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.A If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
10. For Polaris, all of the accounts under the category of Property and Equipment
(except for Land), require adjusting entries. The expense related to the Depreciation
11. Arctic Cat reports $39.2 million for property and equipment. For its adjusting entry, it
12. The accrued wages would be reported as part of the liability “Other short-term
liabilities” on KTM’s balance sheet.
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a. Insurance Expense ………………………………………………. 1,200
Prepaid Insurance …………………………………………. 1,200
To record 6-month insurance coverage expired.
Quick Study 3-2 (10 minutes)
a. Depreciation Expense—Equipment ………………………. 3,600
Accumulated Depreciation—Equipment …………. 3,600
To record depreciation expense for the year.
($20,000 – $2,000) / 5 years = $3,600
Quick Study 3-3 (10 minutes)
a. PE Prepaid expenses
Quick Study 3-4 (10 minutes)
Salaries Expense ………………………………………………….. 400
Quick Study 3-5 (15 minutes)
a. Unearned Revenue ……………………………………………….. 7,500
b. Unearned Subscription Revenue ………………………….. 1,200
Quick Study 3-6 (10 minutes)
Cash Accounting
Revenues (cash receipts) …………………………..…………………. $37,000
Accrual Accounting
Revenues (earned) ………………………………………………………. $45,000
Quick Study 3-7 (15 minutes)
Accounts Debited and Credited
Financial Statement
a.
Debit
Unearned Revenue
Balance Sheet
Credit
Revenue Earned
Income Statement
b.
Debit
Wages Expense
Income Statement
Credit
Wages Payable
Balance Sheet
c.
Debit
Accounts Receivable
Balance Sheet
Credit
Revenue Earned
Income Statement
d.
Debit
Insurance Expense
Income Statement
Credit
Prepaid Insurance
Balance Sheet
e.
Debit
Depreciation Expense
Income Statement
Credit
Accumulated Depreciation
Balance Sheet
Quick Study 3-8 (15 minutes)
Adjusting entry
Credit
1.
Accrue salaries expense
c
2.
Adjust the Unearned Services Revenue account
to recognize earned revenue
f
3.
Record the earning of services revenue for which
cash will be received the following period
f
Quick Study 3-9 (10 minutes)
Explanation
The debit balance in Prepaid Insurance was reduced by $400, implying a
Quick Study 3-10 (15 minutes)
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by ………. $3,200
Accrued salaries error:
Understates expenses (and understates liabilities) by …. 2,000
Combination of errors:
Understates expenses by ……………………………………………..
$5,200
Overstates net income by …………………………………………….
$5,200
Overstates assets by …………………………………………………….
$3,200
Understates liabilities by ……………………………………………...
$2,000
Quick Study 3-11 (10 minutes)
Interpretation: For each dollar that the company records as revenue, it earns
Quick Study 3-12A (5 minutes)
Quick Study 3-13 (10 minutes)
a. Under IFRS, financial statements normally present assets from least
liquid to most liquid.
Quick Study 3-14 (15 minutes)
a. Step 1: Prepaid Insurance equals $4,700
Step 2: Prepaid Insurance should equal $900 (the unexpired part)
Quick Study 3-15 (15 minutes)
a. Step 1: Supplies equal $300
Step 2: Supplies should equal $110 (what’s left); and zero purchased*
Quick Study 3-16 (15 minutes)
a. Step 1: Accumulated Depreciation equals $13,500
Quick Study 3-17 (15 minutes)
a. Step 1: Unearned Rent Revenue equals $6,000
Step 2: Unearned Rent Revenue should equal $5,000; adjusted by
current period earned revenue of $1,000*
Quick Study 3-18 (15 minutes)
a. Step 1: Salaries Payable equals $0
Step 2: Salaries Payable should equal $15,500 (not yet recorded)
Quick Study 3-19 (15 minutes)
a. Step 1: Accounts Receivable equals $0
Step 2: Accounts Receivable should equal $19,000 (not yet recorded)
EXERCISES
Exercise 3-1 (10 minutes)
Exercise 3-2 (25 minutes)
a.
Depreciation Expense—Equipment …………………………..
18,000
Accumulated Depreciation—Equipment………………...
18,000
To record depreciation expense for the year.
b.
Insurance Expense …………………………………………………..
4,900
Prepaid Insurance* ……………………………………………….
4,900
To record insurance coverage that expired
($6,000 – $1,100).
c.
Office Supplies Expense …………………………………………..
3,882
Office Supplies** …………………………………………………...
3,882
To record office supplies used ($700 + $3,480 – $298).
d.
Unearned Fee Revenue …………………………………………….
10,000
Fee Revenue …………………………..…………………………….
10,000
To record earned portion of fee received in advance
($15,000 x 2/3).
e.
Insurance Expense …………………………………………………..
5,800
Prepaid Insurance ………………………………………………...
5,800
To record insurance coverage that expired.
f.
Wages Expense ……………………………………………………….
3,200
Wages Payable ……………………………………………………..
3,200
To record wages accrued but not yet paid.
Notes:
Prepaid Insurance*
Office Supplies**
Bal. Bal.
6,000
Beg. Bal.
700
Purch.
3,480
?
Used
?
Used
End. Bal.
1,100
End. Bal.
298
Exercise 3-3 (30 minutes)
a.
Unearned Fee Revenue …………………………………………….
5,000
Fee Revenue …………………………..…………………………….
5,000
To record earned portion of fee received in advance
($15,000 x 1/3).
b.
Wages Expense ……………………………………………………….
8,000
Wages Payable ……………………………………………………..
8,000
To record wages accrued but not yet paid.
c.
Depreciation Expense—Equipment …………………………..
18,531
Accumulated Depreciation—Equipment………………...
18,531
To record depreciation expense for the year.
d.
Office Supplies Expense …………………………………………..
4,992
Office Supplies* …………………………………………………….
4,992
To record office supplies used ($240 + $5,239 – $487).
e.
Insurance Expense …………………………………………………..
2,800
Prepaid Insurance† …………………………..…………………...
2,800
To record insurance coverage expired ($4,000 – $1,200).
f.
Interest Receivable …………………………..…………………….
1,050
Interest Revenue ………………………………………………..
1,050
To record interest earned but not yet received.
g.
Interest Expense …………………………………………………….
2,500
Interest Payable…………………………………………………..
2,500
To record interest incurred but not yet paid.
Notes:
Prepaid Insurance†
Office Supplies*
Beg. Bal.
4,000
Beg. Bal.
240
Purch.
5,239
?
Used
?
Used
End. Bal.
1,200
End. Bal.
487
Exercise 3-4 (15 minutes)
a. Adjusting entry:
2013
Dec. 31
Wages Expense……………………………………………………..
1,250
Wages Payable …………………………………….………..
1,250
To record accrued wages for one day.
(5 workers x $250)
b. Payday entry:
2014
Jan. 4
Wages Expense……………………………………………………..
3,750
Wages Payable …………………………………………….………..
1,250
Cash …………………………………………………….…
5,000
To record accrued and current wages.
Wages expense = 5 workers x 3 days x $250
Cash = 5 workers x 4 days x $250
Exercise 3-5 (25 minutes)
a.
Apr. 30 Legal Fees Expense ……………………………………. 3,500
Legal Fees Payable ………………………………. 3,500
To record accrued legal fees.
b.
Apr. 30 Interest Expense …………………………………………. 3,000
Interest Payable …………………………………… 3,000
To record accrued interest expense
($9,000 monthly interest x 10/30).
c.
Apr. 30 Salaries Expense ………………………………………… 4,000
Salaries Payable…………………………………… 4,000
To record accrued salaries ($10,000 x 2/5 week).