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
natural business year as the fiscal year.
4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it
is reported as an asset on the balance sheet.
5. Long-term tangible plant assets such as equipment, buildings, and machinery lead
6. The Accumulated Depreciation contra asset account is used for depreciation. 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
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
Expense account would be understated on the income statement if the company
11. 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)
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
Quick Study 3-4 (15 minutes)
Adjusting entry Debit Credit
1. Accrue salaries expense e c
cash will be received the following period
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Chapter 03 – Adjusting Accounts and Preparing Financial Statements
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
Insurance Expense…………………………………………………… 3,800
Prepaid Insurance………………………………….…..…..….... 3,800
To record insurance coverage that expired ($4,700 – $900).
b. Step 1: Prepaid Insurance equals $5,890
*($5,890 – $4,850 = $1,040).
c. Step 1: Prepaid Rent equals $24,000
Step 2: Prepaid Rent should equal $20,000 (the unexpired part)*
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-6 (15 minutes)
To record supplies used
*$300 + $0 purchased – Supplies used = $110
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
Supplies Expense…………………………………………………….. 10,740
Supplies……………………………………………………..…..…... 10,740
To record supplies used
*$4,000 + $9,400 purchased – Supplies used = $2,660
Quick Study 3-7 (10 minutes)
($5,000 + $2,000 – [?] = $800)
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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
period depreciation of $8,800*
*($44,000 – $0) / 5 years
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
Depreciation Expense—Equipment……..………............... 4,000
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Education.
Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-9 (10 minutes)
a. Depreciation Expense—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
*($6,000 / 12 months) x 2 months rental usage
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
Unearned Services Revenue……..……….…..................... 225
Services Revenue……………………………..…..…..…..…... 225
To record earned portion of revenue received in advance.
*$75 x 3 treatments = Services revenue
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Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-11 (15 minutes)
a. Unearned Revenue……………………………………………….. 7,500
Legal Revenue………………………………..………..…… 7,500
To recognize legal revenue earned (10,000 x 3/4).
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
Salaries Expense……………………………………....…..…..…... 15,500
Salaries Payable………………………………..…..…..…..…... 15,500
To record employee salaries earned but not yet paid.
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
Interest Expense……………………………………………..…..….. 875
Interest Payable…………………………………………..…..….. 875
To record interest incurred but not yet paid.
Quick Study 3-13 (10 minutes)
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Chapter 03 – Adjusting Accounts and Preparing Financial Statements
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
Quick Study 3-15 (15 minutes)
Accounts Debited and Credited Financial Statement
a. Debit Unearned Revenue Balance Sheet
Credit Revenue Earned Income Statement
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Chapter 03 – Adjusting Accounts and Preparing Financial Statements
Quick Study 3-16 (15 minutes)
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by........... $3,200
Accrued salaries error:
Quick Study 3-17 (10 minutes)
Explanation
The debit balance in Prepaid Insurance was reduced by $400, implying a
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