c. The company is following the realization principle requiring that revenue not be
PROBLEM 4.6
A
MATE EASE (concluded)
Education.
60 Minutes, Strong
Dec. 31 1,500
Client Fees Earned 1,500
31 2,500
31 95
31 750
(
)
(
(
(
)
(
(
)
(
31 600
Income Taxes Pa
y
able 600
Depreciation Expense: Office Equipment
(
$7,500 – $6,900
)
.
Income Taxes Expense
To record income taxes accrued in December
(
9
)
PROBLEM 4.7B
Unearned Retainer Fees
(
4
)
STILLMORE INVESTIGATIONS
Office Supplies Expense
Accounts Receivable
a.
(Adjusting Entries)
(1)
(
2
)
(
3
)
2015
General Journal
To record accrued revenue in December.
Education.
b.
40,585$
3,500 110
900 180
54,000 36,000$
1,400 420
700
29,000
Salaries expense
Client fees earned
Office supplies expense
PROBLEM 4.7B
STILLMORE INVESTIGATIONS (continued)
STILLMORE INVESTIGATIONS
December 31, 2015
Cash
Accumulated depreciation: Office equipment
Adjusted Trial Balance
Accounts receivable
Office supplies
Prepaid rent
Accounts pa
y
able
Unexpired insurance
Office Equipment
c.
64,000$
700$
9,000 6,075 1,100
PROBLEM 4.7B
STILLMORE INVESTIGATIONS (continued)
STILLMORE INVESTIGATIONS
For the Year Ended December 31, 2015
Income Statement
Rent expense
Office supplies expense
Client fees earned
Depreciation expense: office equipment
f.
35,250$
750
g. Net Owners’
Revenue – Expenses = Income Assets = Liabilities + Equity
INEI I NE I
INEI NE D I
NE I D D NE D
NE I D D NE D
1.
2.
Adjustment
PROBLEM 4.7B
STILLMORE INVESTIGATIONS (concluded)
Income Statement
Add: December depreciation expense (adjusting entry 4)
Accumulated depreciation per unadjusted trial balance
Balance Sheet
3.
4.
20 Minutes, Strong
a. NE NE NE U U NE
b. O NE O O NE O
c. NE O U U NE U
d. O NE O NE NE NE
Total
Assets Total
Liabilities Owners’
Equity
PROBLEM 4.8B
STEPHEN CORPORATION
Error Total
Revenue Total
Expenses Net
Income
Recorded a declared
but unpaid dividend by
debiting dividends and
crediting Cash.
Recorded a receipt of
an account receivable
as a debit to cash and a
credit to fees earned.
Recorded
depreciation expense
twice.
Recorded the sale of
capital stock as a debit
to cash and a credit to
30 Minutes, Medium
a.
b.
c.
d.
e.
SOLUTIONS TO CRITICAL THINKING CASES
YEAR-END ADJUSTMENTS
Management services rendered in December, but which are not billed to customers until
CASE 4.1
No adjusting entry is needed, because although the revenue was collected in advance on
Three months’ revenue was collected in advance on December 1 and was credited to an
unearned revenue account. At December 31, an adjusting entry is needed to recognize that one-
No adjusting entry is required, as none of the cost of this insurance policy expires in the
An adjusting entry should be made to record depreciation expense on all equipment owned.
Education.
25 Minutes, Medium
a. (1)
(2)
CASE 4.2
AVIS RENT-A-CAR
THE CONCEPT OF MATERIALITY:
An event or transaction is “material” when knowledge of the item reasonably may be
expected to influence the decisions of users of financial statements. One
In evaluating the “materiality” of an event or transaction, accountants should consider:
(1) the dollar amounts involved, relative to the size of the business entity, and (2) the
10 Minutes, Easy
a.
b.
Note to instructor: It is likely that the bank would insist upon receiving a set of audited financial
statements prior to approving this loan. As such, the auditors would not provide an unqualified
audit opinion unless Slippery Slope reported the $40,000 advertising expenditure as advertising
expense.
The decision by management to wait three years before converting the $40,000 capitalized
advertising expenditure to advertising expense clearly violates generally accepted
accounting principles. The matching principle requires that revenue earned during a
long-term assets.
ETHICS, FRAUD & CORPORATE GOVERNANCE
CASE 4.3
The decision to capitalize the $40,000 advertising expenditure for three years certainly has
ethical implications if management’s intent was to purposely inflate profitability, and
EXPENSE MANIPULATION
10 Minutes, Easy
1.
10.
Note to the instructor: The adjustments required for several of the accounts listed above are
discussed in subsequent chapters. Some are beyond the scope of an introductory course.
CASE 4.4
IDENTIFYING ACCOUNTS
Accounts from Hershey’s balance sheet likely to have required an adjusting entry are:
Other Intangibles
Accounts Receivable–Trade
INTERNET