Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received while the accrual
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
4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it is
5. Long-term tangible plant assets such as equipment, buildings, and machinery lead to
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
9.A If prepaid expenses are initially recorded with debits to expense accounts, then the
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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 Expense
expenses and other.
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.
13. The four-step closing entry process is: (i) close the revenue (and gain) accounts to the
14. Closing entries affect temporary accounts: revenues, expenses, dividends, and income
summary. Specifically, closing entries at the end of an accounting period prepare the
15. (i) Closing entries prepare the temporary accounts—revenue and expense (and gain
16. The Income Summary account is used to summarize the period’s revenues and
18. A work sheet can be used to collect and organize data for preparing (i) adjusting
19. The adjustments in the Adjustments columns of a work sheet are identified by letters to
20. A company’s operating cycle is the normal time between paying cash for merchandise
21. Assets on a typical classified balance sheet include current assets and noncurrent
23. Plant assets (also called property, plant and equipment or long-lived assets) are
24.C Reversing entries simplify subsequent entries for accrued expenses and accrued
25.C The following reversing entry could be made as of the first day of the next accounting
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QUICK STUDIES
Quick Study 3-1 (10 minutes)
a. Insurance Expense ………………………………………………. 1,200
Prepaid Insurance …………………………………………. 1,200
To record 6-month insurance coverage expired.
b. Supplies Expense ………………………………………………… 6,200
Quick Study 3-2 (10 minutes)
a. Depreciation Expense—Equipment ………………………. 3,600
Accumulated Depreciation—Equipment …………. 3,600
Quick Study 3-3 (10 minutes)
Quick Study 3-4 (10 minutes)
Salaries Expense ………………………………………………….. 400
Quick Study 3-5 (15 minutes)
a. Unearned Revenue ……………………………………………….. 7,500
Legal Revenue ………………………………………………. 7,500
To recognize legal revenue earned (10,000 x 3/4).
b. Unearned Subscription Revenue ………………………….. 1,200
Quick Study 3-6 (10 minutes)
Cash Accounting
Revenues (cash receipts) ……………………………………………… $37,000
Quick Study 3-7 (15 minutes)
Accounts Debited and Credited
Financial Statement
Debit
Unearned Revenue
Balance Sheet
Credit
Revenue Earned
Income Statement
Debit
Wages Expense
Income Statement
Credit
Wages Payable
Balance Sheet
Debit
Accounts Receivable
Balance Sheet
Credit
Revenue Earned
Income Statement
Debit
Insurance Expense
Income Statement
Credit
Prepaid Insurance
Balance Sheet
Debit
Depreciation Expense
Income Statement
Credit
Accumulated Depreciation
Balance Sheet
Overstates net income by …………………………………………….
Overstates assets by …………………………………………………….
Understates liabilities by ……………………………………………...
Quick Study 3-8 (15 minutes)
Adjusting entry
Debit
Credit
1.
Accrue salaries expense
e
c
2.
Adjust the Unearned Services Revenue account
to recognize earned revenue
d
f
3.
Record the earning of services revenue for which
cash will be received the following period
g
f
Quick Study 3-9 (10 minutes)
Explanation
The debit balance in Prepaid Insurance was reduced by $400, implying a $400
Quick Study 3-10 (15 minutes)
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by ………. $3,200
Accrued salaries error:
Quick Study 3-12A (5 minutes)
Quick Study 3-13 (10 minutes)
a. Under IFRS, financial statements normally present assets from least liquid
Quick Study 3-14 (15 minutes)
a. Step 1: Prepaid Insurance equals $4,700
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
Step 2: Accumulated Depreciation should equal $28,100; adding current
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
Quick Study 3-18 (15 minutes)
a. Step 1: Salaries Payable equals $0
b. Step 1: Interest Payable equals $0
c. Step 1: Interest Payable equals $0
Step 2: Interest Payable should equal $875 (not yet recorded)
Quick Study 3-19 (15 minutes)
a. Step 1: Accounts Receivable equals $0
Quick Study 3-21 (10 minutes)
Quick Study 3-22 (5 minutes)
Current assets
Cash …………………………………………………...
$ 7,000
Accounts receivable …………………………..
18,000
Office supplies …………………………………....
2,800
Prepaid insurance ……………………………....
3,560
Total current assets …………………………..
$31,360
Current liabilities
Accounts payable ………………………………..
$11,000
Unearned services revenue ………………....
3,000
Total current liabilities ………………………...
$14,000
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138
Quick Study 3-23 (15 minutes)
Dec. 31 Services Revenue …………………………..……… 13,000
Income Summary ……………………………. 13,000
To close the revenue account.
31 Income Summary ………………………………….. 10,000
Quick Study 3-24 (5 minutes)
Quick Study 3-25 (20 minutes)
CLAUDELL COMPANY
Work Sheet
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Income
Statement
Balance
Sheet .
Account Title
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Prepaid Rent ………………….…
1,000
(a)
200
800
800
Services Revenue ………..…
55,600
(b)
900
56,500
56,500
Wages expense…………….…
5,000
(c)
700
5,700
5,700
Accounts Receivable …..…
(b)
900
900
900
Wages Payable ……………..…
(c)
700
700
700
Rent Expense ………………..…
(a)
200
200
200
Quick Study 3-26C (10 minutes)
2013
Jan. 1 Management Fees Earned ………………………. 12,000