Chapter 3
Adjusting Accounts for
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
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
assets) and the customer has not been billed prior to the end of the period. Therefore,
10. For Apple, all of the accounts under the category of Property, plant and equipment
(except for Land), require adjusting entries. The expense related to the Depreciation
11. Google reports $23,883 million for property and equipment. For its adjusting entry, it
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
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
expenses. As a result, it temporarily has a balance equal to the net income (or net
financial statements.
19. The adjustments in the Adjustments columns of a work sheet are identified by letters
to link the debits with the credits to ensure that the entries are complete and in
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
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
period, after the post-closing trial balance is completed and financial statements are
prepared.
26. The five main categories of noncurrent assets on Apple’s balance sheet are: Long-term
27. Samsung’s current assets are: Cash and cash equivalents; Short-term financial
28. Google has eight current liability accounts: Accounts payable; Short-term debt;
29. The closing entry likely recorded on December 31, 2014, to transfer the company’s net
income to its Retained Earnings account would have been (in millions of Korean won)
QUICK STUDIES
Quick Study 3-1 (5-10 minutes)
Quick Study 3-2 (10 minutes)
Cash Accounting
Revenues (cash receipts) ……………………………………………… $37,000
Quick Study 3-3 (10 minutes)
Quick Study 3-4 (15 minutes)
Adjusting entry
Debit
Credit
Quick Study 3-5 (15 minutes)
c. Step 1: Prepaid Rent equals $24,000
Quick Study 3-6 (15 minutes)
a. Step 1: Supplies equal $300
b. Step 1: Supplies equal $800
Step 2: Supplies should equal $650 (what’s left); and $2,100 purchased *
c. Step 1: Supplies equal $4,000
Quick Study 3-7 (10 minutes)
a. Insurance Expense ………………………………………………. 1,200
Quick Study 3-8 (15 minutes)
b. Step 1: Accumulated Depreciation equals $0
c. Step 1: Accumulated Depreciation equals $0
Quick Study 3-9 (10 minutes)
a. Depreciation Expense—Equipment ………………………. 3,600
Quick Study 3-10 (15 minutes)
a. Step 1: Unearned Rent Revenue equals $6,000
b. Step 1: Unearned Services Revenue equals $300
Quick Study 3-11 (15 minutes)
a. Unearned Revenue ……………………………………………….. 7,500
Quick Study 3-12 (15 minutes)
a. Step 1: Salaries Payable equals $0
To record employee salaries earned but not yet paid.
b. Step 1: Interest Payable equals $0
To record interest incurred but not yet paid.
c. Step 1: Interest Payable equals $0
Quick Study 3-13 (10 minutes)
Salaries Expense ………………………………………………….. 400
Quick Study 3-14 (15 minutes)
a. Step 1: Accounts Receivable equals $0
b. Step 1: Interest Receivable equals $0
Quick Study 3-15 (15 minutes)
Accounts Debited and Credited
Financial Statement
Unearned Revenue
Balance Sheet
Revenue Earned
Income Statement
Wages Expense
Income Statement
Wages Payable
Balance Sheet
Accounts Receivable
Balance Sheet
Revenue Earned
Income Statement
Insurance Expense
Income Statement
Balance Sheet
Depreciation Expense
Income Statement
Accumulated Depreciation
Balance Sheet
Quick Study 3-16 (15 minutes)
The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by ………. $3,200
Accrued salaries error:
Quick Study 3-17 (10 minutes)
Explanation
Quick Study 3-18 (10 minutes)
a. Under IFRS, financial statements normally present assets from least liquid
Quick Study 3-19 (10 minutes)
Quick Study 3-20A (5 minutes)
Quick Study 3-21 (15 minutes)
Dec. 31 Services Revenue ………………………………….. 13,000
Income Summary ……………………………. 13,000
To close the revenue account.
Quick Study 3-22 (5 minutes)
Excluded
d.
f.
Quick Study 3-23 (5 minutes)
Quick Study 3-24 (10 minutes)
Quick Study 3-25 (5 minutes)
Current assets
Cash ……………………………………………………
$ 7,000
Accounts receivable …………………………..
18,000
Accounts payable ………………………………..
$11,000
Unearned services revenue ………………….
Quick Study 3-26B (20 minutes)
Planta Company
Work Sheet
Adjusted
Trial Balance
Income
Statement
Balance Sheet
No.
Account
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash………………………………..
7,000
7,000
106
Accounts receivable ………..
27,200
27,200
153
Trucks …………………………..
42,000
42,000
17,500
Land ………………………………..
32,000
32,000
Accounts payable ……………
15,000
Salaries payable ………………
Unearned fees …………………
Common stock ………………..
318
Retained earnings……………
45,500
319
Dividends ………………………..
15,400
15,400
Plumbing fees earned ……..
84,000
622
Salaries expense ……………..
38,000
640
Rent expense…………………..
13,000
677
Miscellaneous expense …..
189,800
Quick Study 3-27C (10 minutes)
a.
2015
Dec. 31 Accounts Receivable …………………………………………. 12,000
EXERCISES
Exercise 3-1 (15 minutes)
a. Adjusting entry:
2016
Dec. 31
Wages Expense……………………………………………………..
1,250
Wages Payable …………………………..………………….
1,250
b. Payday entry:
2017
Jan. 4
Wages Expense……………………………………………………..
3,750
Wages Payable ………………………………………………………
1,250
5,000
Exercise 3-2 (25 minutes)
a.
Apr. 30 Legal Fees Expense ……………………………………. 3,500
b.
Apr. 30 Interest Expense …………………………………………. 3,000
c.
Apr. 30 Salaries Expense ………………………………………… 4,000
Exercise 3-3 (25 minutes)
a.
Depreciation Expense—Equipment …………………………..
18,000
Accumulated Depreciation—Equipment …………………
18,000
b.
Insurance Expense …………………………………………………..
4,900
Prepaid Insurance* ……………………………………………….
c.
Office Supplies Expense …………………………………………..
3,880
d.
Unearned Fee Revenue …………………………………………….
10,000
Fee Revenue …………………………………………………………
10,000
e.
Insurance Expense …………………………………………………..
5,800
Prepaid Insurance …………………………………………………
Wages Expense ……………………………………………………….
3,200
Exercise 3-4 (30 minutes)
a.
Unearned Fee Revenue …………………………………………….
5,000
Fee Revenue …………………………………………………………
b.
Wages Expense ……………………………………………………….
8,000
Wages Payable ……………………………………………………..
To record wages accrued but not yet paid.
c.
To record depreciation expense for the year.
d.
Office Supplies Expense …………………………………………..
5,000
Office Supplies* …………………………………………………….
5,000
To record office supplies used ($240 + $5,200 – $440).
e.
Insurance Expense …………………………………………………..
2,800
f.
1,050
g.
2,500
To record interest incurred but not yet paid.
Notes:
Prepaid Insurance†
Office Supplies*
Beg. Bal.
4,000
Beg. Bal.
240
Purch.
Used
Used
End. Bal.
1,200
End. Bal.
Exercise 3-5 (25 minutes)
Dec. 31 Accounts Receivable ……………………………………… 2,100
31 Depreciation Expense—Office Furniture …………. . 1,850
Accumulated Depreciation—Office Furniture … 1,850
To record depreciation on office furniture.