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Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-61
Solution 237 (5 min.)
Be. 238
For each of the following oversights, state whether total assets will be understated (U), overstated
(O), or no affect (NA).
_____ 1. Failure to record revenue recognized but not yet received.
_____ 2. Failure to record expired prepaid rent.
_____ 3. Failure to record accrued interest on the bank savings account.
_____ 4. Failure to record depreciation.
_____ 5. Failure to record accrued wages.
_____ 6. Failure to record the recognized portion of unearned revenues.
Solution 238 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-62
Be. 239
State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue
(AR) or an accrued expense (AE).
1. Unrecorded interest on savings bonds is $245.
2. Property taxes that have been incurred but that have not yet been paid or recorded amount
to $300.
3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned.
4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still
unexpired.
5. Unpaid salaries earned by year end but not yet paid or recorded amounted to $1,200.
Solution 239 (5 min.)
Be. 240
Identify the impact on the balance sheet for that month if the following information is not used to ad-
just the accounts.
1. Supplies consumed during the month totalled $3,000.
2. Interest accrues on notes payable at the rate of $200 per month.
3. Insurance of $450 expired during the month.
4. Plant and equipment are depreciated at the rate of $1,200 per month.
Solution 240
Be. 241
On January 1, the Biddle & Biddle, CPAs received a $7,500 cash retainer for accounting services to
be provided rateably over the next 3 months. The full amount was credited to the liability account
Service Unearned Revenue. Assuming that the revenue is recognized rateably over the 3 month pe-
riod, what adjusting journal entry should be made at January 31?
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
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Solution 241
Be. 242
On February 1, the Acts Tax Service received a $3,600 cash retainer for tax preparation services to
be provided rateably over the next 4 months. The full amount was credited to the liability account
Unearned Service Revenue. Assuming that the revenue is recognized rateably over the 4 month pe-
riod, what balance would be reported on the February 28 balance sheet for Unearned Service
Revenue?
Solution 242
Be. 243
Better Publications, sold annual subscriptions to their magazine for $42,000 in December, 2013. The
magazine is published monthly. The new subscribers received their first magazine in January, 2014.
1. What adjusting entry should be made in January if the subscriptions were originally recorded
as a liability?
2. What amount will be reported on the January 2014 balance sheet for Unearned Subscription
Revenue?
Solution 243
Be. 244
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-64
River Ridge Music School borrowed $30,000 from the bank signing a 6%, 6-month note on Novem-
ber 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly
financial statements, what adjusting entry should the company make at November 30 with regard to
the note (round answer to the nearest dollar)?
Solution 244
Be. 245
Match the statements below with the appropriate terms by entering the appropriate letter code in the
spaces provided.
TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses
STATEMENTS:
___ 1. A revenue not yet recognized; collected in advance.
___ 2. An expense incurred; not yet paid or recorded.
___ 3. A revenue recognized; not yet collected or recorded.
___ 4. An expense not yet incurred; paid in advance.
Solution 245 (5 min.)
Be. 246
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-65
Prepare adjusting entries for the following transactions. Omit explanations.
1. Depreciation on equipment is $800 for the accounting period.
2. There was no beginning balance of supplies and purchased $600 of office supplies during
the period. At the end of the period $120 of supplies were on hand.
3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $300 was unex-
pired.
Solution 246 (5 min.)
Be. 247
Prepare adjusting entries for the following transactions. Omit explanations.
1. Unrecorded interest accrued on savings bonds is $200.
2. Property taxes incurred but not paid or recorded amount to $900.
3. Salaries incurred by year end but not yet paid or recorded amounted to $600.
Solution 247 (5 min.)
Be. 248
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-66
The adjusted trial balance of Warbocks Corporation at December 31, 2014 includes the following
accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and
Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense
$500; and Depreciation Expense $1,000. Prepare an income statement for the year ended Decem-
ber 31, 2014.
Solution 248 (5 min.)
Be. 249
The adjusted trial balance of Warbocks Corporation at December 31, 2014 includes the following
accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and
Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense
$500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year.
Solution 249 (5 min.)
Be. 250
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-67
The following selected accounts appear in the adjusted trial balance for Blender Company. Identify
the accounts that would be included in the post-closing trial balance.
1. Accumulated Depreciation 5. Supplies
2. Depreciation Expense 6. Accounts Payable
3. Retained Earnings 7. Service Revenue
4. Dividends
Solution 250 (5 min.)
EXERCISES
Ex. 251
The balance sheets of Palle’ Company include the following:
12/31/14 12/31/13
Interest Receivable $4,300 $ -0-
Supplies 5,000 3,900
Salaries and Wages Payable 3,700 3,800
Unearned Service Revenue -0- 4,000
The income statement for 2014 shows the following:
Interest Revenue $17,500
Service Revenue 78,700
Supplies Expense 10,700
Salaries and Wages Expense 48,000
Instructions:
Calculate the following for 2014:
1. Cash received for interest.
2. Cash paid for supplies.
3. Cash paid for salaries and wages.
4. Cash received for service revenue.
Solution 251 (15 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-68
Ex. 252
The 2014 income statement for Moring Company showed rent expense of $9,500 and wages ex-
pense of $8,600. The related balance sheet account balance at year-end last year and this year
were as follows:
2014 2013
Prepaid Rent $900 $300
Salaries and Wages Payable 500 400
Calculate the following for 2014:
1. Cash paid for rent.
2. Cash paid for wages.
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-69
Solution 252 (10 min.)
Ex. 253
A company using the cash basis of accounting reports net income for 2014 of $45,460. If the com-
pany had used the accrual basis of accounting it would have reported the following year-end
balances:
2014 2013
Accounts receivable $3,850 $5,100
Supplies 1,740 1,950
Salaries and wages payable 3,600 2,250
Other unpaid amounts 2,400 2,100
Instructions:
Determine the company’s net income under the accrual basis of accounting. Show your calcu-
lations. Use the column headings shown below.
Explanation Amount
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-70
Solution 253 (10 min.)
Ex. 254
Double-entry Accounting Services begin operations on July 1. It allows its clients 90 days to pay for
services received. On the other hand, the company’s suppliers require payment for their goods and
services within 30 days. Double-entry prepaid its office rent for 12 months on July 1. At the end of
the year, December 31, the company had yet to pay its last month’s utility bill.
Instructions:
Explain how cash and accrual basis accounting would handle each of the events described
above. Use the column heading s shown below.
Event Cash Basis Accrual Basis
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
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Solution 254 (10 min.)
Ex. 255
Hooper Company prepared the following income statement using the cash basis of accounting:
HOOPER COMPANY
Income Statement, Cash Basis
For the Year Ended December 31, 2013
Service revenue (does not include $40,000 of services rendered on account
because the collection will not be until 2014) .................................................... $380,000
Expenses (does not include $20,000 of expenses on account because
payment will not be made until 2014) ............................................................... 220,000
Net income ............................................................................................................. $160,000
Additional data:
1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not in-
cluded in the expenses above.
2. On January 1, 2013, paid for a two-year insurance policy on the automobile amounting to
$1,600. This amount is included in the expenses above.
Instructions:
(a) Recast the above income statement on the accrual basis in conformity with generally accepted
accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of income.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-72
Solution 255 (15 min.)
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-73
Ex. 256
On December 31, 2014, Çolski Company prepared an income statement and balance sheet and
failed to take into account three adjusting entries. The incorrect income statement showed net in-
come of $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and
stockholders’ equity, $70,000.
The data for the three adjusting entries were:
(1) Depreciation of $9,000 was not recorded on equipment.
(2) Salaries and Wages amounting to $10,000 for the last two days in December were not paid
and not recorded. The next payroll will be in January.
(3) Rent of $8,000 was paid for two months in advance on December 1. The entire amount was
debited to Prepaid Rent when paid.
Instructions:
Complete the following tabulation to correct the financial statement amounts shown (indicate deduc-
tions with parentheses):
Item Net Income Total Assets Total Liabilities Stockholders’ Equity
Incorrect balances $ 40,000 $130,000 $ 60,000 $ 70,000
Effects of:
Depreciation
Salaries and Wages
Rent
Correct Balances
Solution 256 (10 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-74
Ex. 257
The Downtown Company accumulates the following adjustment data at December 31.
1. Revenue of $1,100 collected in advance has been recognized.
2. Salaries of $600 are unpaid.
3. Prepaid rent totaling $400 has expired.
4. Supplies of $550 have been used.
5. Revenue recognized but unbilled totals $750.
6. Utility expenses of $300 are unpaid.
7. Interest of $250 has accrued on a note payable.
Instructions:
(a) For each of the above items indicate:
1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued
expense).
2. The account relationship (asset/liability, liability/revenue, etc.).
3. The status of account balances before adjustment (understatement or overstatement).
4. The adjusting entry.
(b) Assume net income before the adjustments listed above was $22,500. What is the adjusted net
income?
Prepare your answer in the tabular form presented below.
Account Balances
Before Adjustment Income Effect
Type of Account (Understatement Increase
Adjustment Relationship or Overstatement) Adjusting Entry (Decrease)
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
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Solution 257 (20 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-76
Ex. 258
The adjusted trial balance of Masters Company includes the following balance sheet accounts that
frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid ex-
penses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in
the adjusting entry.
(a) (b)
Balance Sheet Account Type of Adjusting Entry Related Account
1. Supplies
2. Accounts Receivable
3. Prepaid Insurance
4. Accumulated Depreciation—
Equipment
5. Interest Payable
6. Salaries and Wages Payable
7. Unearned Service Revenue
Solution 258 (10 min)(cont.)
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-77
Ex. 259
Match the statements below with the appropriate terms by entering the appropriate letter code in the
spaces provided.
TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses
STATEMENTS:
____ 1. A revenue not yet recognized; collected in advance.
____ 2. Office supplies on hand that will be used in the next period.
____ 3. Subscription revenue collected; not yet recognized.
____ 4. Rent not yet collected; already recognized.
____ 5. An expense incurred; not yet paid or recorded.
____ 6. A revenue recognized; not yet collected or recorded.
____ 7. An expense not yet incurred; paid in advance.
____ 8. Interest expense incurred; not yet paid.
Solution 259 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-78
Ex. 260
A review of the ledger of Wilde Co. at December 31, 2014, produces the following data pertaining to
the preparation of annual adjusting entries:
(a) Salaries and Wages Payable $0: Salaries are paid every Friday for the current week. Five em-
ployees receive a weekly salary of $800, and three employees earn a weekly salary of $700.
December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2
days of December.
(b) Unearned Rent Revenue $58,000: The company had several lease contracts during the year as
shown below:
Rent
Term per Number of
Date (in months) lease leases
Oct. 1 12 $ 8,000 3
Dec. 1 12 18,000 2
(c) Notes Receivable $90,000: This is a 6-month note, dated November 1, 2014, with a 6% interest
rate.
Instructions:
Prepare the adjusting entries at December 31, 2014. Show all computations.
Solution 260
Accrual Accounting Concepts
FOR INSTRUCTOR USE ONLY
4-79
Ex. 261
A review of the ledger of Weakly Service Co. at December 31, 2014, produces the following data
pertaining to the preparation of annual adjusting entries:
(a) Notes Payable $80,000: This is a 9-month note, dated September 1, 2014, with a 9% inter-
est rate.
(b) Prepaid Rent $648,000. The company rents offices throughout the Midwest. During 2014 it
signed 10 leases as shown below:
Term Monthly Number of
Date (in months) Rent Leases
Sept. 1 8 $ 4,500 4
Nov. 1 12 7,000 6
(c) Unearned Service Revenue $171,000. During 2014 the company entered into 13 monthly
service contracts with clients. The clients prepaid for the services to be provided over the
contract period in an even manner.
Service Period Amount Number of
Date (in months) Per Contract Contracts
Aug. 1 9 $12,600 8
Oct. 1 6 15,000 5
Instructions:
Prepare the adjusting entries at December 31, 2014. Show all computations.
Solution 261
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
4-80
Ex. 262
The Scarlet Pages, a semi-professional hockey team, prepare financial statements on a monthly ba-
sis. Their season begins in October, but in September the team engaged in the following
transactions:
(a) Paid $150,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the six-
month period October 1 through March 31.
(b) Collected $450,000 cash from sales of season tickets for the team's 30 home games. This
amount was credited to Unearned Ticket Revenue.
(c) During the month of October, the Scarlet Pages played five home games.
Instructions:
Prepare the adjusting entries required at October 31 for the transactions above.
Solution 262 (5 min.)
Ex. 263
The Jacquers, a semi-professional baseball team, prepare financial statements on a monthly basis.
Their season begins in April, but in March the team engaged in the following transactions:
(a) Paid $120,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the six-
month period April 1 through September 30.
(b) Collected $600,000 cash from sales of season tickets for the team's 20 home games. This
amount was credited to Unearned Ticket Revenue.
(c) During the month of April, the Jacquers played four home games and five road games.
Instructions:
Prepare the adjusting entries required at April 30 for the transactions above.
