Chapter 4: Income Measurement and Accrual Accounting
165. Martinez Produce sells fresh vegetables and fruits in Sutton County. The following unadjusted amounts were taken
from the company‘s accounting records at December 31, 2015:
Note Payable, 12%, 4-month, dated December 1, 2015, for $20,000 Note Receivable, 10%, 6-month, dated October
1, 2015, for $12,000
A) Determine the effects on the accounting equation of any adjusting entries that would be necessary at December
31, 2015, for the notes.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B) Fill in the partial balance sheet below by showing the notes and the effects of any adjustments related to the
notes.
Current Assets
Current Liabilities
Balance Sheet
Income Statement
Chapter 4: Income Measurement and Accrual Accounting
166. The following unadjusted amounts were taken from Ruben Gifts‘ accounting records at December 31,
2015:
Rent Collected in Advance $ 1,000
Office Supplies 740
A) Determine the effects on the accounting equation of any adjusting entries necessary for Ruben
Gifts at December 31, 2015, for both of the following transactions:
1) During December of 2015, Ruben Gifts had received payments from tenants that were
renting storage space in its warehouse. The payments received by Ruben Gifts were for
the period December, 2015, and January, 2016.
2) At the end of the year, Ruben Gifts determined that $240 of office supplies remained on
hand.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B) What is the effect of omitting these adjustments on the current year’s net income?
Chapter 4: Income Measurement and Accrual Accounting
B) Revenue would be understated by $500 because of the omission of the first transaction.
Expenses would be understated in the amount of $500 if the second transaction was
omitted. The overstatement and understatement in the same amount would result in a
zero net effect.
167. The following unadjusted amount was reported on Rental Entertainment Corporation’s accounting records
at December 31, 2015:
Unearned Subscription Revenue $ 36,000
A) Determine the effect on the accounting equation of any adjusting entries necessary at
December 31, 2015, for each of the following transactions:
1) During the year, Rental Entertainment sold 12-month subscriptions for its newly developed
Internet service. Half of the subscriptions began October 1, 2014, while the other half began
December 1, 2015.
2) Rental estimates its income taxes to be 30 percent of its estimated income of
$60,000
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net Income
B)
Prepare the current liabilities section of Rental’s balance sheet by listing any current
liabilities and the related amounts as a result of the adjustments in Part A
Chapter 4: Income Measurement and Accrual Accounting
Chapter 4: Income Measurement and Accrual Accounting
168. 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?
169. 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
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
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
170. 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
171. 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.
172. 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
173. Given below are the accounts from Surf Corporation’s ledger accounts after adjustments have been
posted at December 31, 2014.
Sales Revenue
$60,000
Accounts Receivable
$8,200
Accounts Payable
1,500
Rent Expense
2,100
Cash
25,600
Prepaid Rent
1,500
Salaries Expense
2,900
Salaries Payable
800
Retained Earnings, Jan. 1
22,100
Dividends
5,000
Depreciation Expense
1,000
Supplies
900
Supplies Expense
2,200
Cost of Goods Sold
40,000
Notes Payable
3,000
Common Stock
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?
174. 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
175. 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
176. 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:
Chapter 4: Income Measurement and Accrual Accounting
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
177. 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
Chapter 4: Income Measurement and Accrual Accounting
Balance Sheet
Income Statement
=
+
Revenues
–
Expenses
=
Net Income
Revenues
Expenses
Revenues
Expenses
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
178. 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) Identify the effects on accounts adjusted 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)
Balance Sheet
Chapter 4: Income Measurement and Accrual Accounting
179. 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?
=
+
Stockholders’
Revenues
–
Expenses
=