Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received while the
2. The accrual basis of accounting generally provides a better indication of company
3. Businesses that have major seasonal variations in sales are most likely to select the
4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it
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.
9.AIf prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
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Chapter 03 – Adjusting Accounts and Preparing Financial Statements
9. 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
10. Google reports $16,524 million for property and equipment. For its adjusting entry, it
12. The accrued wages would be reported as part of the liability “Accrued expenses” on
Samsung’s balance sheet.
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Chapter 03 – Adjusting Accounts and Preparing Financial Statements
QUICK STUDIES
Quick Study 3-1 (5-10 minutes)
1. h 4. c
Quick Study 3-2 (10 minutes)
Cash Accounting
Revenues (cash receipts)…………………………………………….. $37,000
Accrual Accounting
Revenues (earned) ……………………………………………………… $45,000
Quick Study 3-3 (10 minutes)
a. UR Unearned revenue
b. AE Accrued expenses
Quick Study 3-4 (15 minutes)
Adjusting entry Debit Credit
1. Accrue salaries expense e c
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-5 (15 minutes)
a. Step 1: Prepaid Insurance equals $4,700
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
Insurance Expense…………………………………………………… 1,040
c. Step 1: Prepaid Rent equals $24,000
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-6 (15 minutes)
a. Step 1: Supplies equal $300
b. Step 1: Supplies equal $800
c. Step 1: Supplies equal $4,000
Step 2: Supplies should equal $2,660 (what’s left); & $9,400 purchased *
Quick Study 3-7 (10 minutes)
a. Insurance Expense……………………………………………… 1,200
b. Supplies Expense……………………………………………….. 6,200
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-8 (15 minutes)
a. Step 1: Accumulated Depreciation equals $13,500
b. Step 1: Accumulated Depreciation equals $0
Step 2: Accumulated Depreciation should equal $8,800; adding current
c. Step 1: Accumulated Depreciation equals $0
Step 2: Accumulated Depreciation should equal $4,000; adding current
Step 3: Adjusting entry to get from Step 1 to Step 2
Depreciation Expense—Equipment………………………….. 4,000
Accumulated Depreciation—Equipment……………… 4,000
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
b. Step 1: Unearned Services Revenue equals $300
c. Step 1: Unearned Rent Revenue equals $24,000
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-11 (15 minutes)
a. Unearned Revenue……………………………………………… 7,500
Quick Study 3-12 (15 minutes)
a. Step 1: Salaries Payable equals $0
b. Step 1: Interest Payable equals $0
c. Step 1: Interest Payable equals $0
Step 2: Interest Payable should equal $875 (not yet recorded)
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-13 (10 minutes)
Quick Study 3-14 (15 minutes)
a. Step 1: Accounts Receivable equals $0
b. Step 1: Interest Receivable equals $0
Step 2: Interest Receivable should equal $390 (not yet recorded)
c. Step 1: Accounts Receivable equals $0
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-15 (15 minutes)
Accounts Debited and Credited Financial Statement
a. Debit Unearned Revenue Balance Sheet
Credit Revenue Earned Income Statement
Quick Study 3-16 (15 minutes)
The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by……….. $3,200
Accrued salaries error:
Quick Study 3-17 (10 minutes)
The answer is b.
Explanation
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
was increased by $800, implying an $800 debit to Interest Expense.
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
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Education.