LO3-2 Distinguish between accrual-basis and cash-basis accounting.
LO3-3 Demonstrate the purposes and recording of adjusting entries.
LO3-4 Post adjusting entries and prepare an adjusted trial balance.
LO3-5 Prepare financial statements using the adjusted trial balance.
LO3-6 Demonstrate the purposes and recording of closing entries.
LO3-7 Post closing entries and prepare a post-closing trial balance.
Teaching Suggestions
Part A starts with a discussion of accrual-basis accounting versus cash-basis accounting. One of
the primary reasons for introducing students to cash-basis accounting is that it gives them a
comparison or perspective for accrual-basis accounting. Understanding the informational
deficiencies of cash-basis accounting helps to better understand why accrual-basis accounting is
followed.
Part B continues with Eagle Golf Academy introduced in Chapters 1 and 2. In Chapter 2, 10
external transactions were provided. In this chapter, eight adjusting entries (or internal
transactions) are introduced. The discussion of accrual-basis accounting versus cash-basis
accounting provides students with some background useful in understanding why we record
adjusting entries. After adjusting entries are recorded and posted, an adjusted trial balance is
prepared using balances from the 8 external transactions in Chapter 2 and eight adjusting entries
in Chapter 3.
With the adjusted trial balance, we’re now ready to prepare financial statements for Eagle
Golf Academy in Part C. The direct relations between the adjusted trial balance and the financial
statements are illustrated. The amounts reported in the financial statements match those
presented in Chapter 1. For the balance sheet, students are now ready to understand a classified
balance sheet. [Note: The discussion of Eagle’s statement of cash flow is saved for Chapter 4.]
In Part D, the accounting cycle is completed by introducing students to the closing process
for Woods Golf Academy. The purposes of closing entries can be reinforced by showing students
the impact of posting closing entries to the general ledger and preparing a post-closing trial
balance. That is, closing entries reduce the balances of revenue, expense, and dividend accounts
to zero and transfer those balances to the balance of retained earnings.
Assignment Charts
Questions Learning
Objective(s) Topic
Time
(Min.)
1 LO3-1 Discuss the revenue recognition principle 5
2 LO3-1 Discuss the matching principle 5
3 LO3-1 Discuss the matching principle 5
4 LO3-2 Recognize revenues and expense under cash-basis
accounting
5
5 LO3-2 Record revenue under accrual-basis accounting 5
6 LO3-2 Record revenue under cash-basis accounting 5
7 LO3-2 Record expense under accrual-basis accounting 5
8 LO3-2 Record expense under cash-basis accounting 5
9 LO3-3 Under the purposes of adjusting entries 5
10 LO3-3 Define prepayments and accruals 5
11 LO3-3 Provide an example of prepaid expense 5
12 LO3-3 Provide an example of an unearned revenue 5
13 LO3-3 Provide an example of an accrued expense 5
14 LO3-3 Provide an example of an accrued revenue 5
15 LO3-3 Record an adjusting entry 5
16 LO3-3 Understand the effects of an adjusting entry 5
17 LO3-3 Record an adjusting entry 5
18 LO3-3 Understand the effects of an adjusting entry 5
19 LO3-3 Record adjusting entries 5
20 LO3-4 Recognize the purpose of an adjusted trial balance 5
21 LO3-5 Explain a classified balance sheet 5
22 LO3-5 Calculate stockholders’ equity 5
23 LO3-6 Describe the two purposes of closing entries 5
24 LO3-6 Explain closing of temporary accounts 5
25 LO3-6 Record closing entries 5
26 LO3-6 Determine the balance of retained earnings 5
27 LO3-6 Understand the dividend component of retained
earnings
5
28 LO3-7 Understand the post-closing trial balance 5
Brief
Exercises Learning
Objective(s) Topic
Time
(Min.)
BE3-1 LO3-1 Determine revenues to be recognized 5
BE3-2 LO3-1 Determine revenues to be recognized 5
BE3-3 LO3-1 Calculate net income 5
BE3-4 LO3-1,3-2 Analyze the impact of transactions on the balance of
cash, cash-basis net income, and accrual-basis net
income
10
BE3-5 LO3-1,3-2 Determine accrual basis and cash-basis net income 10
BE3-6 LO3-3 Record the adjusting entry for supplies 10
BE3-7 LO3-3 Record the adjusting entry for prepaid rent 10
BE3-8 LO3-3 Record the adjusting entry for prepaid insurance 10
BE3-9 LO3-3 Record the adjusting entry for depreciation 10
BE3-10 LO3-3 Record the adjusting entry for unearned revenue 10
BE3-11 LO3-3 Record the adjusting entry for salaries payable 10
BE3-12 LO3-3 Record the adjusting entry for interest payable 10
BE3-13 LO3-3 Record the adjusting entry for interest receivable 10
BE3-14 LO3-5 Assign accounts to financial statements 5
BE3-15 LO3-5 Understand the purpose of financial statements 5
BE3-16 LO3-5 Prepare an income statement 10
BE3-17 LO3-5 Prepare a statement of stockholders’ equity 10
BE3-18 LO3-5 Prepare a classified balance sheet 15
BE3-19 LO3-6 Record closing entries 10
BE3-20 LO3-7 Prepare a post-closing trial balance 10
Exercises Learning
Objective(s) Topic
Time
(Min.)
E3-1 LO3-1 Determine the timing of revenue recognition 5
E3-2 LO3-1 Determine the timing of expense recognition 5
E3-3 LO3-2 Cash-basis revenues versus accrual-basis expenses 5
E3-4 LO3-2 Cash-basis expenses versus accrual-basis expenses 5
E3-5 LO3-1 Determine the amount of net income 10
E3-6 LO3-3,3-4,3-5,
3-6,3-7
Organize the steps in the accounting cycle 10
E3-7 LO3-3 Record adjusting entries 10
E3-8 LO3-3 Record year-end adjusting entries 5
E3-9 LO3-3 Calculate the effects of adjusting entries on net
income
5
E3-10 LO3-3 Record year-end adjusting entries 10
E3-11 LO3-3,3-4 Calculate the effects of adjusting entries on the
accounting equation
5
E3-12 LO3-3 Record year-end adjusting entries 10
E3-13 LO3-3 Record year-end adjusting entries 15
E3-14 LO3-3,3-4 Prepare an adjusted trial balance 20
E3-15 LO3-5 Calculate the balance of retained earnings 10
E3-16 LO3-5 Prepare financial statements from an adjusted trial
balance
20
E3-17 LO3-6 Record closing entries 10
E3-18 LO3-6 Record closing entries 10
E3-19 LO3-6,3-7 Record closing entries and a post-closing trial
balance
15
E3-20 LO3-3, 3-4,
3-5, 3-6, 3-7
Record transactions and prepare adjusting entries,
adjusted trial balance, financial statements,
and closing entries
45
Problems Learning
Objective(s) Topic
Time
(Min.)
P3-1A LO3-1,3-2 Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2A LO3-1,3-2 Convert cash-basis accounting to accrual basis
accounting
25
P3-3A LO3-3 Record adjusting entries and determine their effect
on net income
25
P3-4A LO3-3 Record adjusting entries 15
P3-5A LO3-5 Prepare financial statements from an adjusted trial
balance when net income is positive
30
P3-6A LO3-6,3-7 Record closing entries and prepare a post-closing
trial balance
15
P3-7A LO3-4, 3-5,
3-6, 3-7
Completing the accounting cycle after adjusting
entries
60
P3-8A LO3-3, 3-4,
3-5, 3-6, 3-7
Completing the full accounting cycle 60
P3-1B LO3-1, 3-2 Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2B LO3-1, 3-2 Convert cash-basis accounting to accrual basis
accounting
25
P3-3B LO3-3 Record adjusting entries and determine their effect
on net income
25
P3-4B LO3-3 Prepare adjusting entries 15
P3-5B LO3-5 Prepare financial statements from an adjusted trial
balance
30
P3-6B LO3-6, 3-7 Record closing entries and prepare a post-closing
trial balance
15
P3-7B LO3-4, 3-5,
3-6, 3-7
Complete the accounting cycle after adjusting
entries
60
P3-8B LO3-3, 3-4,
3-5, 3-6, 3-7
Complete the full accounting cycle 60
Additional
Perspectives Topic
Time
(Min.)
AP3-1 Continuing Problem: Great Adventures 60
AP3-2 Financial Analysis: American Eagle Outfitters, Inc. 20
AP3-3 Financial Analysis: The Buckle, Inc. 20
AP3-4 Comparative Analysis: American Eagle Outfitters, Inc., vs. The
Buckle, Inc.
15
AP3-5 Ethics 20
AP3-6 Internet Research 30
AP3-7 Written Communication 25
Chapter Quiz Questions
The following multiple-choice questions are 10 unique quiz questions that correspond to the 10
questions at the end of each chapter. Each question covers the same learning objective but with a
little different twist. The correct answer is highlighted in bold for each item.
LO3-1
1. On September 9, Clearmore Services receives a request for services from a customer. The
service is scheduled for September 15. On September 15, the service is provided and the
customer pays one week later on September 22. According to the revenue recognition principle,
on which date should Clearmore Services record service revenue?
a. September 9 (date of service request).
b. September 15 (date of service).
c. September 22 (date of cash receipt).
d. Evenly over the three dates.
LO3-1
2. On March 4, Tonkawa Law asks Green Lawn Services for basic lawn maintenance totaling
$200. Green Lawn provides maintenance on March 8, and Tonkawa pays for the lawn
maintenance on March 12. According to the matching principle, on which date should Tonkawa
record lawn maintenance expense?
a. March 4 (date of request).
b. March 8 (date of lawn maintenance service).
c. March 12 (date of cash payment).
d. Evenly over the three dates.
LO3-2
3. Refer to the information in question 1. Using cash-basis accounting, on which date should
Clearmore Services record service revenue?
a. September 9 (date of service request).
b. September 15 (date of service).
c. September 22 (date of cash receipt).
d. Evenly over the three dates.
LO3-2
4. Refer to the information in self-study question 2. Using cash-basis accounting, on which date
should Tonkawa record lawn maintenance expense?
a. March 4 (date of request).
b. March 8 (date of lawn maintenance service).
c. March 12 (date of cash payment).
d. Evenly over the three dates.
LO3-3
5. Which of the following is a characteristic of adjusting entries?
a. Used in cash-basis accounting.
b. Recorded at the beginning of the accounting period.
c. Reduces the balances of revenue accounts to zero.
d. Allows for proper application of the revenue recognition principle (revenues) or the
matching principle (expenses).
LO3-3
6. Chan Sports purchases one year of rent on November 1 for $12,000 ($1,000 per month),
debiting Prepaid Rent. On December 31, Chan Sports would record the following year-end
adjusting entry:
a. Rent Expense 2,000
Prepaid Rent 2,000
b. Rent Expense 10,000
Prepaid Rent 10,000
c. Rent Expense 12,000
Prepaid rent 12,000
d. No entry is required on December 31 because full cash payment was made on
November 1.
LO3-4
7. The balance of retained earnings in the adjusted trial balance:
a. Equals the balance of retained earnings after closing entries.
b. Equals the balance of retained earnings at the beginning of the accounting period.
c. Is not shown.
d. Is the amount shown for retained earnings in the balance sheet.
LO3-5
8. Which of the following describes the information reported in the income statement?
a. Net cash flows from operating, investing, and financing activities.
b. Changes in stockholders’ equity through changes in common stock and retained earnings.
c. Net income for the period calculated as revenues minus expenses.
d. Equality of total assets with total liabilities plus stockholders’ equity.
LO3-6
9. Which of the following describes the closing process?
a. Record external events for the period so that financial statements can be prepared.
b. Transfer the balances of temporary accounts (revenues, expenses, and dividends) to
retained earnings.
c. Record activities that have occurred but that have not been recorded by the end of the
accounting period.
d. Store all source documents used to record transactions throughout the period.
LO3-7
10. Which of the following accounts is listed in a post-closing trial balance?
a. Salaries Payable.
b. Dividends.
c. Advertising Expense.
d. Service Revenue.
Alternate Let’s Review
Problem #1
Heat Company experienced the following set of events:
October: Provide services to customers on account.
November: Receive cash from customers for services provided in October.
October: Receive utility bill for the month of October.
November: Pay utility bill for October.
Required:
1. Indicate in which month Heat records revenues under:
a. Accrual-basis accounting
b. Cash-basis accounting
2. Indicate in which month Cavalier records expenses under:
a. Accrual-basis accounting
b. Cash-basis accounting
Solution:
1a. October 1b. November 2a. October 2b. November
Alternate Let’s Review
Problem #2
Below are four scenarios for December.
Required:
For each of the scenarios:
1. Indicate the type of adjusting entry needed.
2. Record the transaction described and the period-end adjusting entry.
Scenario 1:
On December 1, a company purchases one year of rent in advance for $9,600 ($800/month).
Solution
Adjusting entry type: Prepaid Expense
December 1 (external transaction) Debit Credit
Prepaid Rent (+A) . . . . . . . . . . . . . . . . . . . . . . 9,600
Cash (−A) . . . . . . . . . . . . . . . . . . . . . . 9,600
(Pay for rent in advance)
December 31 (adjusting entry)
Rent Expense (+E, −SE) . . . . . . . . . . . . . . . . . . . 800
Prepaid Rent (−A) . . . . . . . . . . . . . . . . 800
(Consume one month’s rent)
Scenario 2:
On December 2, a company receives $2,700 cash from a customer in an agreement to provide
services of $900 each month for the next three months, beginning in December.
Solution
Adjusting entry type: Unearned Revenue
September 2 (external transaction) Debit Credit
Cash (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Unearned Revenue (+L) . . . . . . . . . . 2,700
(Receive cash in advance from customer)
December 31 (adjusting entry)
Unearned Revenue (−L) . . . . . . . . . . . . . . . . . . . 900
Service Revenue (+R, +SE) . . . . . . . . . 900
(Provide first three months of services)
Scenario 3:
On December 31, a company receives a utility bill of $1,800 for the month. The company plans
to pay the bill on January 3.
Solution
Adjusting entry type: Accrued Expense
December 31 (adjusting entry) Debit Credit
Utilities Expense (+E, −SE) . . . . . . . . . . . . . . . . 1,800
Utilities Payable (+L) . . . . . . . . . . . . . . 1,800
(Receive but do not pay utilities bill)
January 3 (external transaction)
Utilities Payable (−L) . . . . . . . . . . . . . .. . . . . . . . 1,800
Cash (−A) . . . . . . . . . . . . . . . . . . . . . . 1,800
(Pay for utilities)
balance. That is, closing entries reduce the balances of revenue, expense, and dividend accounts
to zero and transfer those balances to the balance of retained earnings.
Assignment Charts
Questions Learning
Objective(s) Topic
Time
(Min.)
1 LO3-1 Discuss the revenue recognition principle 5
2 LO3-1 Discuss the matching principle 5
3 LO3-1 Discuss the matching principle 5
4 LO3-2 Recognize revenues and expense under cash-basis
accounting
5
5 LO3-2 Record revenue under accrual-basis accounting 5
6 LO3-2 Record revenue under cash-basis accounting 5
7 LO3-2 Record expense under accrual-basis accounting 5
8 LO3-2 Record expense under cash-basis accounting 5
9 LO3-3 Under the purposes of adjusting entries 5
10 LO3-3 Define prepayments and accruals 5
11 LO3-3 Provide an example of prepaid expense 5
12 LO3-3 Provide an example of an unearned revenue 5
13 LO3-3 Provide an example of an accrued expense 5
14 LO3-3 Provide an example of an accrued revenue 5
15 LO3-3 Record an adjusting entry 5
16 LO3-3 Understand the effects of an adjusting entry 5
17 LO3-3 Record an adjusting entry 5
18 LO3-3 Understand the effects of an adjusting entry 5
19 LO3-3 Record adjusting entries 5
20 LO3-4 Recognize the purpose of an adjusted trial balance 5
21 LO3-5 Explain a classified balance sheet 5
22 LO3-5 Calculate stockholders’ equity 5
23 LO3-6 Describe the two purposes of closing entries 5
24 LO3-6 Explain closing of temporary accounts 5
25 LO3-6 Record closing entries 5
26 LO3-6 Determine the balance of retained earnings 5
27 LO3-6 Understand the dividend component of retained
earnings
5
28 LO3-7 Understand the post-closing trial balance 5
Brief
Exercises Learning
Objective(s) Topic
Time
(Min.)
BE3-1 LO3-1 Determine revenues to be recognized 5
BE3-2 LO3-1 Determine revenues to be recognized 5
BE3-3 LO3-1 Calculate net income 5
BE3-4 LO3-1,3-2 Analyze the impact of transactions on the balance of
cash, cash-basis net income, and accrual-basis net
income
10
BE3-5 LO3-1,3-2 Determine accrual basis and cash-basis net income 10
BE3-6 LO3-3 Record the adjusting entry for supplies 10
BE3-7 LO3-3 Record the adjusting entry for prepaid rent 10
BE3-8 LO3-3 Record the adjusting entry for prepaid insurance 10
BE3-9 LO3-3 Record the adjusting entry for depreciation 10
BE3-10 LO3-3 Record the adjusting entry for unearned revenue 10
BE3-11 LO3-3 Record the adjusting entry for salaries payable 10
BE3-12 LO3-3 Record the adjusting entry for interest payable 10
BE3-13 LO3-3 Record the adjusting entry for interest receivable 10
BE3-14 LO3-5 Assign accounts to financial statements 5
BE3-15 LO3-5 Understand the purpose of financial statements 5
BE3-16 LO3-5 Prepare an income statement 10
BE3-17 LO3-5 Prepare a statement of stockholders’ equity 10
BE3-18 LO3-5 Prepare a classified balance sheet 15
BE3-19 LO3-6 Record closing entries 10
BE3-20 LO3-7 Prepare a post-closing trial balance 10
Exercises Learning
Objective(s) Topic
Time
(Min.)
E3-1 LO3-1 Determine the timing of revenue recognition 5
E3-2 LO3-1 Determine the timing of expense recognition 5
E3-3 LO3-2 Cash-basis revenues versus accrual-basis expenses 5
E3-4 LO3-2 Cash-basis expenses versus accrual-basis expenses 5
E3-5 LO3-1 Determine the amount of net income 10
E3-6 LO3-3,3-4,3-5,
3-6,3-7
Organize the steps in the accounting cycle 10
E3-7 LO3-3 Record adjusting entries 10
E3-8 LO3-3 Record year-end adjusting entries 5
E3-9 LO3-3 Calculate the effects of adjusting entries on net
income
5
E3-10 LO3-3 Record year-end adjusting entries 10
E3-11 LO3-3,3-4 Calculate the effects of adjusting entries on the
accounting equation
5
E3-12 LO3-3 Record year-end adjusting entries 10
E3-13 LO3-3 Record year-end adjusting entries 15
E3-14 LO3-3,3-4 Prepare an adjusted trial balance 20
E3-15 LO3-5 Calculate the balance of retained earnings 10
E3-16 LO3-5 Prepare financial statements from an adjusted trial
balance
20
E3-17 LO3-6 Record closing entries 10
E3-18 LO3-6 Record closing entries 10
E3-19 LO3-6,3-7 Record closing entries and a post-closing trial
balance
15
E3-20 LO3-3, 3-4,
3-5, 3-6, 3-7
Record transactions and prepare adjusting entries,
adjusted trial balance, financial statements,
and closing entries
45
Problems Learning
Objective(s) Topic
Time
(Min.)
P3-1A LO3-1,3-2 Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2A LO3-1,3-2 Convert cash-basis accounting to accrual basis
accounting
25
P3-3A LO3-3 Record adjusting entries and determine their effect
on net income
25
P3-4A LO3-3 Record adjusting entries 15
P3-5A LO3-5 Prepare financial statements from an adjusted trial
balance when net income is positive
30
P3-6A LO3-6,3-7 Record closing entries and prepare a post-closing
trial balance
15
P3-7A LO3-4, 3-5,
3-6, 3-7
Completing the accounting cycle after adjusting
entries
60
P3-8A LO3-3, 3-4,
3-5, 3-6, 3-7
Completing the full accounting cycle 60
P3-1B LO3-1, 3-2 Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2B LO3-1, 3-2 Convert cash-basis accounting to accrual basis
accounting
25
P3-3B LO3-3 Record adjusting entries and determine their effect
on net income
25
P3-4B LO3-3 Prepare adjusting entries 15
P3-5B LO3-5 Prepare financial statements from an adjusted trial
balance
30
P3-6B LO3-6, 3-7 Record closing entries and prepare a post-closing
trial balance
15
P3-7B LO3-4, 3-5,
3-6, 3-7
Complete the accounting cycle after adjusting
entries
60
P3-8B LO3-3, 3-4,
3-5, 3-6, 3-7
Complete the full accounting cycle 60
Additional
Perspectives Topic
Time
(Min.)
AP3-1 Continuing Problem: Great Adventures 60
AP3-2 Financial Analysis: American Eagle Outfitters, Inc. 20
AP3-3 Financial Analysis: The Buckle, Inc. 20
AP3-4 Comparative Analysis: American Eagle Outfitters, Inc., vs. The
Buckle, Inc.
15
AP3-5 Ethics 20
AP3-6 Internet Research 30
AP3-7 Written Communication 25
Chapter Quiz Questions
The following multiple-choice questions are 10 unique quiz questions that correspond to the 10
questions at the end of each chapter. Each question covers the same learning objective but with a
little different twist. The correct answer is highlighted in bold for each item.
LO3-1
1. On September 9, Clearmore Services receives a request for services from a customer. The
service is scheduled for September 15. On September 15, the service is provided and the
customer pays one week later on September 22. According to the revenue recognition principle,
on which date should Clearmore Services record service revenue?
a. September 9 (date of service request).
b. September 15 (date of service).
c. September 22 (date of cash receipt).
d. Evenly over the three dates.
LO3-1
2. On March 4, Tonkawa Law asks Green Lawn Services for basic lawn maintenance totaling
$200. Green Lawn provides maintenance on March 8, and Tonkawa pays for the lawn
maintenance on March 12. According to the matching principle, on which date should Tonkawa
record lawn maintenance expense?
a. March 4 (date of request).
b. March 8 (date of lawn maintenance service).
c. March 12 (date of cash payment).
d. Evenly over the three dates.
LO3-2
3. Refer to the information in question 1. Using cash-basis accounting, on which date should
Clearmore Services record service revenue?
a. September 9 (date of service request).
b. September 15 (date of service).
c. September 22 (date of cash receipt).
d. Evenly over the three dates.
LO3-2
4. Refer to the information in self-study question 2. Using cash-basis accounting, on which date
should Tonkawa record lawn maintenance expense?
a. March 4 (date of request).
b. March 8 (date of lawn maintenance service).
c. March 12 (date of cash payment).
d. Evenly over the three dates.
LO3-3
5. Which of the following is a characteristic of adjusting entries?
a. Used in cash-basis accounting.
b. Recorded at the beginning of the accounting period.
c. Reduces the balances of revenue accounts to zero.
d. Allows for proper application of the revenue recognition principle (revenues) or the
matching principle (expenses).
LO3-3
6. Chan Sports purchases one year of rent on November 1 for $12,000 ($1,000 per month),
debiting Prepaid Rent. On December 31, Chan Sports would record the following year-end
adjusting entry:
a. Rent Expense 2,000
Prepaid Rent 2,000
b. Rent Expense 10,000
Prepaid Rent 10,000
c. Rent Expense 12,000
Prepaid rent 12,000
d. No entry is required on December 31 because full cash payment was made on
November 1.
LO3-4
7. The balance of retained earnings in the adjusted trial balance:
a. Equals the balance of retained earnings after closing entries.
b. Equals the balance of retained earnings at the beginning of the accounting period.
c. Is not shown.
d. Is the amount shown for retained earnings in the balance sheet.
LO3-5
8. Which of the following describes the information reported in the income statement?
a. Net cash flows from operating, investing, and financing activities.
b. Changes in stockholders’ equity through changes in common stock and retained earnings.
c. Net income for the period calculated as revenues minus expenses.
d. Equality of total assets with total liabilities plus stockholders’ equity.
LO3-6
9. Which of the following describes the closing process?
a. Record external events for the period so that financial statements can be prepared.
b. Transfer the balances of temporary accounts (revenues, expenses, and dividends) to
retained earnings.
c. Record activities that have occurred but that have not been recorded by the end of the
accounting period.
d. Store all source documents used to record transactions throughout the period.
LO3-7
10. Which of the following accounts is listed in a post-closing trial balance?
a. Salaries Payable.
b. Dividends.
c. Advertising Expense.
d. Service Revenue.
Alternate Let’s Review
Problem #1
Heat Company experienced the following set of events:
October: Provide services to customers on account.
November: Receive cash from customers for services provided in October.
October: Receive utility bill for the month of October.
November: Pay utility bill for October.
Required:
1. Indicate in which month Heat records revenues under:
a. Accrual-basis accounting
b. Cash-basis accounting
2. Indicate in which month Cavalier records expenses under:
a. Accrual-basis accounting
b. Cash-basis accounting
Solution:
1a. October 1b. November 2a. October 2b. November
Alternate Let’s Review
Problem #2
Below are four scenarios for December.
Required:
For each of the scenarios:
1. Indicate the type of adjusting entry needed.
2. Record the transaction described and the period-end adjusting entry.
Scenario 1:
On December 1, a company purchases one year of rent in advance for $9,600 ($800/month).
Solution
Adjusting entry type: Prepaid Expense
December 1 (external transaction) Debit Credit
Prepaid Rent (+A) . . . . . . . . . . . . . . . . . . . . . . 9,600
Cash (−A) . . . . . . . . . . . . . . . . . . . . . . 9,600
(Pay for rent in advance)
December 31 (adjusting entry)
Rent Expense (+E, −SE) . . . . . . . . . . . . . . . . . . . 800
Prepaid Rent (−A) . . . . . . . . . . . . . . . . 800
(Consume one month’s rent)
Scenario 2:
On December 2, a company receives $2,700 cash from a customer in an agreement to provide
services of $900 each month for the next three months, beginning in December.
Solution
Adjusting entry type: Unearned Revenue
September 2 (external transaction) Debit Credit
Cash (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Unearned Revenue (+L) . . . . . . . . . . 2,700
(Receive cash in advance from customer)
December 31 (adjusting entry)
Unearned Revenue (−L) . . . . . . . . . . . . . . . . . . . 900
Service Revenue (+R, +SE) . . . . . . . . . 900
(Provide first three months of services)
Scenario 3:
On December 31, a company receives a utility bill of $1,800 for the month. The company plans
to pay the bill on January 3.
Solution
Adjusting entry type: Accrued Expense
December 31 (adjusting entry) Debit Credit
Utilities Expense (+E, −SE) . . . . . . . . . . . . . . . . 1,800
Utilities Payable (+L) . . . . . . . . . . . . . . 1,800
(Receive but do not pay utilities bill)
January 3 (external transaction)
Utilities Payable (−L) . . . . . . . . . . . . . .. . . . . . . . 1,800
Cash (−A) . . . . . . . . . . . . . . . . . . . . . . 1,800
(Pay for utilities)