Chapter 3
Adjusting Accounts for
Financial Statements
QUESTIONS
2. The accrual basis of accounting generally provides a better indication of company
performance and financial condition than does the cash basis. Also, the accrual basis
3. Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
reported as an asset on the balance sheet.
5. Long-term tangible plant assets such as equipment, buildings, and machinery lead to
6. The Accumulated Depreciation contra asset account is used for depreciation. It
provides financial statement users with additional information about the relative age of
7. Unearned revenue refers to cash received in advance of providing products and
8. Accrued revenue is revenue that is earned but is not yet received in cash (and/or other
assets) and the customer has not been billed prior to the end of the period. Therefore,
9.AIf prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
10. For Apple, all of the accounts under the category of Property, plant and equipment
(except for Land), require adjusting entries. The expense related to the Depreciation
12. The accrued wages would be reported as part of the liability “Accrued expenses” on
Samsung’s balance sheet.
13. The four-step closing entry process is: (i) close the revenue (and gain) accounts to the
Income Summary account, (ii) close the expense (and loss) accounts to the Income
14. Closing entries affect temporary accounts: revenues, expenses, dividends, and
income summary. Specifically, closing entries at the end of an accounting period
15. (i) Closing entries prepare the temporary accounts—revenue and expense (and gain
16. The Income Summary account is used to summarize the period’s revenues and
expenses. As a result, it temporarily has a balance equal to the net income (or net
17. Yes, an error would have occurred because a post-closing trial balance should only
include permanent accounts, and Depreciation Expense is a temporary account that
19. The adjustments in the Adjustments columns of a work sheet are identified by letters
to link the debits with the credits to ensure that the entries are complete and in
20. A company’s operating cycle is the normal time between paying cash for merchandise
21. Assets on a typical classified balance sheet include current assets and noncurrent
assets—where noncurrent assets usually include long-term investments, plant assets,
22. Unearned revenue is reported as a liability—usually a current liability.
24.CReversing entries simplify subsequent entries for accrued expenses and accrued
25.CThe following reversing entry could be made as of the first day of the next accounting
period, after the post-closing trial balance is completed and financial statements are
prepared.
28. Google has eight current liability accounts: Accounts payable; Short-term debt;
Accrued compensation and benefits; Accrued expenses and other current liabilities;
29. The closing entry likely recorded on December 31, 2013, to transfer the company’s net
income to its Retained Earnings account would have been (in millions of Korean won)
QUICK STUDIES
Quick Study 3-1 (5-10 minutes)
Quick Study 3-2 (10 minutes)
Cash Accounting
Revenues (cash receipts)…………………………………………….… $37,000
Expenses (cash payments: $25,500 – $5,250 + $6,750)....... 27,000
Net income …………….…………………………………….…………….… $10,000
Accrual Accounting
Quick Study 3-3 (10 minutes)
a. UR Unearned revenue
e. PE Prepaid expenses (Depreciation)
Quick Study 3-4 (15 minutes)
Adjusting entry Debit Credit
1. Accrue salaries expense e c
Quick Study 3-5 (15 minutes)
a. Step 1: Prepaid Insurance equals $4,700
Step 2: Prepaid Insurance should equal $900 (the unexpired part)
Step 3: Adjusting entry to get from Step 1 to Step 2
b. Step 1: Prepaid Insurance equals $5,890
Step 2: Prepaid Insurance should equal $4,850 (the unexpired part)*
Step 3: Adjusting entry to get from Step 1 to Step 2
c. Step 1: Prepaid Rent equals $24,000
Step 2: Prepaid Rent should equal $20,000 (the unexpired part)*
Step 3: Adjusting entry to get from Step 1 to Step 2
Quick Study 3-6 (15 minutes)
a. Step 1: Supplies equal $300
Step 2: Supplies should equal $110 (what’s left); and zero purchased*
Step 3: Adjusting entry to get from Step 1 to Step 2
b. Step 1: Supplies equal $800
Step 2: Supplies should equal $650 (what’s left); and $2,100 purchased *
Step 3: Adjusting entry to get from Step 1 to Step 2
c. Step 1: Supplies equal $4,000
Step 2: Supplies should equal $2,660 (what’s left); & $9,400 purchased *
Step 3: Adjusting entry to get from Step 1 to Step 2
Quick Study 3-7 (10 minutes)
a. Insurance Expense……………….…………..…….….…….…. 1,200
b. Supplies Expense……………………………..….….…….….… 6,200
Supplies…………….……………………..…………………... 6,200
Quick Study 3-8 (15 minutes)
a. Step 1: Accumulated Depreciation equals $13,500
Step 2: Accumulated Depreciation should equal $28,100; adding current
period depreciation of $14,600*
Step 3: Adjusting entry to get from Step 1 to Step 2
b. Step 1: Accumulated Depreciation equals $0
Step 2: Accumulated Depreciation should equal $8,800; adding current
period depreciation of $8,800*
Step 3: Adjusting entry to get from Step 1 to Step 2
c. Step 1: Accumulated Depreciation equals $0
Step 2: Accumulated Depreciation should equal $4,000; adding current
period depreciation of $4,000*
Step 3: Adjusting entry to get from Step 1 to Step 2
Quick Study 3-9 (10 minutes)
a. Depreciation Expense—Equipment…..….….……..……. 3,600
Accumulated Depreciation—Equipment….…...... 3,600
b. No depreciation adjustments are made for land as
it is expected to last indefinitely.
Quick Study 3-10 (15 minutes)
a. Step 1: Unearned Rent Revenue equals $6,000
Step 2: Unearned Rent Revenue should equal $5,000; adjusted by current
period earned revenue of $1,000*
Step 3: Adjusting entry to get from Step 1 to Step 2
b. Step 1: Unearned Services Revenue equals $300
Step 2: Unearned Services Revenue should equal $75; adjusted by current
period earned revenue of $225*
Step 3: Adjusting entry to get from Step 1 to Step 2
c. Step 1: Unearned Rent Revenue equals $24,000
Step 2: Unearned Rent Revenue should equal $8,000; adjusted by current
period earned revenue of $16,000*
Step 3: Adjusting entry to get from Step 1 to Step 2
Quick Study 3-11 (15 minutes)
a. Unearned Revenue………….………………..………………….. 7,500
b. Unearned Subscription Revenue….….…….….….…...... 1,200
Subscription Revenue……………….…………………… 1,200
Quick Study 3-12 (15 minutes)
a. Step 1: Salaries Payable equals $0
Step 2: Salaries Payable should equal $15,500 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
To record employee salaries earned but not yet paid.
b. Step 1: Interest Payable equals $0
Step 2: Interest Payable should equal $250 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
c. Step 1: Interest Payable equals $0
Step 2: Interest Payable should equal $875 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
Quick Study 3-13 (10 minutes)
Salaries Expense………………………………..………………… 400
Salaries Payable……………………….……..….…….….. 400
[One student earns, $100 x 4 days, Monday—Thursday]
Quick Study 3-14 (15 minutes)
a. Step 1: Accounts Receivable equals $0
Step 2: Accounts Receivable should equal $19,000 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
b. Step 1: Interest Receivable equals $0
Step 2: Interest Receivable should equal $390 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
c. Step 1: Accounts Receivable equals $0
Step 2: Accounts Receivable should equal $1,300 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2