3-1
CHAPTER 3
THE ADJUSTING PROCESS
DISCUSSION QUESTIONS
1. a. Under cash-basis accounting, revenues are reported in the period in which cash is received and
2. The matching concept is related to the accrual basis of accounting.
4. Adjusting entries bring the ledger up to date as a normal part of the accounting cycle. Correcting entries
correct errors in the ledger.
5. Four different categories of adjusting entries include prepaid expenses (deferred expenses), unearned
7. Statement (b): Increases the balance of an expense account.
9. a. The rights acquired represent an asset.
10. a. The portion of the cost of a fixed asset deducted from revenue of the period is debited to Depreciation
Expense. It is the expired cost for the period. The reduction in the fixed asset account is recorded by a
CHAPTER 3 The Adjusting Process
3-2
BASIC EXERCISES
BE 3–1
BE 3–2
BE 3–3
Accounts Receivable
17,555
Fees Earned
17,555
Accrued fees.
BE 3–4
Salaries Expense
23,000
Salaries Payable
23,000
Accrued salaries [($27,600 ÷ 6 days) 5 days].
BE 3–5
Dec.
31
Unearned Rent
11,025
Rent Revenue
11,025
Rent earned [($18,900 ÷ 12 months) 7 months].
BE 3–6
Insurance Expense
16,500
Prepaid Insurance
16,500
Insurance expired ($11,500 + $18,000 – $13,000).
BE 3–7
Depreciation Expense
7,700
Accumulated Depreciation—Equipment
7,700
Depreciation on equipment.
CHAPTER 3 The Adjusting Process
3-3
BE 3–8
BE 3–9
BE 3–10
a.
Cornea Company
Income Statements
For the Years Ended December 31
20Y9
20Y8
Amount
Percent
Amount
Percent
Fees earned
$1,640,000
100%
$1,300,000
100%
Expenses
(869,200)
(53)%
(715,000)
(55)%
Net income
$ 770,800
47%
$ 585,000
45%
b. A favorable change of decreasing operating expenses and increasing operating income is
indicated.
CHAPTER 3 The Adjusting Process
3-4
EXERCISES
Ex.
3–1
1.
Prepaid expense
5.
Unearned revenue
2.
Accrued revenue
6.
Prepaid expense
3.
Unearned revenue
7.
Accrued expense
4.
Accrued expense
8.
Accrued expense
Ex. 3–2
Account Answer
Accounts Receivable……………………….. Normally requires adjustment (AR).
Building ………………………………………….. Does not normally require adjustment.
Cash ………………………………………………. Does not normally require adjustment.
Ex. 3–3
a.
Accounts Receivable
59,500
Fees Earned
59,500
Accrued fees.
accounts, and no adjusting entry would be necessary.
Ex. 3–4
CHAPTER 3 The Adjusting Process
Ex. 3–5
a.
Salaries Expense
5,100
Salaries Payable
5,100
Accrued salaries [($25,500 ÷ 5 days) 1 day].
Salaries Expense
Salaries Payable
Accrued salaries [($25,500 ÷ 5 days) 4 days].
Unearned Fees
Fees Earned
Fees earned ($18,000 – $3,600).
CHAPTER 3 The Adjusting Process
Ex. 3–11
Supplies Expense
7,425
Supplies
7,425
Supplies used ($9,000 – $1,575).
Ex. 3–12
Ex. 3–13
Ex. 3–14
a.
Insurance Expense
20,250
Prepaid Insurance
20,250
Insurance expired.
Insurance Expense
Prepaid Insurance
Insurance expired ($27,000 – $6,750).
Insurance Expense
Insurance expired ($3,000 + $32,500 – $4,800).
Insurance Expense
30,700
Prepaid Insurance
30,700
Insurance expired.
a.
Unearned Fees
Fees Earned
39,750
Unearned fees earned during year.
Accounts Receivable
Fees Earned
Accrued fees earned.
CHAPTER 3 The Adjusting Process
3-7
Ex. 3–17
a.
Dec.
31
Taxes Expense
12,320
Prepaid Taxes
12,320
Prepaid taxes expired
[($18,480 ÷ 12 months) 8 months].
31
Taxes Expense
45,000
Taxes Payable
45,000
Accrued taxes.
Ex. 3–18
Depreciation Expense
8,200
Accumulated Depreciation—Equipment
8,200
Depreciation on equipment.
Ex. 3–19
Ex. 3–20
to year.
Ex. 3–21
Ex. 3–22
CHAPTER 3 The Adjusting Process
3-8
Ex. 3–23
Error (a)
Error (b)
Over-
stated
Under-
stated
Over-
stated
Under-
stated
1. Revenue for the year would be
$ 0
$ 34,900
$ 0
$ 0
2. Expenses for the year would be
0
0
0
12,770
3. Net income for the year would be
0
34,900
12,770
0
4. Assets at July 31 would be
0
0
0
0
5. Liabilities at July 31 would be
34,900
0
0
12,770
6. Stockholders’ equity at July 31 would be
0
34,900
12,770
0
Ex. 3–24
Ex. 3–25
a.
Dec.
31
Depreciation Expense
13,900
Accumulated Depreciation—Equipment
13,900
Depreciation on equipment.
CHAPTER 3 The Adjusting Process
3-9
Ex. 3–26
1.
Accounts Receivable
6
Fees Earned
6
Accrued fees earned.
2.
Supplies Expense
2
Supplies
2
Supplies used.
3.
Insurance Expense
12
Prepaid Insurance
12
Insurance expired.
4.
Depreciation Expense
4
Accumulated Depreciation—Equipment
4
Equipment depreciation.
5.
Wages Expense
2
Wages Payable
2
Accrued wages.
CHAPTER 3 The Adjusting Process
3-10
Ex. 3–27
2. The accountant debited rather than credited Laundry Supplies for $3,000.
4. The accountant credited Laundry Equipment for the depreciation expense of $13,000
The corrected adjusted trial balance is shown below.
Eva’s Laundry
Adjusted Trial Balance
May 31, 20Y9
Debit
Credit
Balances
Balances
Cash
7,500
Accounts Receivable
23,250
Laundry Supplies
750
Prepaid Insurance
1,600
Laundry Equipment
190,000
Accumulated Depreciation—Laundry Equipment
61,000
Accounts Payable
9,600
Wages Payable
1,000
Common Stock
35,000
Retained Earnings
75,300
Dividends
28,775
Laundry Revenue
187,100
Wages Expense
50,200
Rent Expense
25,575
Utilities Expense
18,500
Depreciation Expense
13,000
Laundry Supplies Expense
3,000
Insurance Expense
3,600
Miscellaneous Expense
3,250
369,000
369,000
CHAPTER 3 The Adjusting Process
3-11
PROBLEMS
Prob. 3–1A
1.
Mar.
31
Supplies Expense
4,330
Supplies
4,330
Supplies used ($5,620 – $1,290).
31
Unearned Rent
1,250
Rent Revenue
1,250
Rent earned ($5,000 ÷ 4 months).
31
Wages Expense
2,290
Wages Payable
2,290
Accrued wages.
31
Accounts Receivable
16,825
Fees Earned
16,825
Accrued fees earned.
31
Depreciation Expense
4,600
Accumulated Depreciation—Office Equipment
4,600
Depreciation expense.
2. Adjusting entries are a planned part of the accounting process to update the
CHAPTER 3 The Adjusting Process
3-12
Prob. 3–2A
1.
July
31
Accounts Receivable
11,150
Fees Earned
11,150
Accrued fees earned.
31
Supplies Expense
2,450
Supplies
2,450
Supplies used ($3,350 – $900).
31
Rent Expense
6,000
Prepaid Rent
6,000
Prepaid rent expired.
31
Depreciation Expense
8,950
Accumulated Depreciation—Equipment
8,950
Equipment depreciation.
31
Unearned Fees
10,000
Fees Earned
10,000
Fees earned ($12,000 – $2,000).
31
Wages Expense
4,840
Wages Payable
4,840
Accrued wages.
3. Accounts Receivable would be understated by $11,150; total assets would be understated
by $11,150; Wages Payable would be understated by $4,840; total liabilities would be
CHAPTER 3 The Adjusting Process
3-13
Prob. 3–3A
1.
20Y3
Nov.
30
Accounts Receivable
7,000
Fees Earned
7,000
Accrued fees earned.
30
Supplies Expense
14,900
Supplies
14,900
Supplies used ($16,200 – $1,300).
30
Depreciation Expense
7,200
Accumulated Depreciation—Equipment
7,200
Equipment depreciation.
30
Unearned Fees
13,500
Fees Earned
13,500
Fees earned.
30
Wages Expense
4,800
Wages Payable
4,800
Accrued wages.
2. Revenues ……………………………… $294,750
CHAPTER 3 The Adjusting Process
3-14
Prob. 3–4A
20Y6
June
30
Supplies Expense
8,850
Supplies
8,850
Supplies used ($11,250 – $2,400).
30
Insurance Expense
10,400
Prepaid Insurance
10,400
Insurance expired ($14,250 – $3,850).
30
Depreciation Expense—Equipment
11,600
Accumulated Depreciation—Equipment
11,600
Equipment depreciation
($106,100 – $94,500).
30
Depreciation Expense—Automobiles
7,300
Accumulated Depreciation—Automobiles
7,300
Automobile depreciation
($62,050 – $54,750).
30
Utilities Expense
1,200
Accounts Payable
1,200
Accrued utilities expense
($26,130 – $24,930, or $14,100 – $12,900).
30
Salary Expense
8,100
Salaries Payable
8,100
Accrued salary ($525,000 – $516,900).
30
Unearned Service Fees
9,000
Service Fees Earned
9,000
Service fees earned ($18,000 – $9,000, or
$742,800 – $733,800).
CHAPTER 3 The Adjusting Process
3-15
Prob. 3–5A
1.
20Y1
Jan.
31
Insurance Expense
4,800
Prepaid Insurance
4,800
Insurance expired ($7,200 – $2,400).
31
Supplies Expense
1,730
Supplies
1,730
Supplies used ($1,980 – $250).
31
Depreciation Expense—Building
6,600
Accumulated Depreciation—Building
6,600
Building depreciation.
31
Depreciation Expense—Equipment
3,500
Accumulated Depreciation—Equipment
3,500
Equipment depreciation.
31
Unearned Rent
4,000
Rent Revenue
4,000
Rent revenue earned ($6,750 – $2,750).
31
Salaries and Wages Expense
1,800
Salaries and Wages Payable
1,800
Accrued salaries and wages.
31
Accounts Receivable
15,000
Fees Earned
15,000
Accrued fees earned.
CHAPTER 3 The Adjusting Process
3-16
Prob. 3–5A (Concluded)
2.
Sears Editing Company
Adjusted Trial Balance
January 31, 20Y1
Debit
Credit
Balances
Balances
Cash
7,500
Accounts Receivable
53,400
Prepaid Insurance
2,400
Supplies
250
Land
112,500
Building
150,250
Accumulated Depreciation—Building
94,150
Equipment
135,300
Accumulated Depreciation—Equipment
101,450
Accounts Payable
12,150
Unearned Rent
2,750
Salaries and Wages Payable
1,800
Common Stock
75,000
Retained Earnings
146,000
Dividends
15,000
Fees Earned
339,600
Rent Revenue
4,000
Salaries and Wages Expense
195,170
Utilities Expense
42,375
Advertising Expense
22,800
Repairs Expense
17,250
Depreciation Expense—Building
6,600
Depreciation Expense—Equipment
3,500
Insurance Expense
4,800
Supplies Expense
1,730
Miscellaneous Expense
6,075
776,900
776,900
CHAPTER 3 The Adjusting Process
3-17
Prob. 3–6A
1.
Apr.
30
Supplies Expense
2,750
Supplies
2,750
Supplies used.
30
Accounts Receivable
23,700
Fees Earned
23,700
Accrued fees earned.
30
Depreciation Expense
1,800
Accumulated Depreciation—Equipment
1,800
Equipment depreciation.
30
Wages Expense
1,400
Wages Payable
1,400
Accrued wages.
2.
Net
Income
Total
Assets
=
Total
Liabilities
+
Total
Stockholders’
Equity
Reported amounts Corrections:
$120,000
$750,000
$300,000
$450,000
Supplies used
(2,750)
(2,750)
0
(2,750)
Unbilled fees used
+23,700
+23,700
0
+23,700
Equipment depreciation
(1,800)
(1,800)
0
(1,800)
Accrued wages
(1,400)
0
+1,400
(1,400)
Corrected amounts
$137,750
$769,150
$301,400
$467,750
CHAPTER 3 The Adjusting Process
3-18
Prob. 3–1B
1.
May
31
Accounts Receivable
19,750
Fees Earned
19,750
Accrued fees earned.
31
Supplies Expense
8,150
Supplies
8,150
Supplies used ($12,300 – $4,150).
31
Wages Expense
2,700
Wages Payable
2,700
Accrued wages.
31
Unearned Rent
3,000
Rent Revenue
3,000
Rent earned ($9,000 ÷ 3 months).
31
Depreciation Expense
3,200
Accumulated Depreciation—Equipment
3,200
Depreciation expense.
2. Adjusting entries are a planned part of the accounting process to update the
CHAPTER 3 The Adjusting Process
Prob. 3–2B
1.
Nov.
30
Supplies Expense
2,620
Supplies
2,620
Supplies used ($3,170 – $550).
30
Depreciation Expense
1,675
Accumulated Depreciation—Equipment
1,675
Depreciation for year.
30
Rent Expense
8,500
Prepaid Rent
8,500
Rent expired.
30
Wages Expense
2,000
Wages Payable
2,000
Accrued wages.
30
Unearned Fees
6,000
Fees Earned
6,000
Fees earned ($10,000 – $4,000).
30
Accounts Receivable
5,380
Fees Earned
5,380
Accrued fees.
3. Accumulated Depreciation—Equipment would be understated by $1,675; total assets
would be overstated by $1,675; Unearned Fees would be overstated by $6,000; total