1. a. Under cash-basis accounting, revenues are reported in the period in which cash is received and
expenses are reported in the period in which cash is paid.
b. Under accrual-basis accounting, revenues are reported in the period in which they are earned
and expenses are reported in the same period as the revenues to which they relate.
5. Four different categories of adjusting entries include prepaid expenses (deferred expenses), unearned
revenues (deferred revenues), accrued expenses (accrued liabilities), and accrued revenues (accrued
assets).
6. Statement (a): Increases the balance of a revenue account.
7. Statement (b): Increases the balance of an expense account.
8. Yes, because every adjusting entry affects expenses or revenues.
9. a. The rights acquired represent an asset.
b. The justification for debiting Rent Expense is that when the ledger is summarized in a trial
b
alance at the end of the month and statements are prepared, the rent will have become an
expense. Hence, no adjusting entry will be necessary.
b
CHAPTER 3
THE ADJUSTING PROCESS
DISCUSSION QUESTIONS
CHAPTER 3 The Adjusting Process
PE 3-1A
a. No c. Yes e. No
b. No d. No f. Yes
PE 3-1B
PE 3-2A
a. (2) Unearned revenue c. (4) Accrued expense
b. (3) Accrued revenue d. (1) Prepaid expense
PE 3-2B
PE 3-3A
Accounts Receivable 18,540
Fees Earned 18,540
Accrued fees.
PE 3-3B
PE 3-4A
Salaries Expense 22,200
Salaries Payable 22,200
Accrued salaries [($33,300 ÷ 6 days) × 4 days].
PE 3-4B
PRACTICE EXERCISES
CHAPTER 3 The Adjusting Process
PE 3-5A
PE 3-5B
Dec. 31 Unearned Fees 96,050
Fees Earned 96,050
Fees Earned ($316,290 – $220,240).
PE 3-6A
PE 3-6B
Supplies Expense 8,285
Supplies 8,285
Supplies used ($4,085 + $7,810 – $3,610).
PE 3-7A
PE 3-7B
Depreciation Expense 8,120
Accumulated Depreciation—Building 8,120
Depreciation on building.
CHAPTER 3 The Adjusting Process
PE 3-8A
a. Revenues were understated by $8,000.
b. Expenses were understated by $12,600 ($1,700 + $10,900).
c. Net income was overstated by $4,600 ($12,600 – $8,000).
PE 3-8B
PE 3-9A
a. The totals are equal even though the credit should have been to Wages
Payable instead of Accounts Payable.
b. The totals are unequal. The credit total is higher by $72 ($1,591 – $1,519).
PE 3-9B
PE 3-10A
a.
Amount Percent Amount Percent
Fees earned $924,000 100% $784,000 100%
b. A favorable change of decreasing operating expenses and increasing income from
operations as percentages of revenue is indicated.
PE 3-10B
a.
Amount Percent Amount Percent
b. An unfavorable change of increasing operating expenses and decreasing income
from operations as percentages of revenue is indicated.
Income Statements
For the Years Ended December 31
20Y5 20Y4
Versatile Company
Upward Company
Income Statements
For the Years Ended December 31
20Y5 20Y4
CHAPTER 3 The Adjusting Process
Ex. 3-1
1. Accrued expense (b) 5. Unearned revenue (c)
2. Unearned revenue (c) 6. Prepaid expense (d)
Ex. 3-2
Accounts Receivable…………………… Normally requires adjustment (AR).
Cash………………………………………
…
Does not normally require adjustment.
Harriet Kasun, Capital…………………
…
Does not normally require adjustment.
Interest Expense………………………… Normally requires adjustment (AE).
Interest Receivable……………………… Normally requires adjustment (AR).
Ex. 3-3
a. Accounts Receivable 59,500
Ex. 3-4
a. Fees earned (or revenues) will be understated. Net income will be understated.
b. Accounts receivable (or assets) will be understated. Owner’s equity (owner’s
capital account) will be understated.
EXERCISES
Account Answer
CHAPTER 3 The Adjusting Process
Ex. 3-5
a. Salaries Expense 8,880
Salaries Payable 8,880
Accrued salaries [($14,800 ÷ 5 days) × 3 days].
b. Salaries Expense 11,840
Ex. 3-6
$66,075 ($73,250 – $7,175)
Ex. 3-7
a. Salary expense (or expenses) will be understated. Net income will be overstated.
b. Salaries payable (or liabilities) will be understated. Owner’s equity (owner’s
capital account) will be overstated.
Ex. 3-8
a. Salary expense (or expenses) will be overstated because two days of salaries
that should have been included as October expenses are being recorded in
November. Net income will be understated.
Ex. 3-9
Unearned Fees 18,480
Fees Earned 18,480
($23,100 – $4,620).
CHAPTER 3 The Adjusting Process
Ex. 3-11
Supplies Expense 8,740
Supplies 8,740
Supplies used ($10,680 – $1,940).
Ex. 3-12
$9,110 ($1,310 + $7,800)
Ex. 3-13
Ex. 3-14
a. Insurance Expense 20,250
Prepaid Insurance 20,250
Insurance expired.
Ex. 3-15
a. Insurance Expense 30,700
Prepaid Insurance 30,700
Insurance expired ($3,000 + $32,500 – $4,800).
b. Insurance Expense 30,700
Ex. 3-16
a. Unearned Fees 39,750
Fees Earned 39,750
Unearned fees earned during year.
CHAPTER 3 The Adjusting Process
Ex. 3-17
a. Dec. 31 Taxes Expense 12,320
Prepaid Taxes 12,320
Prepaid taxes expired
[($18,480 ÷ 12 months) × 8 months].
b. $57,320 ($12,320 + $45,000)
Ex. 3-18
Depreciation Expense 8,200
Accumulated Depreciation—Equipment 8,200
Depreciation on equipment.
Ex. 3-19
Ex. 3-20
a. $29,460 million ($58,683 – $29,223)
b. No. Depreciation is an allocation method, not a valuation method. That is,
depreciation allocates the cost of a fixed asset over its useful life. Depreciation
does not attempt to measure market values, which may vary significantly from
year to year.
Ex. 3-21
CHAPTER 3 The Adjusting Process
Ex. 3-23
Over- Under- Over- Under-
stated stated stated 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
Ex. 3-24
$218,530 ($196,400 + $34,900 – $12,770)
Ex. 3-25
a. Dec. 31 Depreciation Expense 13,900
Accumulated Depreciation—Equipment 13,900
Depreciation on equipment.
Error (b)Error (a)
CHAPTER 3 The Adjusting Process
Ex. 3-26
1. Accounts Receivable 6
Fees Earned 6
Accrued fees earned.
3. Insurance Expense 12
Prepaid Insurance 12
Insurance expired.
5. Wages Expense 2
Wages Payable 2
Accrued wages.
CHAPTER 3 The Adjusting Process
Ex. 3-27
1. The accountant debited Accounts Receivable for $5,000 but did not credit
Laundry Revenue. This adjusting entry represents accrued laundry revenue.
4. The accountant credited Laundry Equipment for the depreciation expense of
$13,000 instead of crediting the accumulated depreciation account.
The corrected adjusted trial balance is shown below.
Debit Credit
Balances Balances
Cash 7,500
Accounts Receivable 23,250
Accounts Payable 9,600
Wages Payable 1,000
Eva Baldwin, Capital 110,300
Eva Baldwin, Drawing 28,775
Laundry Revenue 187,100
Miscellaneous Expense 3,250
369,000 369,000
May 31, 20Y3
Eva’s Laundry
Adjusted Trial Balance
CHAPTER 3 The Adjusting Process
Ex. 3-28
a.
Amount Percent Amount Percent
Product sales $141,915 60.9% $118,573 66.7%
Service sales 90,972 39.1% 59,293 33.3%
Total sales $232,887 100.0% $177,866 100.0%
Cost of sales $139,156 59.8% $111,934 62.9%
Fulfillment 34,027 14.6% 25,249 14.2%
b. The vertical analysis indicates that operating income increased from 2.3% to 5.3%
of total sales between the two years. Total expenses decreased from 97.7% to 94.7%
of total sales. There was a sizable decrease in the cost of sales from 62.9% to 59.8%
Amazon.com, Inc.
Operating Income Statements
For the Years Ended December 31
Year 2 Year 1
(in millions)
CHAPTER 3 The Adjusting Process
Ex. 3-29
a. Net income: $1,933 – $4,240 = –$2,307 million
($2,307)
$4,240
Ex. 3-30
a.
Revenues………………………………………………………
…
$170,756 100.0%
Cost of services (expense)…………………………………
…
(79,419) (46.5)%
Selling and marketing expense……………………………
…
(36,765) (21.5)%
Depreciation and other expenses…………………………
…
(28,476) (16.7)%
Operating income……………………………………………
…
$ 26,096 15.3%
b.
Revenues………………………………………………………
…
$130,863 100.0%
Cost of services (expense)…………………………………
…
(55,508) (42.4)%
Selling and marketing expense……………………………
…
(31,083) (23.8)%
Depreciation and other expenses…………………………
…
(21,994) (16.8)%
Operating income……………………………………………
…
$ 22,278 17.0%
= –54.4%
AT&T
Verizon
CHAPTER 3 The Adjusting Process
Prob. 3-1A
1. Dec. 31 Supplies Expense 1,265
Supplies 1,265
Supplies used ($1,585 – $320).
31 Accounts Receivable 21,610
Fees Earned 21,610
Accrued fees earned.
31 Depreciation Expense 3,340
Accumulated Depreciation—Office Equipment 3,340
Depreciation expense.
PROBLEMS
CHAPTER 3 The Adjusting Process
Prob. 3-2A
1. July 31 Accounts Receivable 11,150
Fees Earned 11,150
Accrued fees earned.
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).
2. Fees Earned would be understated by $11,150, Wages Expense would be understated
by $4,840, and net income would be understated by $6,310 ($11,150 – $4,840).
4. There is no effect on “Net increase or decrease in cash” on the statement of cash
flows because adjusting entries do not affect cash.
CHAPTER 3 The Adjusting Process
Prob. 3-3A
1. 20Y4
June 30 Accounts Receivable 7,380
Fees Earned 7,380
Accrued fees earned.
30 Unearned Fees 16,500
Fees Earned 16,500
Fees earned.
2. Revenues…………………………
…
$294,750
Expenses…………………………
…
226,350 ($94,500 + $72,000 + $51,750 + $8,100)
Net income…………………………
…
$ 68,400
…
…
…
4. The effect of the adjusting entries on Nancy Townes, Capital is the difference in net
income in (2) and (3) of $4,425 ($68,400 – $63,975). The adjusting entries reduced
net income by $4,425.
CHAPTER 3 The Adjusting Process
Prob. 3-4A
20Y5
Nov. 30 Supplies Expense 8,850
Supplies 8,850
Supplies used ($11,250 – $2,400).
30 Depreciation Expense—Automobiles 7,300
Accumulated Depreciation—Automobiles 7,300
Automobile depreciation
($62,050 – $54,750).
30 Unearned Service Fees 9,000
Service Fees Earned 9,000
Service fees earned ($18,000 – $9,000, or
$742,800 – $733,800).
1. 20Y6
Oct. 31 Insurance Expense 6,000
Prepaid Insurance 6,000
Insurance expired ($6,550 – $550).
31 Depreciation Expense—Equipment 7,830
Accumulated Depreciation—Equipment 7,830
Equipment depreciation.
31 Unearned Rent 4,090
Rent Revenue 4,090
Rent revenue earned ($6,140 – $2,050).