Chapter 3 – The Accounting Cycle: End of the Period
Chapter 3
The Accounting Cycle: End of the Period
REVIEW QUESTIONS
Question 3-1 (LO 3-1)
The revenue recognition principle states that we record revenue in the period in which we
Question 3-2 (LO 3-1)
The matching principle states that we recognize expenses in the same period as the revenues they
Question 3-3 (LO 3-1)
Net income is an important profitability measure used by investors, creditors, and others in
Question 3-4 (LO 3-2)
Under cash-basis accounting, revenues are recorded when cash is received and expenses are
Question 3-5 (LO 3-2)
(1) April 10th.
Question 3-6 (LO 3-2)
(1) March 28th.
Chapter 3 – The Accounting Cycle: End of the Period
Answers to Review Questions (continued)
Question 3-7 (LO 3-2)
Question 3-8 (LO 3-2)
(1) March 28th.
Question 3-9 (LO 3-3)
One of the primary purposes of adjusting entries is to allow for proper application of the revenue
Question 3-10 (LO 3-3)
Prepayments are cases where cash is received before revenue is recognized or where cash is paid
Question 3-11 (LO 3-3)
Question 3-12 (LO 3-3)
Question 3-13 (LO 3-3)
An accrued expense includes incurring an expense before the related cash outflow, such as when
Question 3-14 (LO 3-3)
Chapter 3 – The Accounting Cycle: End of the Period
Answers to Review Questions (continued)
Question 3-15 (LO 3-3)
October 31
Debit
Credit
Question 3-16 (LO 3-3)
Yes. Utilities expense and utilities payable will be understated at the end of September. Utilities
Question 3-17 (LO 3-3)
November 30
Debit
Credit
Question 3-18 (LO 3-3)
Yes. Accounts receivable and service revenue will be understated at the end of May. Accounts
Question 3-19 (LO 3-3)
(a) Prepaid expense: Debit Supplies Expense; credit Supplies.
Question 3-20 (LO 3-4)
The purpose of the adjusted trial balance is to list all accounts and their balances after updating
Question 3-21 (LO 3-5)
Classified indicates that assets are separated into those that provide a benefit over the next year
Chapter 3 – The Accounting Cycle: End of the Period
Answers to Review Questions (continued)
Question 3-22 (LO 3-5)
Assets
=
Liabilities
+
Stockholders’
equity
=
+
=
Question 3-23 (LO 3-6)
Question 3-24 (LO 3-6)
To “close” temporary accounts indicates that temporary account balances should be reduced to zero
Question 3-25 (LO 3-6)
The first closing entry transfers revenue transactions to retained earnings by debiting all revenue
accounts (reducing their balances to zero) and crediting retained earnings. The second closing entry
Question 3-26 (LO 3-6)
Net Income
Dividends
Retained
Earnings*
Year 1
$ 300
$200
$ 100
Year 3
Year 4
Chapter 3 – The Accounting Cycle: End of the Period
Answers to Review Questions (continued)
Question 3-27 (LO 3-6)
It is important to understand that transactions are recorded from the company’s perspective. The
Question 3-28 (LO 3-7)
The adjusted trial balance does not include the effect of closing entries while the post-closing
trial balance does. This means that revenues, expenses, and dividends will be reported in the adjusted
Chapter 3 – The Accounting Cycle: End of the Period
BRIEF EXERCISES
Brief Exercise 3-1 (LO 3-1)
Brief Exercise 3-2 (LO 3-1)
Brief Exercise 3-3 (LO 3-1)
Revenues
−
Expenses
=
Net Income
−
=
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-4 (LO 3-1, 3-2)
Impact on:
Cash
Balance
Cash-basis
Net Income
Accrual-basis
Net Income
(a)
for work in May and $200 is
for work in April.
Pay $200 to advertise in a
local newspaper in May.
Receive $1,500 from
Brief Exercise 3-5 (LO 3-1, 3-2)
Cash-basis
net income
Accrual
adjustments
Accrual-basis
net income
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-6 (LO 3-3)
(1)
May 15
Debit
Credit
(2)
May 31
Debit
Credit
(3)
Supplies
Supplies
Expense
May 1
Beginning balance
$ 500
$ 0
May 15
Purchase
Adjustment
Supplies used during May
May 31
Ending balance
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-7 (LO 3-3)
(1)
Oct. 1
Debit
Credit
(2)
Dec. 31
Debit
Credit
(3)
Prepaid
Rent
Rent
Expense
Jan. 1
Beginning balance
$ 0
$ 0
Oct. 1
Payment
Dec. 31
Ending balance
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-8 (LO 3-3)
(1)
Mar. 1
Debit
Credit
(2)
Dec. 31
Debit
Credit
Insurance Expense
30,000
(3)
Prepaid
Insurance
Insurance
Expense
Jan. 1
Beginning balance
$ 0
$ 0
Mar. 1
Payment
Dec. 31
Ending balance
$ 6,000
$30,000
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-9 (LO 3-3)
(1)
Apr. 1
Debit
Credit
(2)
Dec. 31
Debit
Credit
Depreciation Expense
5,400
(3)
Accumulated
Depreciation
Depreciation
Expense
Jan. 1
Beginning balance
$ 0
$ 0
Adjustment
Depreciation during year
Dec. 31
Ending balance
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-10 (LO 3-3)
(1)
Nov. 1
Debit
Credit
(2)
Dec. 31
Debit
Credit
Deferred Revenue
4,000
(3)
Deferred
Revenue
Service
Revenue
Jan. 1
Beginning balance
$ 0
$ 0
Nov. 1
Cash received
Dec. 31
Ending balance
$4,000
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-11 (LO 3-3)
(1)
Dec. 31, 2018
Debit
Credit
Salaries Expense
(2)
Jan. 11, 2019
Debit
Credit
Salaries Payable
1,200
(3)
Salaries
Payable
Jan. 1, 2018
Beginning balance
$ 0
Adjustment
Salaries incurred but not paid
Dec. 31, 2018
Ending balance
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-12 (LO 3-3)
(1)
Jul. 1, 2018
Debit
Credit
Cash
15,000
(2)
Dec. 31, 2018
Debit
Credit
Interest Expense
900
(3)
Interest
Payable
Interest
Expense
Jan. 1, 2018
Beginning balance
$ 0
$ 0
Adjustment
Interest incurred but not paid
Dec. 31, 2018
Ending balance
Brief Exercise 3-13 (LO 3-3)
(1)
Jul. 1, 2018
Debit
Credit
(2)
Dec. 31, 2018
Debit
Credit
Interest Receivable
Chapter 3 – The Accounting Cycle: End of the Period
(3)
Interest
Receivable
Interest
Revenue
Jan. 1, 2018
Beginning balance
$ 0
$ 0
Adjustment
Interest earned but not received
Dec. 31, 2018
Ending balance
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-14 (LO 3-5)
Account
Financial Statement
1.
Accounts Receivable
Balance Sheet
2.
Deferred Revenue
Balance Sheet
4.
Salaries Payable
Balance Sheet
5.
Depreciation Expense
6.
Service Revenue
Brief Exercise 3-15 (LO 3-5)
1.
(b)
3.
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-16 (LO 3-5)
Beavers Corporation
Income Statement
For the year ended December 31, 2018
Service revenue
$275,000
Expenses:
Brief Exercise 3-17 (LO 3-5)
Spiders Corporation
Statement of Stockholders’ Equity
For the year ended December 31, 2018
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Balance at January 1
Issuance of common stock
Add: Net income for 2018
Balance at December 31
Chapter 3 – The Accounting Cycle: End of the Period
3-18 Financial Accounting, 4e
Brief Exercise 3-18 (LO 3-5)
Blue Devils Corporation
Balance Sheet
December 31, 2018
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 5,000
Accounts payable
$ 26,000
Supplies
Stockholders’ Equity
Long-term assets:
Common stock
60,000
Equipment
Retained earnings
Accumulated depr.
66,000
$108,000
Total assets
*
Assets
=
Liabilities
+
Stockholders’ equity
$108,000
=
+
$108,000
$6,000
Chapter 3 – The Accounting Cycle: End of the Period
Brief Exercise 3-19 (LO 3-6)
December 31
Debit
Credit
Service Revenue
900,000
Retained Earnings
900,000
(Close revenue accounts)
Retained Earnings
625,000
Rent Expense
(Close expense accounts)
Retained Earnings
Dividends
(Close dividends account)
Brief Exercise 3-20 (LO 3-7)
Hilltoppers Corporation
Post-Closing Trial Balance
Accounts
Debit
Credit
Cash
$ 5,000
Equipment
Accounts Payable
Common Stock
Retained Earnings
* Retained Earnings
(before closing)
+
Revenues
−
Expenses
−
Dividends
=
Retained
Earnings
(after closing)
Chapter 3 – The Accounting Cycle: End of the Period
EXERCISES
Exercise 3-1 (LO 3-1)
Exercise 3-2 (LO 3-1)
Exercise 3-3 (LO 3-2)