip
15,000
15,000
Accounts Payable
9,500
9,500
Wages Payable
3,060
Capital Stock
13,240
13,240
Retained Earnings, 1/1/14
5,000
5,000
Dividends
Fees Earned
34,000
Wages Expense
Rent Expense
Depreciation Expense
Totals
79,800
44,000
45,800
Net Loss
45,800
45,800
Chapter 4: Income Measurement and Accrual Accounting
205. What two choices must be made in the measurement process for a company that acquires a piece of equipment
and needs to record it in the accounting records? Explain.
206. Describe the benefit(s) of using the accrual process as compared to the cash basis.
207. Why does the accrual basis of accounting require adjustments, while the cash basis does not?
208. Why is the cash basis of accounting too limited for proper financial reporting?
209. What is the revenue recognition principle? Are there any exceptions to this rule? If so, what are they? If not,
explain why
210. What is the matching principle? How does it relate to the revenue recognition process?
211. What role do accounting records play in the adjustment process?
212. What is the significance of the timing in which cash is paid or received as it relates to the adjusting process?
Chapter 4: Income Measurement and Accrual Accounting
213. Explain the differences between the cash and accrual basis of accounting and how the adjusting process fits in.
214. Explain the purpose of a work sheet.
215. Does the Retained Earnings account that appears in the balance sheet credit column of a work sheet reflect the
beginning or the ending balance in the account? Explain.
216. Answer each of the following questions (a–c) with a separate short paragraph per question.
(a) What is the difference between a real account and a nominal account? Give an example of each type of
account. Why is this distinction important for the closing process?
(b) What two purposes are served in making closing entries?
(c) Why is the Dividends account closed directly to Retained Earnings rather than to the Income Summary
account?
217. Assuming the use of a work sheet, are the formal adjusting entries recorded and posted to the accounts before or
after the financial statements are prepared? Explain your answer. Would your answer change if a work sheet was
not prepared? Explain.
Chapter 4: Income Measurement and Accrual Accounting
218. The balance sheet columns of the work sheet for Barrows Corporation show total debits and total credits of
$245,000 each. Dividends for the period are $5,000. Accumulated depreciation is $15,000 at the end of the period.
Compute the amount that should appear on the formal balance sheet for total assets. How do you explain the
difference between this amount and the amount that appears as the total debits and total credits on the work sheet?
Select the correct revenue recognition principle for each of the following.
a. Recognize revenue over the passage of time.
b. Recognize revenue when the customer takes possession of the product.
c. Recognize revenue when cash is collected.
d. Recognize revenue when service is performed.
219. Interest
220. Rent
221. Merchandise
222. Carpet cleaning
Match the most probable matching method to the costs listed below.
a. Directly match a specific revenue.
b. Indirectly match with the period during which it will provide revenue.
c. Immediately recognize because no future benefits are expected.
223. Warehouse used for storing inventory goods
224. Commissions earned by sales people
225. Cost of two-year insurance policy
Chapter 4: Income Measurement and Accrual Accounting
226. Taxes owed on income earned during the current period
Match the following choices to the listed situation.
a. a deferred expense
b. a deferred revenue
c. an accrued liability
d. an accrued asset
227. One year’s premium on truck insurance was paid in advance
228. Cash was collected from customers for rental of tents for next year
229. A warehouse building was acquired for cash
230. Income taxes are owed to the federal government at year end
231. Rent is owed by a tenant but not yet collected
For each transaction select the letter of the type of adjustment that would be required
a. Deferred expense
b. Deferred revenue
c. Accrued liability
d. Accrued asset
232. Depreciation on a delivery truck is recorded
233. Revenue is earned during the current period, although customers had paid in a previous period
234. Interest earned on notes receivable, but not yet received is recorded
235. The cost of supplies used during the current year is determined and recorded
236. The cost of salaries earned by employees, but not paid at the end of the accounting period is recorded
For each transaction select the letter of the type of adjustment that would be required.
a. Deferred expense
b. Deferred revenue
c. Accrued liability
d. Accrued asset
Chapter 4: Income Measurement and Accrual Accounting
237. Amounts earned, not received from customers are recorded
238. Magazine subscriptions are delivered during the current period, although customers had paid in a previous period
239. Interest is incurred on money borrowed from the bank, but not yet paid
240. The depreciation on office equipment used during the current year is recorded
241. The cost of commissions to salesmen that has been earned, but not paid at the end of the accounting period is
recorded
From the list of accounts below, determine whether the account would be a nominal account or a real
account.
a. nominal account
b. real account
242. Cash
243. Sales Revenue
244. Office Equipment
245. Depreciation Expense
246. Prepaid Rent
247. Unearned Revenue
248. Utilities Expense
249. Interest Payable
Chapter 4: Income Measurement and Accrual Accounting
250. A decline in purchasing power is evidenced by all of the following except:
a. inflation.
b. a continuing rise in the general level of prices in an economy.
c. buying the same amount of goods or services for a higher price a year later.
d. current value is equal to historical cost.
251. All of the following describe a revenue except:
a. A revenue can result in the inflow of assets.
b. A revenue can result in the settlement of liabilities from the delivery or distribution of goods.
c. A revenue can result in the settlement of liabilities from rendering services.
d. A revenue must involve an inflow of assets.
252. Which of the following statements is true concerning the matching principle?
a. All costs can be directly matched with revenue.
b. All costs can be indirectly matched with periods in which they provide a benefit.
c. The association of assets for a period with the liabilities necessary to generate the assets is known as the
matching principle.
d. Cost of goods sold matched with sales revenue is a classic example of direct matching under the matching
principle.
253. The unit of measure in Japan is the U.S. dollar.
a. True
b. False
254. The accounting profession is currently experimenting with financial statements adjusted for the changing value of
the dollar since inflation is increasing.
a. True
b. False
255. Because of its objective nature, historical cost is the attribute used to measure many of the assets recognized on the
balance sheet.
a. True
b. False
256. The income statement tells the reader about the actual cash inflows during a period of time.
a. True
b. False
257. The statement of cash flows reflects the revenues actually earned by the business, regardless of whether cash has
been collected.
a. True
b. False
258. The justification for the accrual basis of accounting lies in the needs of financial statement users for periodic
information on the financial position and the profitability of the entity.
a. True
b. False
259. The revenue recognition principle involves two factors: paid and incurred.
a. True
b. False
260. The revenue recognition principle does not pertain to long-term contracts, franchises, commodities, and installment
sales.
a. True
b. False
261. Conceptually, anytime a cost is incurred, an asset is acquired.
a. True
b. False
262. Costs incurred for purchases of merchandise result in an asset, Merchandise Inventory, and are eventually matched
with revenue at the time the product is sold.
a. True
b. False