Type
Solution Manual
Book Title
Financial Accounting Fundamentals 5th Edition
ISBN 13
978-0078025754

978-0078025754 Chapter 3 Lecture Note Part 2

March 26, 2020
VISUAL #3-1
ACCRUAL BASIS ACCOUNTING
(Follows GAAP)
Requires that the
Income Statement
(for a period)
report
ALL REVENUES EARNED in period (Collected or Not)
Minus ALL EXPENSES INCURRED in period (Paid or Not)
Equals Net Income or Net Loss for the period
ACCOUNTS MUST BE ADJUSTED TO FOLLOW PRINCIPLES
GAAP
Revenue
Recognition
GAAP
Periodicity
GAAP
Expense
Recognition
(or Matching)
GAAP
Expense
Recognition
or Matching
VISUAL #3-2
DEFERRALS
The converse of statements in Visual #3-1 also applies.
Revenue not earned or expense not incurred results in Deferrals*
UNEARNED = LIABILITY *
A REVENUE not earned cannot be shown, even if collected.
An EXPENSE not incurred cannot be shown, even if paid.
PREPAID = ASSET *
*We defer or postpone the reporting of the collected revenues
(as revenues) and prepaid expenses (as expenses) until the
revenue is earned and the expense is incurred.
VISUAL #3-3
ADJUSTMENTS
TYPE
AMOUNT
1A. Prepaid (deferred)
expensesinitially recorded as
assets
Amount used, or
consumed, or expired
1B. Prepaid (deferred)
expensesthat are depreciable
(plant assets)
Portion of cost
allocated to this period
as depreciation
1C. Prepaid (deferred)
expensesinitially recorded as
expenses (alternate treatment
appendix)
Amount left, or
not consumed, or
unexpired
2A. Unearned revenues
(revenue received in advance)
initially record as liability
(unearned account)
Amount earned to date
2B. Unearned revenues
(revenue received in advance)
initially recorded as a revenue
(alternate treatment
appendix)
Amount still not
earned
3. Accrued expenses
(expenses incurred but not yet
recorded)
Amount accrued
4. Accrued revenues
(revenues earned but not
yet recorded)
Amount accrued
*Note: (1) Each adjustment affects a Balance Sheet Account and an Income
Statement Account and (2) CASH NEVER appears in an adjustment.
**Title or account name varies.
Alternate Demonstration Problem #1
Chapter Three
On July 1, 2015, Howard M. Tenant, Inc., rents office space from John Q.
Landlord for two years, starting immediately, at a rate of $100 per month, or
$2,400 in total. The full $2,400 was paid on this date. Record the original
transaction and the appropriate adjusting entries in 2015, 2016, and 2017
from the point of view of Tenant and Landlord.
Solution: Alternate Demonstration Problem #1
Chapter 3
Tenant
Landlord
7/1/15
Prepaid Rent ................
2,400
Cash .............................
2,400
Cash
2,400
Unearned Rent
Rev. ....................
2,400
12/31/15
Rent Expense ..............
600
Unearned Rent Rev.
600
Prepaid Rent ........
600
Rent Revenue
600
12/31/16
Rent Expense ..............
1,200
Unearned Rent Rev.
1,200
*Prepaid Rent .......
1,200
Rent Revenue
1,200
12/31/17
*Rent Expense .............
600
Unearned Rent Rev.
600
Prepaid Rent ........
600
Rent Revenue
600
An Alternative Solution (Based on the Appendix)
Tenant
Landlord
7/1/15
Rent Expense ..............
2,400
Cash .............................
2,400
Cash ......................
2,400
Rent Rev. .............
2,400
12/31/15
Prepaid Rent ...............
1,800
Rent Rev.
1,800
Rent Expense .......
1,800
Unearned Rent
Revenue .............
1,800
*12/31/15
Rent Expense ..............
1,200
Unearned Rent Rev.
1,200
Prepaid Rent ........
1,200
Rent Revenue
1,200
*12/31/16
Rent Expense ..............
600
Unearned Rent Rev.
600
Prepaid Rent ........
600
Rent Revenue
600
*Notice the adjustment is the same in 2016 and 2017 under both
approaches. This is because the adjustment in the appendix alternative
solution places all remaining unexpired/unearned amounts in the
asset/liability accounts to be considered for future adjustment.
Alternate Demonstration Problem #2
Chapter Three
The trial balance of Large Company, Inc., at the end of its annual
accounting period is as follows:
LARGE COMPANY, INC.
Trial Balance
December 31, 2015
Cash ..........................................................................
$ 4,000
Accounts Receivable………………………………..
400
Prepaid Insurance ...................................................
1,200
Supplies ..................................................................
2,100
Equipment ...............................................................
20,000
Accumulated DepreciationEquipment ...............
$ 2,000
Common Stock …………………………………….
Retained earnings ..................................................
19,000
Dividends .................................................................
2,000
Revenue ...................................................................
33,000
Salaries Expense .....................................................
18,300
Rent Expense ..........................................................
6,000
______
Totals ........................................................................
$54,000
$54,000
Additional information:
1. Expired insurance, $400.
2. Unused supplies, per inventory, $800.
3. Estimated depreciation, $1,000.
4. Earned but unpaid salaries, $700.
5. Services completed for a client by year-end but the client has not been
billed for those services, $500
Required:
Prepare adjusting entries.
Solution: Alternate Demonstration Problem #2
Chapter 3
1.
Insurance Expense ...........................................
400
Prepaid Insurance ......................................
400
Supplies Expense .............................................
1,300
Supplies ......................................................
1,300
$2,100 800 inventory = 1,300 supplies used
Depreciation Expense Equip. ..........................
1,000
Accumulated Depreciation Equip. ............
1,000
Salaries Expense ..............................................
700
Salaries Payable .........................................
700
Accounts Receivable .......................................
500
Revenue .....................................................
500

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