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Chapter 4: Income Measurement and Accrual Accounting
238. Agle Company purchased a dump truck at a cost of $48,000 on January 1, 2015. 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, 2016, balance sheet immediately after the adjustments are recorded and posted.
ANSWER:
Accumulated depreciation = ($48,000 - $6,000)/6 = $7,000 × 2 years = $14,000
Long-term Assets:
Dump truck
$ 48,000
Less Accumulated depreciation
(14,000)
$ 34,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Analyzing
239. Union Company purchased a delivery van at a cost of $30,000 cash on January 1, 2015. 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?
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net Income
B.
How much depreciation expense should be reported for 2016?
C.
What is the total amount of accumulated depreciation at December 31, 2016?
ANSWER:
A.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net Income
Van
30,000
Cash
(30,000)
B. $30,000 $6,000)/6 = $4,000
C. $4,000 × 2 = $8,000
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Analyzing
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240. Marcus Roberts operates a small retail establishment. The following unadjusted amounts were taken from Roberts’
accounting records at December 31, 2016:
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, 2016, for each of the transactions
that follow:
A.
The advertising costs are for television commercials to be aired equally throughout
December, 2016, and January and February, 2017.
B.
The machinery had an original cost of $50,000 and was purchased during 2011. The
estimated useful life is 6 years with an estimated salvage value equal to $8,000. Roberts
uses the straight-line method of depreciation.
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net Income
ANSWER:
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
A. Prepaid
Advertising
(400)
(400)
Advertising
Expense
400
(400)
B. Accum.
Deprec.
(7,000)
(7,000)
Deprec.
Expense
7,000
(7,000)
($50,000 $8,000)/6)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
241. 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?
ANSWER:
March 31.
Office Supplies Expense
2,330
Office Supplies on Hand
2,330
To record office supplies used:
$1,850 + $1,500 $1,020.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Off.Supp
on
Hand
(2,330)
(2,330)
Office
Supplies
Expense
2,330*
(2,330)
Net income for the month of March would be overstated by $2,330 if this adjusting entry
were not recognized because expenses would be understated.
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
242. On May 1, 2016, 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, 2016.
2. Assume that Meehan prepares quarterly statements on May 30, 2016. Prepare the adjusting entry on Meehan’s books on
May 30, 2016 regarding the loan.
3. Prepare the entry on Meehan’s books on July 29, 2016, when Solar Power repays the principal and interest.
ANSWER:
1.
May 1
Notes Receivable
125,000
Cash
125,000
To record 12%, 90-day loan to Solar Power Inc.
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Notes
Receivable
125,000
Cash
(125,000)
2.
May 30
Interest Receivable
1,250
Interest Income
1,250
To accrue interest due on note for one month:
$125,000 × 12% × 30/360.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Interest
Receivable
1,250
1,250
Interest
Income
1,250
1,250
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3.
July 29
Cash
128,750
Notes Receivable
125,000
Interest Receivable
1,250
Interest Income
2,500
To record collection of note and interest at maturity date.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Cash
128,750
Notes Receivable
(125,000)
Interest Receivable
(1,250)
2,500
Interest
Income
2,500
2,500
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Analyzing
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243. Exclusive Builders owns property in Camden County. Exclusive’s 2016 property taxes amounted to $85,000.
Camden County will send out the 2017 property tax bills to property owners during April 2017. Taxes must be paid by
June 1, 2017. Assume that Exclusive prepares adjusting entries only once a year, on December 31 for the entire year’s
taxes, and that property taxes for 2017 are expected to increase by 9% over those for 2016.
Required:
1. Prepare the adjusting entry required to record the 2016 property taxes payable on December 31, 2016.
2. Prepare the journal entry to record the payment of the 2017 property taxes on June 1, 2017.
ANSWER:
1. Dec 31. 2016
Dec. 31 Property Tax Expense 92,650
Property Taxes Payable 92,650
To accrue 2016 property taxes: 109% × $85,000.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Property Taxes
Payable 92,650
(92,650)
Property
Tax
Expense
(92,650)
(92,650)
2. June 1, 2017
June 1 Property Taxes Payable 92,650
Cash 92,650
To record payment of 2017 property taxes.
Balance Sheet
Income Statement
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244. 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?
ANSWER:
1.
June 1
Cash
15,000
Customer Deposits
15,000
To record receipt of customer deposit for
six months of accounting service.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Cash
15,000
Customer
Deposits
15,000
2.
June 30
Customer Deposits
2,500
Accounting Fees Earned
2,500
To record one month of accounting fees earned:
$15,000/6.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Customer
Deposits
Accounting
Fees
Earned
page-pf8
245. On October 1, 2016, 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, 2016.
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 2016.
5. Compute the computer’s carrying value that will be shown on Winter’s balance sheet prepared on December 31, 2016.
ANSWER:
1.
Oct. 1
Computer
270,000
Cash
270,000
To record purchase of computer.
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4.
Oct. 31
Depreciation Expense
4,000
Accumulated DepreciationComputer System
4,000
To record one month’s depreciation expense.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
Expenses
=
Net
Income
Accumulated
Depreciation
Computer
System*
(4,000)
(4,000)
Depreciation
Expense
(4,000)
(4,000)
*The Accumulated DepreciationComputer System account has increased. It is
shown as a decrease in the equation above because it is a contra account and causes
total assets to decrease.
5.
Computer
$270,000
Less: Accumulated depreciation (3 months ×
$4,000/month)
(12,000)
Carrying value
$258,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Analyzing
page-pfa
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
246. 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.
ANSWER:
1.
Closing entries:
Commissions Earned
83,000
Income Summary
83,000
To close revenue account.
Income Summary
19,095
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
To close expense accounts.
Income Summary
63,905
Retained Earnings
63,905
To close Income Summary to Retained Earnings.
2. Closing entries serve two purposes. First, the balances in revenue, expense, and dividend
accounts are returned to zero to start the following period. Second, the net income and the
dividends of the period are transferred to Retained Earnings. Closing entries are recorded at
the end of the period.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-07 - LO: 04-07
KEYWORDS:
Bloom's: Analyzing
page-pfb
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
247. The following accounts appear on Treetop Inc. 2016 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 2016.
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 ExpensesCredit
Segment
275
Selling, General and Administrative ExpensesRetail Stores,
Direct and Other Segments
2,228
ANSWER:
Net Sales
7,172
Credit card Revenues
325
Other Income and Expense, net*
13
Income Summary
7,510
To close Net Sales and other income accounts.
*Assumes that the amount netted to income rather than expense.
Income Summary
7,153
Cost of Sales and Related Buying and Occupancy Costs
4,317
Selling, General and Administrative ExpensesRetail Stores,
Direct and Other Segment
2,228
Selling, General and Administrative ExpensesCredit Segment
275
Income Tax Expense
207
Interest Expense, net
126
To close expense accounts.
Retained Earnings
357
To close Net Income to Retained Earnings.
Retained Earnings
104
Cash Dividends Paid
104
To close Dividends to Retained Earnings.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-07 - LO: 04-07
KEYWORDS:
Bloom's: Analyzing
page-pfc
248. 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
ANSWER:
Adjusting Entries:
1)
Insurance Expense
300
Prepaid Insurance
300
2)
Accounts Receivable
1,500
page-pfd
page-pfe
Chapter 4: Income Measurement and Accrual Accounting
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
ANSWER:
Residential Enterprises
Work sheet
For the Year Ended December 31, 2016
Adjusted Trial
Balance
Income Statement
Balance Sheet
Account Title
Debit
Credit
Debit
Credit
Debit
Credit
Cash
14,500
14,500
Accounts Receivable
7,500
7,500
Supplies
500
500
Equipment
20,500
20,500
Accumulated Depr-
Equip
15,000
15,000
Accounts Payable
9,500
9,500
Wages Payable
3,060
3,060
Capital Stock
13,240
13,240
Retained Earnings,
1/1/16
5,000
5,000
Dividends
1,000
1,000
Fees Earned
34,000
34,000
Wages Expense
18,000
18,000
Rent Expense
9,300
9,300
Depreciation Expense
8,500
8,500
Totals
79,800
79,800
35,800
34,000
44,000
45,800
Net Loss
1,800
1,800
35,800
35,800
45,800
45,800
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-06 - LO: 04-06
FACC.PONO.13.04-08 - LO: 04-08
KEYWORDS:
Bloom's: Analyzing
page-pff
page-pf10
254. What is the revenue recognition principle? Are there any exceptions to this rule? If so, what are they? If not, explain
why
ANSWER:
The revenue recognition principle requires that revenues are recognized when they are
realized or realizable and earned. Normally, this is when a product or service is delivered to
the customer. An exception that may apply to this rule is a company that has a very high rate
of product returns. In this case, it would be prudent to recognize revenue only after the return
period expires.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-03 - LO: 04-03
KEYWORDS:
Bloom's: Applying
255. What is the matching principle? How does it relate to the revenue recognition process?
ANSWER:
The matching principle is the association of costs in the accounting period with the related
revenue that was earned. The revenue recognition process determines when and how much
revenue should be recognized. Once revenue is determined, then the matching concept is
applied, i.e., the amount of expense to be allocated to that period is determined.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-04 - LO: 04-04
KEYWORDS:
Bloom's: Applying
256. What role do accounting records play in the adjustment process?
ANSWER:
The adjustments are made by examining the balances of the accounts that need to be adjusted
that appear in the general ledger.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Applying
257. What is the significance of the timing in which cash is paid or received as it relates to the adjusting process?
ANSWER:
Cash paid before an expense is incurred results in a deferred expense, which is recognized as
an asset on the balance sheet. The adjusting entry reduces the asset and recognizes a
corresponding amount of expense. Cash received before revenue is earned requires the
recognition of a liability, a deferred revenue. The adjusting entry reduces the liability and
recognizes a corresponding amount of revenue. At the end of the period, if cash has not been
paid or received, amounts must be accrued for any assets expected to be received or any
liabilities owed.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Applying
page-pf11
258. Explain the differences between the cash and accrual basis of accounting and how the adjusting process fits in.
ANSWER:
The cash basis of accounting assumes revenues are recognized when cash is received and
expenses are recognized when cash is paid. The accrual basis assumes revenues are
recognized when earned and expenses are recognized when incurred. The two approaches
differ in the timing of when revenues and expenses are recognized on the income statement.
The adjusting process is used for the accrual basis, but is unnecessary for the cash basis of
accounting.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-02 - LO: 04-02
FACC.PONO.13.04-05 - LO: 04-05
KEYWORDS:
Bloom's: Applying
259. Explain the purpose of a work sheet.
ANSWER:
A work sheet is not a financial statement, but is a useful device for organizing the
information needed to prepare the financial statements. It eliminates the immediate need to
record and post adjusting entries in the journal and ledger.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.04-06 - LO: 04-06
KEYWORDS:
Bloom's: Applying
260. 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.
ANSWER:
The beginning balance in the Retained Earnings account is entered initially on the work sheet
on the unadjusted trial balance and is spread to the balance sheet credit column of the work
sheet. The reason the unadjusted or beginning balance is entered in the balance sheet credit
column is that the net income of the period and any dividends declared are entered in the
balance sheet columns also. Thus, the balance sheet columns contain all three amounts: the
beginning retained earnings balance, the net income, and any dividends.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-06 - LO: 04-06
FACC.PONO.13.04-08 - LO: 04-08
KEYWORDS:
Bloom's: Applying
page-pf12
261. 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?
ANSWER:
(a) Balance sheet accounts are called real accounts because they are permanent and are not
closed at the end of a period. Conversely, income statement accounts are called nominal or
temporary accounts because they are closed at the end of the period. For example, it would
not make sense to close the Equipment account at the end of the period. The account should
stay on the books as long as the company keeps the asset. On the other hand, Depreciation
Expense on the equipment is a temporary account that indicates the expense associated with
using the asset during the period and is therefore closed along with all other income
statement accounts at the end of the period.
(b) Closing entries are made at the end of an accounting period. They have two important
purposes: (1) to return the balance in all temporary or nominal accounts (revenues, expenses,
and dividends) to zero to start the next accounting period and (2) to transfer the net income
(or net loss) and the dividends of the period to Retained Earnings.
(c) The Dividends account is closed directly to Retained Earnings because it is not an
expense and therefore is not an income statement account. Because it does not appear on an
income statement, it is not closed through the Income Summary account, but instead directly
to Retained Earnings.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-07 - LO: 04-07
KEYWORDS:
Bloom's: Applying
262. 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.
ANSWER:
When a work sheet is used, the formal adjusting entries are recorded after the financial
statements have been prepared. Instead of taking the time to formally journalize adjusting
entries and post them to the accounts, the accountant enters the adjusting entries directly on a
work sheet as a basis for preparing the financial statements. The actual recording and posting
of the adjusting entries can be done after the statements are released. Of course, if a work
sheet is not prepared, adjusting entries must be recorded before the statements can be
page-pf13
263. 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?
ANSWER:
Total debits on the work sheet: $245,000
Less: Dividends (5,000)
Accumulated depreciation (15,000)
Total assets $225,000
Not all debits on the work sheet are assets. For example, Dividends are listed as a debit on the
work sheet, but they reduce retained earnings rather than increase assets. Also, some items in
the Asset section such as Accumulated Depreciation are not debits.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.04-08 - LO: 04-08
KEYWORDS:
Bloom's: Applying

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