Chapter 03 – The Accounting Cycle: End of the Period
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Chapter 3
The Accounting Cycle: End of the Period
INSTRUCTOR’S MANUAL
Learning Objectives
LO3-1 Understand when revenues and expenses are recorded.
LO3-2 Distinguish between accrual-basis and cash-basis accounting.
LO3-4 Post adjusting entries and prepare an adjusted trial balance.
LO3-6 Demonstrate the purposes and recording of closing entries.
Chapter 03 – The Accounting Cycle: End of the Period
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Teaching Suggestions
Chapter 2 introduced students to transactions that occur throughout the year and how to record
those transactions. Chapter 3 explains the year-end process of making adjusting entries,
preparing financial statements, and closing. The differences in the procedures during the year
(Chapter 2) and at the end of the year (Chapter 3) are demonstrated in Illustration 3-3.
Before beginning the discussion of adjusting entries, Part A first explains accrual-basis
accounting versus cash-basis accounting based on some of the transactions of Eagle Golf
Academy from Chapter 2. One of the primary reasons for introducing students to cash-basis
10).
With the adjusted trial balance, students are then ready to prepare financial statements for
Eagle Golf Academy in Part C. The direct relations between the adjusted trial balance and the
financial statements are provided in Illustration 3-11. The amounts reported in the financial
statements match those presented in Chapter 1. For the balance sheet, students are ready to
understand a classified balance sheet. [Note: The discussion of Eagle’s statement of cash flow is
saved for Chapter 4.]
Chapter 03 – The Accounting Cycle: End of the Period
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Questions
Learning
Objective(s)
Topic
Time
(Min.)
1
LO3-1
Discuss the revenue recognition principle
5
2
LO3-1
Discuss the matching principle
5
3
LO3-1
Discuss the matching principle
5
4
LO3-2
Recognize revenues and expenses under cash-basis
accounting
5
5
LO3-2
Record revenue under accrual-basis accounting
5
6
LO3-2
Record revenue under cash-basis accounting
5
7
LO3-2
Record an expense under accrual-basis accounting
5
8
LO3-2
Record an expense under cash-basis accounting
5
9
LO3-3
Understand the purposes of adjusting entries
5
10
LO3-3
Define prepayments and accruals
5
11
LO3-3
Provide an example of a prepaid expense
5
12
LO3-3
Provide an example of an unearned revenue
5
13
LO3-3
Provide an example of an accrued expense
5
14
LO3-3
Provide an example of an accrued revenue
5
15
LO3-3
Record an adjusting entry
5
16
LO3-3
Understand the effects of an adjusting entry
5
17
LO3-3
Record an adjusting entry
5
LO3-3
Understand the effects of an adjusting entry
5
LO3-4
Recognize the purpose of an adjusted trial balance
5
21
LO3-5
Explain a classified balance sheet
5
22
LO3-5
5
23
LO3-6
Describe the two purposes of closing entries
5
24
LO3-6
Explain closing of temporary accounts
5
25
LO3-6
Record closing entries
5
26
LO3-6
Determine the balance of retained earnings
5
LO3-6
Understand the dividend component of retained
earnings
5
LO3-7
Understand the post-closing trial balance
5
Chapter 03 – The Accounting Cycle: End of the Period
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Brief
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
BE3-1
LO3-1
Determine revenues to be recognized
5
BE3-2
LO3-1
Determine expenses to be recognized
5
BE3-3
LO3-1
Calculate net income
5
BE3-4
LO3-1, 3-2
Analyze the impact of transactions on the balance of
cash, cash-basis net income, and accrual-basis net
income
10
BE3-5
Determine accrual-basis and cash-basis net income
10
BE3-6
LO3-3
Record the adjusting entry for supplies
10
BE3-7
LO3-3
Record the adjusting entry for prepaid rent
10
BE3-8
LO3-3
Record the adjusting entry for prepaid insurance
10
BE3-9
LO3-3
Record the adjusting entry for depreciation
10
BE3-10
LO3-3
Record the adjusting entry for deferred revenue
10
BE3-11
LO3-3
Record the adjusting entry for salaries payable
10
BE3-12
LO3-3
Record the adjusting entry for interest payable
10
BE3-13
LO3-3
Record the adjusting entry for interest receivable
10
BE3-14
LO3-5
Assign accounts to financial statements
5
BE3-15
LO3-5
Understand the purpose of financial statements
5
BE3-16
LO3-5
Prepare an income statement
10
BE3-17
LO3-5
10
BE3-18
LO3-5
Prepare a classified balance sheet
15
BE3-19
LO3-6
Record closing entries
10
BE3-20
LO3-7
Prepare a post-closing trial balance
10
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
E3-1
LO3-1
Determine the timing of revenue recognition
5
LO3-1
Determine the timing of expense recognition
5
E3-3
LO3-2
Differentiate cash-basis revenues from accrual-basis
revenues
5
E3-5
LO3-1
Determine the amount of net income
10
E3-6
LO3-3, 3-4,
3-5, 3-6, 3-7
Organize the steps in the accounting cycle
10
E3-7
LO3-3
Record adjusting entries
10
E3-8
LO3-3
Record year-end adjusting entries
5
E3-9
LO3-3
Calculate the effects of adjusting entries on net
income
5
E3-10
LO3-3
Record year-end adjusting entries
10
3-5
E3-11
LO3-3, 3-4
Calculate the effects of adjusting entries on the
accounting equation
5
E3-12
LO3-3
Record year-end adjusting entries
10
E3-13
LO3-3
Record year-end adjusting entries
15
E3-14
LO3-3, 3-4
Prepare an adjusted trial balance
20
E3-15
LO3-5
Calculate the balance of retained earnings
10
LO3-5
Prepare financial statements from an adjusted trial
balance
20
E3-17
LO3-6
Record closing entries
10
E3-18
LO3-6, 3-7
Record closing entries and prepare a post-closing
trial balance
10
E3-19
LO3-6, 3-7
Record closing entries and prepare a post-closing
trial balance
15
3-5, 3-6, 3-7
adjusted trial balance, financial statements,
and closing entries
E3-21
LO3-3, 3-4,
3-5, 3-6
Complete the accounting cycle
45
Problems
Learning
Objective(s)
Topic
Time
(Min.)
P3-1A
LO3-1, 3-2
Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2A
LO3-1, 3-2
Convert cash-basis accounting to accrual-basis
accounting
25
P3-3A
LO3-3
Record adjusting entries
25
P3-4A
LO3-3
Record adjusting entries
15
P3-5A
LO3-5
Prepare financial statements from an adjusted trial
balance when net income is positive
30
P3-6A
LO3-6, 3-7
Record closing entries and prepare a post-closing
trial balance
15
P3-7A
3-6, 3-7
entries
LO3-4, 3-5,
Complete the accounting cycle after adjusting
60
P3-8A
LO3-3, 3-4,
3-5, 3-6, 3-7
Complete the full accounting cycle
60
P3-9A
LO3-3, 3-4,
Complete the full accounting cycle
60
P3-1B
LO3-1, 3-2
Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2B
LO3-1, 3-2
Convert cash-basis accounting to accrual-basis
accounting
25
P3-3B
LO3-3
Record adjusting entries
25
Chapter 03 – The Accounting Cycle: End of the Period
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P3-5B
LO3-5
Prepare financial statements from an adjusted trial
balance
30
P3-6B
LO3-6, 3-7
Record closing entries and prepare a post-closing
trial balance
15
P3-7B
LO3-4, 3-5,
Complete the accounting cycle after adjusting
60
3-6, 3-7
entries
P3-8B
LO3-3, 3-4,
3-5, 3-6, 3-7
Complete the full accounting cycle
60
P3-9B
LO3-3, 3-4,
Complete the full accounting cycle
60
3-5, 3-6, 3-7
Additional
Perspectives
Topic
Time
(Min.)
AP3-1
Continuing Problem: Great Adventures
60
Financial Analysis: American Eagle Outfitters, Inc.
20
AP3-3
Financial Analysis: The Buckle, Inc.
20
Comparative Analysis: American Eagle Outfitters, Inc. vs. The
Buckle, Inc.
15
AP3-5
Ethics
20
AP3-6
Internet Research
30
AP3-7
Written Communication
25
Chapter 03 – The Accounting Cycle: End of the Period
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Chapter Quiz Questions
The following multiple-choice questions are 10 unique quiz questions that correspond to the 10
questions at the end of each chapter. Each question covers the same learning objective but with a
little different twist. The correct answer is highlighted in bold for each item.
LO3-1
1. On September 9, Clearmore Services receives a request for services from a customer. The
service is scheduled for September 15. On September 15, the service is provided, and the
customer pays one week later on September 22. According to the revenue recognition
principle, on which date should Clearmore Services record service revenue?
LO3-1
2. On March 4, Tonkawa Law asks Green Lawn Services for basic lawn maintenance totaling
$200. Green Lawn provides maintenance on March 8, and Tonkawa pays for the lawn
maintenance on March 12. According to the matching principle, on which date should
Tonkawa record lawn maintenance expense?
LO3-2
3. Refer to the information in question 1. Using cash-basis accounting, on which date should
Clearmore Services record service revenue?
LO3-2
4. Refer to the information in question 2. Using cash-basis accounting, on which date should
Tonkawa record lawn maintenance expense?
LO3-3
5. Which of the following is a characteristic of adjusting entries?
Chapter 03 – The Accounting Cycle: End of the Period
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LO3-3
6. Chan Sports purchases one year of rent on November 1 for $12,000 ($1,000 per month),
debiting Prepaid Rent. On December 31, Chan Sports would record the following year-end
adjusting entry:
LO3-4
7. The balance of retained earnings in the adjusted trial balance:
LO3-5
8. Which of the following describes the information reported in the income statement?
LO3-6
9. Which of the following describes the closing process?
LO3-7
10. Which of the following accounts is listed in a post-closing trial balance?
Chapter 03 – The Accounting Cycle: End of the Period
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Alternate Let’s Review
Problem #1
Heat Company experienced the following set of events:
October: Provides services to customers on account.
November: Receives cash from customers for services provided in October.
October: Receives utility bill for the month of October.
November: Pays utility bill for October.
Required:
1. Indicate in which month Heat records revenues under:
a. Accrual-basis accounting
b. Cash-basis accounting
2. Indicate in which month Cavalier records expenses under:
a. Accrual-basis accounting
b. Cash-basis accounting
Solution:
Chapter 03 – The Accounting Cycle: End of the Period
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Problem #2
Below are four scenarios for December.
Required:
For each of the scenarios:
1. Indicate the type of adjusting entry needed.
2. Record the transaction described and the period-end adjusting entry.
Scenario 1:
On December 1, a company purchases one year of rent in advance for $9,600 ($800/month).
Solution
Adjusting entry type: Prepaid expense.
December 1 (external transaction)
Debit
Credit
Prepaid Rent (+A) . . . . . . . . . . . . . . . . . . . . . .
9,600
December 31 (adjusting entry)
Scenario 2:
On December 2, a company receives $2,700 cash from a customer in an agreement to provide
services of $900 each month for the next three months, beginning in December.
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Solution
Adjusting entry type: Unearned revenue.
September 2 (external transaction)
Debit
Credit
Cash (+A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,700
Unearned Revenue (+L) . . . . . . . . . .
2,700
December 31 (adjusting entry)
Service Revenue (+R, +SE) . . . . . . . . .
Scenario 3:
On December 31, a company receives a utility bill of $1,800 for the month. The company plans
to pay the bill on January 3.
Solution
Adjusting entry type: Accrued expense.
December 31 (adjusting entry)
Debit
Credit
Utilities Expense (+E, −SE) . . . . . . . . . . . . . . . .
1,800
Utilities Payable (+L) . . . . . . . . . . . . . .
January 3 (external transaction)
Utilities Payable (−L) . . . . . . . . . . . . . .. . . . . . . .
Cash (−A) . . . . . . . . . . . . . . . . . . . . . .
1,800
Scenario 4:
Customers receiving $700 of services from a company have not been billed as of the end of
December. These customers will be billed on January 4 and are expected to pay the full amount
owed on January 9.
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Solution
Adjusting entry type: Accrued revenue.
December 31 (adjusting entry)
Debit
Credit
Accounts Receivable (+A) . . . . . . . . . . . . . . . . .
700
Service Revenue (+R, +SE) . . . . . . . . .
700
January 9 (external transaction)
Accounts Receivable (−A) . . . . . . . . .
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Problem #3
Below is the adjusted trial balance of Swan Dance Academy for December 31.
Swan Dance Academy
Adjusted Trial Balance
December 31
Account Title
Debit
Credit
Cash
$ 3,400
Accounts Receivable
6,200
Accounts Payable
$ 1,300
Utilities Payable
800
Common Stock
4,000
Retained Earnings
2,400
Dividends
1,300
Service Revenue
17,200
Salaries Expense
6,300
Supplies Expense
2,800
Advertising Expense
5,700
Totals
$25,700
$25,700
Required:
1. Prepare closing entries.
2. Prepare a post-closing trial balance.
3. Compare the balances of retained earnings in the adjusted trial balance and the post-closing
trial balance.