978-0078025549 Chapter 3 Solution Manual Part 1

Question 3-1 (LO 3-1)

The revenue recognition principle states that we record revenue in the period in which we

earn it. If a company sells products or provides services to a customer in the current year, then

Question 3-2 (LO 3-1)

The matching principle states that we recognize expenses in the same period as the

revenues they help to generate. There is a cause-and-eect relationship between revenue and

Question 3-3 (LO 3-1)

Net income is an important profitability measure used by investors, creditors, and others in

assessing the performance of the company. Net income equals revenues minus expenses.

Question 3-4 (LO 3-2)

Under cash-basis accounting, revenues are recorded when cash is received and expenses are

recorded when cash is paid. In contrast, under accrual-basis accounting, revenues are recorded

Question 3-5 (LO 3-2)

(1) April 10th.

(2) April 10th.

(3) April 10th.

Question 3-6 (LO 3-2)

(1) March 28th.

(2) April 10th.

(3) May 2nd.

Chapter 3

The Accounting Cycle: End of the Periodreview Questions

Answers to Review Questions (continued)

Question 3-7 (LO 3-2)

(1) April 10th.

(2) April 10th.

(3) April 10th.

Question 3-8 (LO 3-2)

(1) March 28th.

(2) April 10th.

(3) May 2nd.

Question 3-9 (LO 3-3)

One of the primary purposes of adjusting entries is to allow for proper application of the

Question 3-10 (LO 3-3)

Prepayments are cases where cash is received before revenue is recognized or where cash is

Question 3-11 (LO 3-3)

A prepaid expense includes the purchase of supplies, prepaid insurance, and prepaid rent. The

Question 3-12 (LO 3-3)

An unearned revenue includes a customer paying cash before receiving the related product or

Question 3-13 (LO 3-3)

An accrued expense includes incurring an expense before the related cash outflow, such as

when the cost of employees’ salaries, utilities, taxes, and interest are incurred but not paid until a

Question 3-14 (LO 3-3)

An accrued revenue includes earning a revenue before the related cash inflow, such as

Answers to Review Questions (continued)

Question 3-15 (LO 3-3)

October 31 Debit Credit

Question 3-16 (LO 3-3)

Yes. Utilities expense and utilities payable will be understated at the end of September.

Utilities expense should be recorded during the period incurred (that is, in the period it helps to

Question 3-17 (LO 3-3)

November 30 Debit Credit

Unearned Revenues 20,000

Question 3-18 (LO 3-3)

Yes. Accounts receivable and service revenue will be understated at the end of May.

Accounts receivable should be recorded in the period the right to receive cash arises. Service

Question 3-19 (LO 3-3)

(a) Prepaid expense: Debit Supplies Expense; credit Supplies.

(b) Unearned revenue: Debit Unearned Revenue; credit Service Revenue.

Question 3-20 (LO 3-4)

The purpose of the adjusted trial balance is to list all accounts and their balances after

updating account balances for adjusting entries and check the equality of total debits and total

Question 3-21 (LO 3-5)

Classified indicates that assets are separated into those that provide a benefit over the next

year (current assets) and those that provide a benefit for more than one year (long-term assets).

Answers to Review Questions (continued)

Question 3-22 (LO 3-5)

Assets = Liabilities +

Stockholders’

equity

$12,000 = $8,000 + $X

Question 3-23 (LO 3-6)

The two purposes of closing entries are (1) to transfer the balances of temporary accounts

(revenues, expenses, and dividends) to the retained earnings account and (2) to reduce the

Question 3-24 (LO 3-6)

To “close” temporary accounts indicates that temporary account balances should be reduced to

zero at the end of the accounting period. The reason is that temporary accounts measure activity

Question 3-25 (LO 3-6)

The first closing entry transfers revenue transactions to retained earnings by debiting all

revenue accounts (reducing their balances to zero) and crediting retained earnings. The second

Question 3-26 (LO 3-6)

Net Income Dividends Retained Earnings*

Year 1 $ 300 $200 $ 100

Year 2 900 200 800

Question 3-27 (LO 3-6)

It is important to understand that transactions are recorded from the company’s perspective.

The company is paying dividends to its stockholders. From the company’s perspective, there is a

Question 3-28 (LO 3-7)

The adjusted trial balance does not include the effect of closing entries while the post-closing

trial balance does. This means that revenues, expenses, and dividends will be reported in the

BRIEF Exercises

Brief Exercise 3-1 (LO 3-1)

(a) $0; Cash received in advance is recorded as unearned revenue (liability).

Brief Exercise 3-2 (LO 3-1)

(a) $600.

Brief Exercise 3-3 (LO 3-1)

Revenues − Expenses = Net Income

Brief Exercise 3-4 (LO 3-1, 3-2)

Impact on:

Cash

Balance

Cash-basis

Net

Income

Accrual-basis

Net Income

(a) Receive $1,500 from

for services in April.

(b) Provide $3,200 of consulting

services to a local business.

Payment is not expected

until June.

(c) Purchase office supplies for

$400 on account. All

supplies are used by the end

of May.

(d) Pay $600 to workers. $400 is

for work in April.

(e) Pay $200 to advertise in a

Brief Exercise 3-5 (LO 3-1, 3-2)

Cash-basis

net income

Accrual

adjustments

Accrual-basis

net income

Cash inflows $50,000 +$6,900* $56,900

* The increase in accounts receivable ($6,900) represents accrual-basis revenues with no

corresponding cash inflows.

** The decrease in salaries owed ($3,000) represents cash outflows for salaries of the prior

year and would not be expensed in the current year.

Brief Exercise 3-6 (LO 3-3)

(1)

May 15 Debit Credit

Supplies 3,300

(2)

May 31 Debit Credit

Supplies Expense 3,500

(3)

Supplies

Expense

May 1 Beginning balance $ 500 $ 0

May 15 Purchase 3,300

Brief Exercise 3-7 (LO 3-3)

(1)

Oct. 1 Debit Credit

Prepaid Rent 25,200

(2)

Dec. 31 Debit Credit

Rent Expense 6,300

(Adjust prepaid rent)

(3) Prepaid

Rent

Expense

Jan. 1 Beginning balance $ 0 $ 0

Adjustment Prepaid rent expired during year (6,300) 6,300

Brief Exercise 3-8 (LO 3-3)

(1)

Mar. 1 Debit Credit

Prepaid Insurance 36,000

(2)

Dec. 31 Debit Credit

Insurance Expense 30,000

Prepaid Insurance 30,000

(3) Prepaid

Insurance

Expense

Jan. 1 Beginning balance $ 0 $ 0

Mar. 1 Purchase 36,000

Brief Exercise 3-9 (LO 3-3)

(1)

Apr. 1 Debit Credit

Equipment 50,400

(2)

Dec. 31 Debit Credit

Depreciation Expense 5,400

(3) Accumulated

Depreciation

Expense

Jan. 1 Beginning balance $ 0 $ 0

Adjustment Depreciation during year 5,400 5,400

Brief Exercise 3-10 (LO 3-3)

(1)

Nov. 1 Debit Credit

Cash 6,000

(2)

Dec. 31 Debit Credit

Unearned Revenue 4,000

(3) Unearned

Revenue

Service

Revenue

Jan. 1 Beginning balance $ 0 $ 0

Nov. 1 Receipt 6,000

Brief Exercise 3-11 (LO 3-3)

(1)

Dec. 31, 2015 Debit Credit

Salaries Expense 1,200

(2)

Jan. 11, 2016 Debit Credit

Salaries Payable 1,200

Salaries Expense 4,400

(3) Salaries

Payable

Jan. 1, 2015 Beginning balance $ 0

Brief Exercise 3-12 (LO 3-3)

(1)

Jul. 1, 2015 Debit Credit

Cash 15,000

(2)

Dec. 31, 2015 Debit Credit