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Exercises
E3-18 Comparing cash and accrual basis accounting and applying the revenue recognition
principle
Learning Objectives 1, 2
Momentous Occasions is a photography business that shoots videos at college parties. The
freshman class pays $1,000 in advance on March 3 to guarantee services for its party to be held
on April 2. The sophomore class promises a minimum of $2,800 for filming its formal dance and
actually pays cash of $4,100 on February 28 at the dance.
Answer the following questions about the correct way to account for revenue under the accrual
basis:
a. Considering the $1,000 paid by the freshman class, on what date was revenue recognized?
Did the recognition occur on the same date cash was received?
b. Considering the $4,100 paid by the sophomore class, on what date was revenue recognized?
Did the recognition occur on the same date cash was received?
SOLUTION
E3-19 Comparing cash and accrual basis accounting and applying the revenue recognition
principle and the matching principle
Learning Objectives 1, 2
Chef’s Catering completed the following selected transactions during May 2018:
Requirements
1. Show whether each transaction would be handled as a revenue or an expense using both the
cash basis and accrual basis accounting systems by completing the following table. (Expenses
should be shown in parentheses.) Also, indicate the dollar amount of the revenue or expense.
The May 1 transaction has been completed as an example.
2. After completing the table, calculate the amount of net income or net loss for Chef’s Catering
under the accrual basis and cash basis accounting systems for May.
3. Considering your results from Requirement 2, which method gives the best picture of the true
earnings of Chef’s Catering? Why?
Requirement 1
SOLUTION
E3-19, cont.
Requirement 2
Requirement 3
principle.
E3-20 Determining the amount of prepaid expenses
Learning Objective 3
Consider the facts presented in the following table for Tropical View:
Complete the table by filling in the missing values.
SOLUTION
E3-21 Journalizing adjusting entries
Learning Objective 3
Consider the following situations:
a. Business receives $3,200 on January 1 for 10-month service contract for the period January 1
through October 31.
b. Total salaries for all employees is $3,600 per month. Employees are paid on the 1st and 15th
of the month.
c. Work performed but not yet billed to customers for the month is $1,600.
d. The company pays interest on its $16,000, 4% note payable of $53 on the first day of each
month.
Assume the company records adjusting entries monthly. Journalize the adjusting entries needed
as of January 31.
SOLUTION
E3-22 Journalizing adjusting entries
Learning Objective 3
Consider the following independent situations at December 31:
a. On October 1, a business collected $3,000 rent in advance, debiting Cash and crediting
Unearned Revenue. The tenant was paying one year’s rent in advance. On December 31, the
business must account for the amount of rent it has earned.
b. Salaries expense is $1,800 per day—Monday through Friday—and the business pays
employees each Friday. This year, December 31 falls on a Thursday.
c. The unadjusted balance of the Office Supplies account is $3,000. Office supplies on hand total
$1,900.
d. Equipment depreciation was $500.
e. On April 1, when the business prepaid $4,320 for a two-year insurance policy, the business
debited Prepaid Insurance and credited Cash.
Journalize the adjusting entry needed on December 31 for each situation. Use the letters to label
the journal entries.
SOLUTION
E3-22, cont.
E3-23 Journalizing adjusting entries
Learning Objective 3
Consider the following situations for Betterton Welding Services:
a. Depreciation for the current year includes equipment, $2,100.
b. Each Monday, Betterton pays employees for the previous week’s work. The amount of weekly
payroll is $1,400 for a seven-day workweek (Monday to Sunday). This year, December 31
falls on Thursday.
c. The beginning balance of Office Supplies was $2,300. During the year, Betterton purchased
office supplies for $3,000, and at December 31 the office supplies on hand totaled $1,000.
d. Betterton prepaid a two full years’ insurance on July 1 of the current year, $6,000. Record
insurance expense for the year ended December 31.
e. Betterton had earned $2,800 of unearned revenue.
f. Betterton had incurred (but not recorded) $200 of interest expense on a note payable. The
interest will not be paid until February 28.
g. Betterton billed customers $3,000 for welding services performed.
Journalize the adjusting entry needed on December 31 for each situation. Use the letters to label
the journal entries.
SOLUTION
E3-24 Journalizing adjusting entries and posting to T-accounts
Learning Objective 3
3. Unearned Revenue bal. $800 CR
The accounting records of Mackay Architects include the following selected, unadjusted
balances at March 31: Accounts Receivable, $1,500; Office Supplies, $700; Prepaid Rent,
$2,240; Equipment, $8,000; Accumulated Depreciation—Equipment, $0; Salaries Payable, $0;
Unearned Revenue, $900; Service Revenue, $4,100; Salaries Expense, $800; Supplies Expense,
$0; Rent Expense, $0; Depreciation Expense—Equipment, $0. The data developed for the March
31 adjusting entries are as follows:
a. Service revenue accrued, $700.
b. Unearned revenue that has been earned, $100.
c. Office Supplies on hand, $300.
d. Salaries owed to employees, $200.
e. One month of prepaid rent has expired, $560.
f. Depreciation on equipment, $120.
Requirements
1. Open a T-account for each account using the unadjusted balances given.
2. Journalize the adjusting entries using the letter and March 31 date in the date column.
3. Post the adjustments to the T-accounts, entering each adjustment by letter. Show each
account’s adjusted balance.
