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Chapter 3
The Adjusting Process
Review Questions
1. What is the difference between cash basis accounting and accrual basis accounting?
2. Which method of accounting (cash or accrual basis) is consistent with Generally Accepted
Accounting Principles?
Accrual basis accounting is consistent with generally accepted accounting principles.
3. Which accounting concept or principle requires companies to divide their activities into small time
segments such as months, quarters, or years?
4. What is a fiscal year? Why might companies choose to use a fiscal year that is not a calendar year?
5. Under the revenue recognition principle, when is revenue recorded?
Under the revenue recognition principle, revenue is determined using a five step process:
6. Under the matching principle, when are expenses recorded?
7. When are adjusting entries completed, and what is their purpose?
Adjusting entries are completed at the end of the accounting period to record revenues in the period
3-2
8. What are the two basic categories of adjusting entries? Provide two examples of each.
The two basic categories of adjusting entries are deferrals and accruals.
9. What is a deferred expense? Provide an example.
10. What is the process of allocating the cost of a plant asset over its useful life called?
11. What is a contra account?
12. In the recording of depreciation expense, which account is credited?
When recording depreciation expense, the Accumulated Depreciation account is credited.
13. What does accumulated depreciation represent?
14. How is book value calculated, and what does it represent?
15. What is a deferred revenue? Provide an example.
Deferred revenue is a liability created when a company collects cash from customers in advance of
16. What is an accrued expense? Provide an example.
3-3
17. What is an accrued revenue? Provide an example.
An accrued revenue is a revenue that a company has earned but not yet collected in cash. For
18. What are the two rules to remember about adjusting entries?
The two rules to remember about adjusting entries are:
19. When is an adjusted trial balance prepared, and what is its purpose?
20. If an accrued expense is not recorded at the end of the year, what is the impact on the financial
statements?
21. What is a worksheet, and how is it used to help prepare an adjusted trial balance?
A worksheet is an internal document that helps summarize data for the preparation of the financial
22A. If a payment of a deferred expense was recorded under the alternative treatment, what account
would be debited at the time of payment?
23A. If a payment of a deferred expense was recorded under the alternative treatment, what account
would be debited in the adjusting entry?
If a payment of a deferred expense was recorded under the alternative treatment, an asset account
would be debited in the adjusting entry.
Short Exercises
S3-1 Comparing cash and accrual basis accounting for expenses
Learning Objective 1
The Pink Peonies Law Firm prepays for advertising in the local newspaper. On January 1, the law firm
paid $3,000 for 10 months of advertising.
How much advertising expense should Pink Peonies Law Firm record for the two months ending
February 28 under the
a. cash basis?
b. accrual basis?
SOLUTION
a.
$3,000
advertising expense using cash basis
3-5
S3-2 Comparing cash and accrual basis accounting for revenues
Learning Objective 2
Protection Home provides house-sitting for people while they are away on vacation. Some of its
customers pay immediately after the job is finished. Some customers ask that the business send them a
bill. As of the end of the year, Protection Home has collected $900 from cash-paying customers.
Protection Home’s remaining customers owe the business $1,300.
How much service revenue would Protection Home have for the year under the
a. cash basis?
b. accrual basis?
SOLUTION
a.
$ 900
service revenue using cash basis
S3-3 Applying the revenue recognition principle
Learning Objective 2
Seacoast Magazine sells subscriptions for $36 for 18 issues. The company collects cash in advance and
then mails out the magazines to subscribers each month.
Apply the revenue recognition principle to determine
a. when Seacoast Magazine should record revenue for this situation.
b. the amount of revenue Seacoast Magazine should record for eight issues.
SOLUTION
a. Seacoast Magazine should record revenue when each performance obligation has been
S3-4 Applying the matching principle
Learning Objective 2
Suppose on January 1, Andrew’s Tavern prepaid rent of $16,800 for the full year.
At November 30, how much rent expense should be recorded for the period January 1 through
November 30?
SOLUTION
At November 30, rent expense of $15,400 should be recorded.
Calculations:
3-7
S3-5 Identifying types of adjusting entries
Learning Objective 3
A select list of transactions for Anuradha’s Goals follows:
Apr.
1
Paid six months of rent, $4,800.
10
Received $1,200 from customer for six-month service
contract that began April 1.
15
Purchased a computer for $1,000.
18
Purchased $300 of office supplies on account.
30
Work performed but not yet billed to customer, $500.
30
Employees earned $600 in salaries that will be paid May
2.
For each transaction, identify what type of adjusting entry would be needed. Select from the following
four types of adjusting entries: deferred expense, deferred revenue, accrued expense, and accrued
revenue.
SOLUTION
April 1:
Deferred expense
S3-6 Journalizing and posting adjusting entries for prepaid rent
Learning Objective 3
On September 1, Big Fan of Toledo prepaid six months of rent, $3,300.
Requirements
1. Record the journal entry for the September 1 payment.
2. Record the adjusting entry required at September 30.
3. Using T-accounts, post the journal entry and adjusting entry to the accounts involved and show their
balances at September 30. (Ignore the Cash account.)
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Sep. 1
Prepaid Rent
3,300
Cash
3,300
To record rent paid in advance.
3-9
S3-7 Journalizing and posting an adjusting entry for office supplies
Learning Objective 3
On November 1, Carlisle Equipment had a beginning balance in the Office Supplies account of $600.
During the month, Carlisle purchased $2,300 of office supplies. At November 30, Carlisle Equipment
had $500 of office supplies on hand.
Requirements
1. Open the Office Supplies T-account, and enter the beginning balance and purchase of office supplies.
2. Record the adjusting entry required at November 30.
3. Post the adjusting entry to the two accounts involved, and show their balances at November 30.
SOLUTION
Requirement 1
Office Supplies
Nov. 1 600
2,300
S3-8 Journalizing and posting an adjusting entry for depreciation and determining book value
Learning Objective 3
On October 1, Orlando Gold Exchange paid cash of $57,600 for computers that are expected to remain
useful for three years. At the end of three years, the value of the computers is expected to be zero.
Requirements
1. Calculate the amount of depreciation for the month of October using the straight-line depreciation
method.
2. Record the adjusting entry for depreciation on October 31.
3. Post the purchase of October 1 and the depreciation on October 31 to T-accounts for the following
accounts: Computer Equipment, Accumulated Depreciation—Computer Equipment, and
Depreciation Expense—Computer Equipment. Show their balances at October 31.
4. What is the computer equipment’s book value on October 31?
SOLUTION
Requirement 1
Straight-line depreciation per month
=
(Cost – Residual Value) / Useful Life
=
($57,600 – $0) 3 years
3-11
S3-8, cont.
Requirement 4
S3-9 Journalizing and posting an adjusting entry for unearned revenue
Learning Objective 3
Eastside Magazine collects cash from subscribers in advance and then mails the magazines to
subscribers over a one-year period.
Requirements
1. Record the journal entry to record the original receipt of $180,000 cash.
2. Record the adjusting entry that Eastside Magazine makes to record earning $8,000 in subscription
revenue that was collected in advance.
3. Using T-accounts, post the journal entry and adjusting entry to the accounts involved and show their
balances after adjustments. (Ignore the Cash account.)
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Cash
180,000
S3-10 Journalizing and posting an adjusting entry for accrued salaries expense
Learning Objective 3
Birch Park Senior Center has a weekly payroll of $12,500. December 31 falls on Wednesday, and Birch
Park Senior Center will pay its employees the following Monday (January 5) for the previous full week.
Assume Birch Park Senior Center has a five-day workweek and has an unadjusted balance in Salaries
Expense of $620,000.
Requirements
1. Record the adjusting entry for accrued salaries on December 31.
2. Post the adjusting entry to the accounts involved, and show their balances after adjustments.
3. Record the journal entry for payment of salaries made on January 5.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
S3-10, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Jan. 5
Salaries Expense
5,000*
S3-11 Journalizing and posting an adjusting entry for accrued interest expense
Learning Objective 3
Resort Travel borrowed $33,000 on September 1, 2018, by signing a one-year note payable to State One
Bank. Resort’s interest expense on the note payable for the remainder of the fiscal year (September
through November) is $355.
Requirements
1. Record the adjusting entry to accrue interest expense at November 30, 2018.
2. Post the adjusting entry to the T-accounts of the two accounts affected by the adjustment.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Nov. 30
Interest Expense
355
3-14
S3-12 Journalizing an adjusting entry for accrued revenue
Learning Objective 3
At the end of June, Gerber Dental had performed $9,000 of dental services but has not yet billed
customers.
Record the adjusting entry for accrued revenue.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
June 30
Accounts Receivable
9,000
S3-13 Preparing an adjusted trial balance
Learning Objective 4
Seth’s Tax Services had the following accounts and account balances after adjusting entries. Assume all
accounts have normal balances.
Prepare the adjusted trial balance for Seth’s Tax Services as of December 31, 2018.
3-15
SOLUTION
SETH’S TAX SERVICES
Adjusted Trial Balance
December 31, 2018
Account Title
Balance
Debit
Credit
Cash
$ 37,250
S3-14 Determining the effects on financial statements
Learning Objective 5
In recording adjusting entries, Reagan Financial Advisors failed to record the adjusting entries for the
following situations:
a. Office supplies on hand, $100.
b. Accrued revenues, $5,000.
c. Accrued interest expense, $250.
d. Depreciation, $800.
e. Unearned revenue that has been earned, $550.
Determine the effects on the income statement and balance sheet by identifying whether assets,
liabilities, equity, revenue, and expenses are either overstated or understated. Use the following table.
Adjustment a has been provided as an example.
SOLUTION
Adjustment
Balance Sheet
Income Statement
Not Recorded
Assets
Liabilities
Equity
Revenue
Expenses
a.
Overstated
Overstated
Understated
3-17
S3-15 Preparing a partial worksheet
Learning Objective 6
Just Right Hair Stylists has begun the preparation of its worksheet as follows:
Year-end data include the following:
a. Office supplies on hand, $300.
b. Depreciation, $700.
c. Accrued interest expense, $800.
Complete Just Right’s worksheet through the adjusted trial balance section. In the adjustments section, mark each adjustment by letter.
3-18
SOLUTION
JUST RIGHT HAIR STYLISTS
Worksheet
December 31, 2018
Account Names
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Debit
Credit
Debit
Credit
Debit
Credit
Cash
$ 300
$ 300
Office Supplies
900
$ 600
a.
300
3-19
S3A-16 Journalizing the alternative treatment of deferred expenses
Learning Objective 7 Appendix 3A
On October 1, 2018, Kitchen Design paid $15,000 for store rent covering the six-month period ending
March 31, 2019.
Requirements
1. Journalize the entry on October 1 by using the alternative treatment of deferred expenses.
2. Record the December 31, 2018 adjusting entry.
SOLUTION
Requirement 1
Requirement 2
* Calculations:
$15,000
Rent prepaid on October 1 for 6 months
3-20
S3A-17 Journalizing the alternative treatment of deferred revenues
Learning Objective 7 Appendix 3A
On September 1, 2018, Salem Landscaping collected $24,000 in advance from customers for
landscaping services. The service revenue will be earned monthly over the 12-month period ending
August 31, 2019.
Requirements
1. Journalize the entry on September 1 by using the alternative treatment of deferred revenues.
2. Record the December 31, 2018 adjusting entry.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Sep. 1
Cash
24,000
Exercises
E3-18 Comparing cash and accrual basis accounting and applying the revenue recognition
principle
Learning Objectives 1, 2
Momentous Occasions is a photography business that shoots videos at college parties. The freshman
class pays $1,000 in advance on March 3 to guarantee services for its party to be held on April 2. The
sophomore class promises a minimum of $2,800 for filming its formal dance and actually pays cash of
$4,100 on February 28 at the dance.
Answer the following questions about the correct way to account for revenue under the accrual basis:
a. Considering the $1,000 paid by the freshman class, on what date was revenue recognized? Did the
recognition occur on the same date cash was received?
b. Considering the $4,100 paid by the sophomore class, on what date was revenue recognized? Did the
recognition occur on the same date cash was received?
SOLUTION
a. Considering the $1,000 paid by the freshman class, the revenue was recognized on April 2.
E3-19 Comparing cash and accrual basis accounting and applying the revenue recognition
principle and the matching principle
Learning Objectives 1, 2
Chef’s Catering completed the following selected transactions during May 2018:
Requirements
1. Show whether each transaction would be handled as a revenue or an expense using both the cash
basis and accrual basis accounting systems by completing the following table. (Expenses should be
shown in parentheses.) Also, indicate the dollar amount of the revenue or expense. The May 1
transaction has been completed as an example.
2. After completing the table, calculate the amount of net income or net loss for Chef’s Catering under
the accrual basis and cash basis accounting systems for May.
3. Considering your results from Requirement 2, which method gives the best picture of the true
earnings of Chef’s Catering? Why?
Requirement 1
SOLUTION
Amount of Revenue (Expense) for May
Date
Cash Basis Amount of
Revenue (Expense)
Accrual Basis Amount of
Revenue (Expense)
May
1
$(2,400)
$ (0)
3-23
E3-19, cont.
Requirement 2
Net income (loss) under cash basis is ($3,500).
Calculations:
E3-20 Determining the amount of prepaid expenses
Learning Objective 3
Consider the facts presented in the following table for Tropical View:
Complete the table by filling in the missing values.
SOLUTION
Missing values shown in italics.
3-25
E3-21 Journalizing adjusting entries
Learning Objective 3
Consider the following situations:
a. Business receives $3,200 on January 1 for 10-month service contract for the period January 1 through
October 31.
b. Total salaries for all employees is $3,600 per month. Employees are paid on the 1st and 15th of the
month.
c. Work performed but not yet billed to customers for the month is $1,600.
d. The company pays interest on its $16,000, 4% note payable of $53 on the first day of each month.
Assume the company records adjusting entries monthly. Journalize the adjusting entries needed as of
January 31.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jan. 31
Unearned Revenue
320*
(a)
Service Revenue
320*
3-26
E3-22 Journalizing adjusting entries
Learning Objective 3
Consider the following independent situations at December 31:
a. On October 1, a business collected $3,000 rent in advance, debiting Cash and crediting Unearned
Revenue. The tenant was paying one year’s rent in advance. On December 31, the business must
account for the amount of rent it has earned.
b. Salaries expense is $1,800 per day—Monday through Friday—and the business pays employees each
Friday. This year, December 31 falls on a Thursday.
c. The unadjusted balance of the Office Supplies account is $3,000. Office supplies on hand total
$1,900.
d. Equipment depreciation was $500.
e. On April 1, when the business prepaid $4,320 for a two-year insurance policy, the business debited
Prepaid Insurance and credited Cash.
Journalize the adjusting entry needed on December 31 for each situation. Use the letters to label the
journal entries.
3-27
SOLUTION
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Unearned Revenue
750*
Rent Revenue
750*
* Calculations:
Situation a:
$3,000
Rent collected in advance on October 1 for 1 year
3-28
E3-22, cont.
Situation c:
$ 3,000
Office supplies prior to adjustment
(1,900)
Office supplies on hand
$ 1,100
Supplies expense (cost of office supplies used)
E3-23 Journalizing adjusting entries
Learning Objective 3
Consider the following situations for Betterton Welding Services:
a. Depreciation for the current year includes equipment, $2,100.
b. Each Monday, Betterton pays employees for the previous week’s work. The amount of weekly
payroll is $1,400 for a seven-day workweek (Monday to Sunday). This year, December 31 falls on
Thursday.
c. The beginning balance of Office Supplies was $2,300. During the year, Betterton purchased office
supplies for $3,000, and at December 31 the office supplies on hand totaled $1,000.
d. Betterton prepaid a two full years’ insurance on July 1 of the current year, $6,000. Record insurance
expense for the year ended December 31.
e. Betterton had earned $2,800 of unearned revenue.
f. Betterton had incurred (but not recorded) $200 of interest expense on a note payable. The interest will
not be paid until February 28.
g. Betterton billed customers $3,000 for welding services performed.
Journalize the adjusting entry needed on December 31 for each situation. Use the letters to label the
journal entries.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
a.
Depreciation Expense—Equipment
2,100
Accumulated Depreciation—Equipment
2,100
To record depreciation on equipment.
* Calculations: Situation b:
$1,400
Payroll for a 7-day work week
7
work days
$ 200
Salaries expense per work day
3-30
E3-23, cont.
E3-24 Journalizing adjusting entries and posting to T-accounts
Learning Objective 3
3. Unearned Revenue bal. $800 CR
The accounting records of Mackay Architects include the following selected, unadjusted balances at
March 31: Accounts Receivable, $1,500; Office Supplies, $700; Prepaid Rent, $2,240; Equipment,
$8,000; Accumulated Depreciation—Equipment, $0; Salaries Payable, $0; Unearned Revenue, $900;
Service Revenue, $4,100; Salaries Expense, $800; Supplies Expense, $0; Rent Expense, $0;
Depreciation Expense—Equipment, $0. The data developed for the March 31 adjusting entries are as
follows:
a. Service revenue accrued, $700.
b. Unearned revenue that has been earned, $100.
c. Office Supplies on hand, $300.
d. Salaries owed to employees, $200.
e. One month of prepaid rent has expired, $560.
f. Depreciation on equipment, $120.
Requirements
1. Open a T-account for each account using the unadjusted balances given.
2. Journalize the adjusting entries using the letter and March 31 date in the date column.
3. Post the adjustments to the T-accounts, entering each adjustment by letter. Show each account’s
adjusted balance.
SOLUTION
Requirement 1
Accounts Receivable
Salaries Payable
Service Revenue
Bal.
1,500
0
Bal.
4,100
Bal.
3-32
E3-24, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Mar. 31
Accounts Receivable
700
Service Revenue
700
To accrue service revenue.
* Calculations:
$ 700
Office supplies prior to adjustment
E3-24, cont.
Requirement 3
Accounts Receivable
Salaries Payable
Service Revenue
Bal.
1,500
0
Bal.
4,100
Bal.
a.
700
200
d.
700
a.
3-34
E3-25 Journalizing adjusting entries and posting to T-accounts
Learning Objective 3
3. Office Supplies bal. $300 DR
The unadjusted trial balance for All Mopped Up Company, a cleaning service, is as follows:
During the 12 months ended December 31, 2018, All Mopped Up:
a. used office supplies of $1,700.
b. used prepaid insurance of $580.
c. depreciated equipment, $500.
d. accrued salaries expense of $310 that hasn’t been paid yet.
e. earned $400 of unearned revenue.
Requirements
1. Open a T-account for each account using the unadjusted balances.
2. Journalize the adjusting entries using the letter and December 31 date in the date column.
3. Post the adjustments to the T-accounts, entering each adjustment by letter. Show each account’s
adjusted balance.
3-35
SOLUTION
Requirement 1
Cash
Accounts Payable
Service Revenue
Bal.
800
2,400
Bal.
25,000
Bal.
E3-25, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Supplies Expense
1,700
Office Supplies
1,700
To record office supplies used.
3-37
E3-25, cont.
Requirement 3
Cash
Accounts Payable
Service Revenue
Bal.
800
2,400
Bal.
25,000
Bal.
Bal.
800
2,400
Bal.
400
e.
25,400
Bal
Note: Exercise E3-26 should be used only in conjunction with Exercise E3-25.
E3-26 Preparing an adjusted trial balance
Learning Objective 4
Adj. trial balance $46,210 total
Refer to the data in Exercise E3-25, and prepare an adjusted trial balance.
SOLUTION
ALL MOPPED UP COMPANY
Adjusted Trial Balance
December 31, 2018
Account Title
Balance
3-39
E3-27 Identifying the impact of adjusting entries on the financial statements
Learning Objectives 3, 5
Austin Acoustics recorded the following transactions during October:
a. Received $2,500 cash from customer for three months of service beginning October 1 and ending
December 31. The company recorded a $2,500 debit to Cash and a $2,500 credit to Unearned
Revenue.
b. Employees are paid $3,000 on Monday following the five-day workweek. October 31 is on Friday.
c. The company pays $440 on October 1 for its six-month auto insurance policy. The company
recorded a $440 debit to Prepaid Insurance and a $440 credit to Cash.
d. The company purchased office furniture for $8,300 on January 2. The company recorded a $8,300
debit to Office Furniture and an $8,300 credit to Accounts Payable. Annual depreciation for the
furniture is $1,000.
e. The company began October with $50 of office supplies on hand. On October 10, the company
purchased office supplies on account of $100. The company recorded a $100 debit to Office
Supplies and a $100 credit to Accounts Payable. The company used $120 of office supplies during
October.
f. The company received its electric bill on October 31 for $325 but did not pay it until November 10.
g. The company paid November’s rent of $2,500 on October 30. On October 30, the company
recorded an $2,500 debit to Rent Expense and a $2,500 credit to Cash.
Indicate if an adjusting entry is needed for each item on October 31 for the month of October.
Assuming the adjusting entry is not made, indicate which specific category or categories of accounts
on the financial statements are misstated and if they are overstated or understated. Use the following
table as a guide. Item a is completed as an example:
3-40
SOLUTION
Item
Adjusting
Entry
Needed?
Specific Category
of Accounts on the
Balance Sheet
Over /
Understated
Specific Category
of Accounts on the
Income Statement
Over /
Understated
a.
Yes
Liability
Over
Revenue
Under
Equity
Under
E3-28 Journalizing adjusting entries and analyzing their effect on the income statement
Learning Objectives 3, 5
The following data at July 31, 2018, are given for RCO:
a. Depreciation, $600.
b. Prepaid rent expires, $200.
c. Interest expense accrued, $700.
d. Employee salaries owed for Monday through Thursday of a five-day workweek; weekly payroll,
$8,000.
e. Unearned revenue earned, $1,000.
f. Office supplies used, $150.
Requirements
1. Journalize the adjusting entries needed on July 31, 2018.
2. Suppose the adjustments made in Requirement 1 were not made. Compute the overall
overstatement or understatement of net income as a result of the omission of these adjustments.
3-41
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Jul. 31
Depreciation Expense
600
Accumulated Depreciation
600
To record depreciation.
3-42
E3-28, cont.
Requirement 2
If the adjustments in Requirement 1 were not made, net income would be overstated by $7,050 overall.
Calculations:
E3-29 Using the worksheet to record the adjusting journal entries
Learning Objective 6
1. Adjustments $3,700 total
The worksheet of Best Jobs Employment Service follows but is incomplete.
The following data at April 30, 2018, are given for Best Jobs Employment Service:
a. Service revenue accrued, $700.
b. Office supplies used, $300.
c. Depreciation on equipment, $1,300.
d. Salaries owed to employees, $1,400.
Requirements
1. Calculate and enter the adjustment amounts directly in the Adjustments columns. Use letters a
through d to label the four adjustments.
2. Calculate and enter the adjusted account balances in the Adjusted Trial Balance columns.
3. Prepare each adjusting journal entry calculated in Requirement 1. Date the entries, and include
explanations.
SOLUTION
Requirements 1 and 2
BEST JOBS EMPLOYMENT SERVICES
Worksheet
April 30, 2018
3-44
E3-29, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
a. Apr. 30
Accounts Receivable
700
Service Revenue
700
3-45
E3-30 Using the worksheet to prepare the adjusted trial balance
Learning Objective 6
Adj. trial balance $273,700 total
The worksheet of Macey’s Landscaping Services follows but is incomplete.
Requirements
1. Calculate and enter the adjusted account balances in the Adjusted Trial Balance columns.
2. Describe each adjusting entry. For example, a. Prepaid rent expires, $1,150.
SOLUTION
Requirement 1
MACEY’S LANDSCAPING SERVICES
Worksheet
December 31, 2018
Account Names
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Debit
Credit
Debit
Credit
Debit
Credit
3-47
E3-30, cont.
Requirement 2
a. Prepaid rent expired, $1,150
b. Office supplies used, $350
c. Depreciation on equipment, $1,300
d. Depreciation on trucks, $1,900
e. Unearned revenue earned, $3,200
f. Salaries owed to employees, $7,200
g. Interest expense accrued, $300
h. Service revenue accrued, $3,500
E3A-31 Understanding the alternative treatment of prepaid expenses
Learning Objectives 3, 7 Appendix 3A
At the beginning of the year, office supplies of $1,200 were on hand. During the year, Tempo Air
Conditioning Service paid $4,000 for more office supplies. At the end of the year, Tempo has $800 of office
supplies on hand.
Requirements
1. Record the adjusting entry assuming that Tempo records the purchase of office supplies by initially
debiting an asset account. Post the adjusting entry to the Office Supplies and Supplies Expense T-accounts.
Make sure to include the beginning balance and purchase of office supplies in the Office Supplies T-
account.
2. Record the adjusting entry assuming that Tempo records the purchase of office supplies by initially
debiting an expense account. Post the adjusting entry to the Office Supplies and Supplies Expense T-
accounts. Make sure to include the beginning balance in the Office Supplies T-account and the purchase of
office supplies in the Supplies Expense T-account.
3. Compare the ending balances of the T-accounts under both approaches. Are they the same?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
3-48
E3A-32 Understanding the alternative treatment of unearned revenues
Learning Objectives 3, 7 Appendix 3A
At the beginning of the year, Modish Advertising owed customers $2,100 for unearned revenue
collected in advance. During the year, Modish received advance cash receipts of $6,100 and earned
$20,000 of service revenue (exclusive of any amount earned from advance payments). At year-end, the
liability for unearned revenue is $3,100 and unadjusted service revenue is $20,000.
Requirements
1. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by
initially crediting a liability account. Post the adjusting entry to the Unearned Revenue and Service
Revenue T-accounts. Make sure to include the beginning balance and additional unearned revenue in
the Unearned Revenue T-account.
2. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by
initially crediting a revenue account. Post the adjusting entry to the Unearned Revenue and Service
Revenue T-accounts. Make sure to include the beginning balance in the Unearned Revenue T-
account and the additional unearned revenue in the Service Revenue T-account.
3. Compare the ending balances of the T-accounts under both approaches. Are they the same?
3-49
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Unearned Revenue
5,100*
Service Revenue
5,100*
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Service Revenue
1,000*
3-50
E3A-32, cont.
Requirement 3
The ending balances in the Unearned Revenue account and the Service Revenue account are the same,
regardless of which of the two approaches is used.
Problems (Group A)
P3-33A Journalizing adjusting entries and subsequent journal entries
Learning Objective 3
Laughter Landscaping has collected the following data for the December 31 adjusting entries:
a. Each Friday, Laughter pays employees for the current week’s work. The amount of the weekly payroll is
$8,000 for a five-day workweek. This year, December 31 falls on a Tuesday. Laughter will pay its
employees on January 3.
b. On January 1 of the current year, Laughter purchases an insurance policy that covers two years, $8,000.
c. The beginning balance of Office Supplies was $4,300. During the year, Laughter purchased office
supplies for $5,600, and at December 31 the office supplies on hand total $1,500.
d. During December, Laughter designed a landscape plan and the client prepaid $6,500. Laughter recorded
this amount as Unearned Revenue. The job will take several months to complete, and Laughter estimates
that the company has earned 40% of the total revenue during the current year.
e. At December 31, Laughter had earned $3,000 for landscape services completed for Turnkey Appliances.
Turnkey has stated that it will pay Laughter on January 10.
f. Depreciation for the current year includes Equipment, $3,000; and Trucks, $2,200.
g. Laughter has incurred $250 of interest expense on a $550 interest payment due on January 15.
Requirements
1. Journalize the adjusting entry needed on December 31 for each of the previous items affecting Laughter
Landscaping. Assume Laughter records adjusting entries only at the end of the year.
2. Journalize the subsequent journal entries for adjusting entries a, d, and g.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Salaries Expense
3,200*
Salaries Payable
3,200*
To accrue salaries expense.
3-52
P3-33A, cont.
* Calculations:
a:
$8,000
Payroll for a 5-day work week
5
work days
3-53
P3-33A, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Jan. 3
Salaries Expense
4,800*
Salaries Payable
3,200
3-54
P3-34A Journalizing adjusting entries and identifying the impact on financial statements
Learning Objectives 3, 5
Griffin Fishing Charters has collected the following data for the December 31 adjusting entries:
a. The company received its electric bill on December 31 for $375 but will not pay it until January 5.
(Use the Utilities Payable account.)
b. Griffin purchased a three-month boat insurance policy on November 1 for $1,200. Griffin recorded a
debit to Prepaid Insurance.
c. As of December 31, Griffin had earned $3,000 of charter revenue that has not been recorded or
received.
d. Griffin’s fishing boat was purchased on January 1 at a cost of $33,500. Griffin expects to use the
boat for 10 years and that it will have a residual value of $3,500. Determine annual depreciation
assuming the straight-line depreciation method is used.
e. On October 1, Griffin received $9,000 prepayment for a deep-sea fishing charter to take place in
December. As of December 31, Griffin has completed the charter.
Requirements
1. Journalize the adjusting entries needed on December 31 for Griffin Fishing Charters. Assume Griffin
records adjusting entries only at the end of the year.
2. If Griffin had not recorded the adjusting entries, indicate which specific category of accounts on the
financial statements would be misstated and if the misstatement is overstated or understated. Use the
following table as a guide.
3-55
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Utilities Expense
375
Utilities Payable
375
To accrue utilities expense.
P3-34A, cont. d:
Requirement 2
Adjusting
Entry
Specific Category
of Accounts on the
Balance Sheet
Over /
Understated
Specific Category
of Accounts on the
Income Statement
Over /
Understated
a.
Liability
Understated
Expense
Understated
Equity
Overstated
3-57
P3-35A Journalizing and posting adjustments to the T-accounts and preparing an adjusted trial
balance
Learning Objectives 3, 4
3. Adjusted trial balance total $75,600
The unadjusted trial balance of Anniston Air Purification System at December 31, 2018, and the data
needed for the adjustments follow.
Adjustment data at December 31 follow:
a. On December 15, Anniston contracted to perform services for a client receiving $3,100 in advance.
Anniston recorded this receipt of cash as Unearned Revenue. As of December 31, Anniston has
completed $2,100 of the services.
b. Anniston prepaid two months of rent on December 1. (Assume the Prepaid Rent balance as shown on the
unadjusted trial balance represents the two months of rent prepaid on December 1.)
c. Anniston used $750 of office supplies.
d. Depreciation for the equipment is $850.
e. Anniston received a bill for December’s online advertising, $1,100. Anniston will not pay the bill until
January. (Use Accounts Payable.)
f. Anniston pays its employees on Monday for the previous week’s wages. Its employees earn $3,500 for a
five-day workweek. December 31 falls on Wednesday this year.
g. On October 1, Anniston agreed to provide a four-month air system check (beginning October 1) for a
customer for $3,400. Anniston has completed the system check every month, but payment has not yet
been received and no entries have been made.
Requirements
1. Journalize the adjusting entries on December 31.
2. Using the unadjusted trial balance, open the T-accounts with the unadjusted balances. Post the
adjusting entries to the T-accounts.
3. Prepare the adjusted trial balance.
4. How will Anniston Air Purification System use the adjusted trial balance?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Unearned Revenue
2,100
Service Revenue
2,100
To record service revenue earned that was collected in
advance.
3-59
P3-35A, cont.
* Calculations:
b:
$2,900
Rent prepaid on December 1 for two months
2
months
P3-35A, cont.
Requirement 2
Cash
Accounts Payable
Service Revenue
Bal.
7,600
2,900
Bal.
15,300
Bal.
Bal.
7,600
1,100
e.
2,100
a.
3-61
P3-35A, cont.
Requirement 3
ANNISTON AIR PURIFICATION SYSTEM
Adjusted Trial Balance
December 31, 2018
P3-36A Journalizing and posting adjustments to the four-column accounts and preparing an adjusted
trial balance
Learning Objectives 3, 4
3. Adjusted trial balance $572,040 total
The unadjusted trial balance of Guthrie Inn Company at December 31, 2018, and the data needed for the
adjustments follow.
Adjustment data at December 31 follow:
a. As of December 31, Guthrie had $700 of Prepaid Insurance remaining.
b. At the end of the month, Guthrie had $500 of office supplies remaining.
c. Depreciation on the building is $1,200.
d. Guthrie pays its employees weekly on Friday. Its employees earn $1,800 for a five-day workweek.
December 31 falls on Wednesday this year.
e. On November 20, Guthrie contracted to perform services for a client receiving $3,600 in advance.
Guthrie recorded this receipt of cash as Unearned Revenue. As of December 31, Guthrie has $1,600 still
unearned.
3-63
Requirements
1. Journalize the adjusting entries on December 31.
2. Using the unadjusted trial balance, open the accounts (use a four-column ledger) with the unadjusted
balances. Post the adjusting entries to the ledger accounts.
3. Prepare the adjusted trial balance.
4. Assuming the adjusted trial balance has total debits equal to total credits, does this mean that the
adjusting entries have been recorded correctly? Explain.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Insurance Expense
3,900*
Prepaid Insurance
3,900*
To record insurance expense.
3-64
P3-36A, cont.
b:
$800
Office Supplies prior to adjustment
(500)
Office Supplies remaining
$300
Supplies Expense (cost of office supplies used)
Requirement 2
CASH
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
P3-36A, cont.
ACCOUNTS RECEIVABLE
Account No.
3-65
PREPAID INSURANCE
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
2018
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
2018
Dec. 31
Balance
530,000
ACCUMULATED DEPRECIATION—BUILDING
Account No.
P3-36A, cont.
UNEARNED REVENUE
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
2018
Date
Item
Post Ref.
Debit
Credit
Debit
Credit
2018
Dec. 31
Balance
2,340
SERVICE REVENUE
Account No.
Balance
3-67
P3-36A, cont.
DEPRECIATION EXPENSE—BUILDING
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
P3-36A, cont.
Requirement 3
GUTHRIE INN COMPANY
Adjusted Trial Balance
December 31, 2018
Unearned Revenue
1,600
Common Stock
288,950
Dividends
2,340
Service Revenue
17,500
Salaries Expense
3,880
3-69
P3-37A Using the worksheet to record the adjusting journal entries
Learning Objective 6
Greavy Theater Production Company’s partially completed worksheet as of December 31, 2018, follows.
Adjustment data at December 31 follow:
a. As of December 31, Greavy had performed $500 of service revenue but has not yet billed customers.
b. At the end of the month, Greavy had $700 of office supplies remaining.
c. Prepaid Insurance of $3,900 remained.
d. Depreciation expense, $4,000.
e. Accrued salaries expense of $200 that hasn’t been paid yet.
Requirements
1. Complete the worksheet. Use letters a through e to label the five adjustments.
2. Journalize the adjusting entries.
3-70
SOLUTION
Requirement 1
GREAVY THEATER PRODUCTION COMPANY
Worksheet
December 31, 2018
Account
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
3-71
P3-37A, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Accounts Receivable
500
Service Revenue
500
To accrue service revenue.
P3A-38A Understanding the alternative treatment of prepaid expenses and unearned revenues
Learning Objectives 3, 7 Appendix 3A
Rapid Way Pack’n Mail completed the following transactions during 2018:
Requirements
1. Journalize the transactions assuming that Rapid Way debits an asset account for prepaid expenses and
credits a liability account for unearned revenues.
2. Journalize the related adjusting entries at December 31, 2018.
3. Post the journal and adjusting entries to the T-accounts, and show their balances at December 31, 2018.
(Ignore the Cash account.)
3-72
4. Repeat Requirements 1–3. This time, debit an expense account for prepaid expenses and credit a revenue
account for unearned revenues.
5. Compare the account balances in Requirements 3 and 4. They should be equal.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Nov. 1
Prepaid Rent
9,600
Cash
9,600
To record rent paid in advance.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Rent Expense
3,200*
Prepaid Rent
3,200*
To record rent expense.
3-73
P3A–38A, cont.
* Calculations:
Adjusting Journal Entry One:
$9,600
Rent prepaid on November 1 for 6 months
6
months
$1,600
Rent expense per month
Requirement 3
Prepaid Rent
Rent Expense
Nov. 1 9,600
3,200 Dec. 31
Dec. 31 3,200
Bal. 6,400
Bal. 3,200
3-74
P3A-38A, cont.
Requirement 4
Date
Accounts and Explanation
Debit
Credit
Nov. 1
Rent Expense
9,600
Cash
9,600
To record rent paid in advance.
P3A–38A, cont.
* Calculations:
Adjusting Journal Entry One:
Adjusting Journal Entry Three:
$ 9,000
Collected in advance on December 1 for 5 months
(1,800)
Revenue earned during December
$ 7,200
Revenue still unearned on December 31
Adjusting Journal Entry Four:
$ 7,200
Collected in advance on December 1 for 3 months
(2,400)
Revenue earned during December
$ 4,800
Revenue still unearned on December 31
3-76
Requirement 5
The ending balances in the accounts are the same, regardless of which of the two approaches is used.
3-77
Problems (Group B)
P3-39B Journalizing adjusting entries and subsequent journal entries
Learning Objective 3
Lopez Landscaping has the following data for the December 31 adjusting entries:
a. Each Friday, Lopez pays employees for the current week’s work. The amount of the weekly payroll is
$6,500 for a five-day workweek. This year, December 31 falls on a Wednesday. Lopez will pay its
employees on January 2.
b. On January 1 of the current year, Lopez purchases an insurance policy that covers two years, $7,500.
c. The beginning balance of Office Supplies was $3,700. During the year, Lopez purchased office supplies
for $5,800, and at December 31 the office supplies on hand total $3,000.
d. During December, Lopez designed a landscape plan and the client prepaid $6,000. Lopez recorded this
amount as Unearned Revenue. The job will take several months to complete, and Lopez estimates that
the company has earned 70% of the total revenue during the current year.
e. At December 31, Lopez had earned $7,500 for landscape services completed for Tomball Appliances.
Tomball has stated that it will pay Lopez on January 10.
f. Depreciation for the current year includes Equipment, $3,800; and Trucks, $1,400.
g. Lopez has incurred $250 of interest expense on a $350 interest payment due on January 15.
Requirements
1. Journalize the adjusting entry needed on December 31 for each of the previous items affecting Lopez
Landscaping. Assume Lopez records adjusting entries only at the end of the year.
2. Journalize the subsequent journal entries for adjusting entries a, d, and g.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Salaries Expense
3,900*
Salaries Payable
3,900*
To accrue salaries expense.
3-79
P3-39B, cont.
* Calculations:
a:
b:
$7,500
Insurance prepaid on January 1 for two years
2
years
$3,750
Insurance expense for one year
3-80
P3-39B, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Jan. 2
Salaries Expense
2,600*
Salaries Payable
3,900
Cash
6,500
To record payment of salaries.
* Calculations:
a:
$6,500
Payroll for a 5-day work week
5
work days
$1,300
Salaries expense per work day
3-81
P3-40B Journalizing adjusting entries and identifying the impact on financial statements
Learning Objectives 3, 5
Harrison Fishing Charters has collected the following data for the December 31 adjusting entries:
a. The company received its electric bill on December 31 for $375 but will not pay it until January 5. (Use
the Utilities Payable account.)
b. Harrison purchased a three-month boat insurance policy on November 1 for $3,600. Harrison recorded a
debit to Prepaid Insurance.
c. As of December 31, Harrison had earned $1,000 of charter revenue that has not been recorded or
received.
d. Harrison’s fishing boat was purchased on January 1 at a cost of $56,500. Harrison expects to use the boat
for five years and that it will have a residual value of $6,500. Determine annual depreciation assuming
the straight-line depreciation method is used.
e. On October 1, Harrison received $5,000 prepayment for a deep-sea fishing charter to take place in
December. As of December 31, Harrison has completed the charter.
Requirements
1. Journalize the adjusting entries needed on December 31 for Harrison Fishing Charters. Assume Harrison
records adjusting entries only at the end of the year.
2. If Harrison had not recorded the adjusting entries, indicate which specific category of accounts on the
financial statements would be misstated and if the misstatement is overstated or understated. Use the
following table as a guide:
3-82
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Utilities Expense
375
Utilities Payable
375
To accrue utilities expense.
* Calculations:
b:
$3,600
Insurance prepaid on November 1 for 3 months
3
months
$1,200
Insurance expense per month
P3-40B, cont.
Requirement 2
Adjusting
Entry
Specific Category
of Accounts on the
Balance Sheet
Over /
Understated
Specific Category
of Accounts on the
Income Statement
Over /
Understated
a.
Liability
Understated
Expense
Understated
Equity
Overstated
3-84
P3-41B Journalizing and posting adjustments to the T-accounts and preparing an adjusted trial
balance
Learning Objectives 3, 4
3. Adjusted trial balance total $69,800
The unadjusted trial balance of Avery Air Purification System at December 31, 2018, and the data needed
for the adjustments follow.
Adjustment data at December 31 follow:
a. On December 15, Avery contracted to perform services for a client receiving $2,700 in advance. Avery
recorded this receipt of cash as Unearned Revenue. As of December 31, Avery has completed $2,100 of
the services.
b. Avery prepaid two months of rent on December 1. (Assume the Prepaid Rent balance as shown on the
unadjusted trial balance represents the two months of rent prepaid on December 1.)
c. Avery used $750 of office supplies during the month.
d. Depreciation for the equipment is $800.
e. Avery received a bill for December’s online advertising, $500. Avery will not pay the bill until January.
(Use Accounts Payable.)
f. Avery pays its employees weekly on Monday for the previous week’s wages. Its employees earn $2,000
for a five-day workweek. December 31 falls on Wednesday this year.
g. On October 1, Avery agreed to provide a four-month air system check (beginning October 1) for a
customer for $2,800. Avery has completed the system check every month, but payment has not yet been
received and no entries have been made.
Requirements
1. Journalize the adjusting entries on December 31.
2. Using the unadjusted trial balance, open the T-accounts with the unadjusted balances. Post the adjusting
entries to the T-accounts.
3. Prepare the adjusted trial balance.
4. How will Avery Air Purification System use the adjusted trial balance?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Unearned Revenue
2,100
Service Revenue
2,100
To record service revenue earned that was collected in
advance.
3-86
P3-41B, cont.
* Calculations:
b:
$2,400
Rent prepaid on December 1 for two months
2
months
$1,200
Rent expense for December
g:
$2,800
Service revenue to be earned October through January
4
months
$ 700
Service revenue earned per month
P3-41B, cont.
Requirement 2
Cash
Accounts Payable
Service Revenue
Bal.
7,100
3,500
Bal.
15,900
Bal.
Bal.
7,100
500
e.
2,100
a.
4,000
Bal.
2,100
g.
20,100
Bal.
3-88
P3-41B, cont.
Requirement 3
AVERY AIR PURIFICATION SYSTEM
Adjusted Trial Balance
December 31, 2018
Account Title
Balance
Debit
Credit
Cash
$ 7,100
Accounts Receivable
21,200
Prepaid Rent
1,200
Office Supplies
650
Requirement 4
3-89
P3-42B Journalizing and posting adjustments to the four-column accounts and preparing an adjusted
trial balance
Learning Objectives 3, 4
3. Adjusted trial balance total $557,750
The unadjusted trial balance of Midway Inn Company at December 31, 2018, and the data needed for
the adjustments follow.
Adjustment data at December 31 follow:
a. As of December 31, Midway Inn had $800 of Prepaid Insurance remaining.
b. At the end of the month, Midway Inn had $500 of office supplies remaining.
c. Depreciation on the building is $2,100.
d. Midway Inn pays its employees on Friday for the weekly salaries. Its employees earn $1,300 for a
five-day workweek. December 31 falls on Wednesday this year.
e. On November 20, Midway Inn contracted to perform services for a client receiving $1,600 in
advance. Midway Inn recorded this receipt of cash as Unearned Revenue. As of December 31,
Midway Inn has $1,400 still unearned.
Requirements
1. Journalize the adjusting entries on December 31.
2. Using the unadjusted trial balance, open the accounts (use a four-column ledger) with the unadjusted
balances. Post the adjusting entries to the ledger accounts.
3-90
3. Prepare the adjusted trial balance.
4. Assuming the adjusted trial balance has total debits equal to total credits, does this mean that the
adjusting entries have been recorded correctly? Explain.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Insurance Expense
600*
Prepaid Insurance
600*
To record insurance expense.
P3-42B, cont.
d:
$1,300
Salaries for a five-day work week
5
Work days
$ 260
Salaries Expense per work day
Thus,
Requirement 2
CASH
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
2018
Dec. 31
Balance
14,500
3-92
P3-42B, cont.
OFFICE SUPPLIES
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
2018
2018
Dec. 31
Balance
310,000
Dec. 31
c.
2,100
312,100
ACCOUNTS PAYABLE
Account No.
Balance
P3-42B, cont.
COMMON STOCK
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
2018
Dec. 31
Balance
16,900
Dec. 31
e.
200
17,100
SALARIES EXPENSE
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
Date
Item
Post Ref.
Debit
Credit
Debit
Credit
2018
Dec. 31
c.
2,100
2,100
ADVERTISING EXPENSE
Account No.
Date
Item
Post Ref.
Debit
Credit
Balance
Debit
Credit
2018
Dec. 31
Balance
680
3-94
P3-42B, cont.
SUPPLIES EXPENSE
Account No.
Balance
Requirement 3
MIDWAY INN COMPANY
Adjusted Trial Balance
December 31, 2018
Account Title
Balance
Debit
Credit
Cash
$ 14,500
Accounts Receivable
15,100
Prepaid Insurance
800
Requirement 4
No. Even if total debits equals total credits on the adjusted trial balance, this does not mean that the
3-95
P3-43B Using the worksheet to record the adjusting journal entries
Learning Objective 6
Galaxy Theater Production Company’s partially completed worksheet as of December 31, 2018, follows.
Adjustment data at December 31 follow:
a. As of December 31, Galaxy had performed $900 of service revenue but has not yet billed customers.
b. At the end of the month, Galaxy had $500 of office supplies remaining.
c. Prepaid Insurance of $600 remained.
d. Depreciation expense, $4,200.
e. Accrued salaries expense of $150 that hasn’t been paid yet.
Requirements
1. Complete the worksheet. Use letters a through e to label the five adjustments.
2. Journalize the adjusting entries.
SOLUTION
Requirement 1
GALAXY THEATER PRODUCTION COMPANY
Worksheet
December 31, 2018
Account
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Debit
Credit
Debit
Credit
Debit
Credit
Cash
$ 3,600
$ 3,600
3-97
P3-43B, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Accounts Receivable
900
Service Revenue
900
To accrue service revenue.
P3A-44B Understanding the alternative treatment of prepaid expenses and unearned revenues
Learning Objectives 3, 7 Appendix 3A
Sent It Pack’n Mail completed the following transactions during 2018:
Requirements
1. Journalize the transactions assuming that Sent It Pack’n Mail debits an asset account for prepaid
expenses and credits a liability account for unearned revenues.
2. Journalize the related adjusting entries at December 31, 2018.
3. Post the journal and adjusting entries to the T-accounts, and show their balances at December 31,
2018. (Ignore the Cash account.)
4. Repeat Requirements 1–3. This time debit an expense account for prepaid expenses and credit a
revenue account for unearned revenues.
5. Compare the account balances in Requirements 3 and 4. They should be equal.
3-98
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Nov. 1
Prepaid Rent
6,000
Cash
6,000
To record rent paid in advance.
3-99
P3A-44B, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Rent Expense
3,000*
Prepaid Rent
3,000*
To record rent expense.
* Calculations:
Adjusting Journal Entry One:
$6,000
Rent prepaid on November 1 for 4 months
4
Months
$1,500
Rent expense per month
Thus,
$1,500
Rent expense per month
× 2
Months
$3,000
Rent expense for November and December
3-100
P3A-44B, cont.
Requirement 3
Prepaid Rent
Rent Expense
Nov. 1 6,000
3,000 Dec. 31
Dec. 31 3,000
Bal. 3,000
Bal. 3,000
Requirement 4
Date
Accounts and Explanation
Debit
Credit
Nov. 1
Rent Expense
6,000
Cash
6,000
To record rent paid in advance.
3-101
P3A-44B, cont.
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Prepaid Rent
3,000*
Rent Expense
3,000*
To record prepaid rent.
* Calculations:
Adjusting Journal Entry One:
$6,000
Rent prepaid on November 1 for 4 months
4
Months
$1,500
Rent expense per month
P3-44B, cont.
Adjusting Journal Entry Three:
$12,000
Collected in advance on December 1 for 5 months
(2,400)
Revenue earned during December
$9,600
Revenue still unearned on December 31
Requirement 5
The ending balances in the accounts are the same, regardless of which of the two approaches is used.
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Using Excel
P3-45 Using Excel to journalize and post adjusting entries, and to create the Adjustments and
Adjusted Trial Balance columns of the worksheet
Download an Excel template for this problem online in MyAccountingLab or at
http://www.pearsonhighered.com/Horngren.
Cedar River Corporation started operations on July 1, 2018. The transactions that occurred during the
month were journalized and posted, and a trial balance was prepared at the end of the month. The
month-end adjusting entries are to be journalized and posted to T-accounts. A worksheet is to be used to
help prepare the adjusted trial balance.
Requirements
1. Use Excel to journalize the adjusting entries. Use the blue shaded areas for inputs.
a. To record the account name in the journal, click in the Account and Explanation column. A drop
down arrow will appear to the right. Click the arrow and select an account from the chart of accounts.
Use the explanation to help you with the entry.
b. Indent the account name of the account to be credited using the indent button on the Home tab. Click
the Increase Indent button twice.
2. Once the adjustments have been journalized, post the amounts to the correct side of the T-account.
(Note that the balance at the end of the month has been posted as a single entry.)
a. The T-account totals will be calculated automatically.
b. Total debits should equal total credits. The debit-credit balance check appears in the top right-
hand corner of the T-account worksheet.
3. Use a formula to fill in the Adjustment debit and credit columns on the worksheet by referencing the
adjusting entries.
4. Use a formula to add or subtract the adjustments to the trial balance amounts to calculate the
amounts in the Adjusted Trial Balance columns.
5. Use a formula to total the Adjustments and Adjusted Trial Balance columns.
6. On the Worksheet
a. Format the cells requiring dollar signs.
b. Format the cells requiring a single underline and cells requiring double underlines.
c. Boldface the totals.
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SOLUTION
Continuing Problem
P3-46 Preparing adjusting entries and preparing an adjusted trial balance
This problem continues the Canyon Canoe Company situation from Chapter 2. You will need to use the
unadjusted trial balance and posted T-accounts that you prepared in Chapter 2.
At December 31, the business gathers the following information for the adjusting entries:
a. Office supplies on hand, $165
b. Rent of one month has been used. (Hint: See Dec. 1 transaction from Chapter 2)
c. Determine the depreciation on the building using straight-line depreciation. Assume the useful life of
the building is five years and the residual value is $5,000. (Hint: The building was purchased on
December 1.)
d. $400 of unearned revenue has now been earned.
e. The employee who has been working the rental booth has earned $1,250 in wages that will be paid
January 15, 2019.
f. Canyon Canoes has earned $1,850 of canoe rental revenue that has not been recorded or received.
g. Determine the depreciation on the canoes purchased on November 3 using straight-line depreciation.
Assume the useful life of the canoes is 4 years and the residual value is $0.
h. Determine the depreciation on the canoes purchased on December 2 using straight-line depreciation.
Assume the useful life of the canoes is 4 years and the residual value is $0.
i. Interest expense accrued on the notes payable, $50.
Requirements
1. Journalize and post the adjusting entries using the T-accounts that you completed in Chapter 2. In the
T-accounts, denote each adjusting amount as Adj. and an account balance as Balance.
2. Prepare an adjusted trial balance as of December 31, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Supplies Expense
1,085*
Office Supplies
1,085*
To record supplies used.
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P3-46, cont.
Requirement 1, cont.
* Calculations:
$1,250
Office Supplies prior to adjustment
(165)
Office Supplies remaining
$1,085
Supplies Expense (cost of supplies used)
$3,000
Rent prepaid on December 1 for 3 months
3
Months
$1,000
Rent expense per month
=
P3-46, cont.
Requirement 1
Cash
Accounts Payable
Nov. 1 16,000
1,200 Nov. 2
Nov. 26 1,000
4,800 Nov. 3
Nov. 7 1,400
1,500 Nov. 13
Dec. 19 2,000
750 Nov. 4
Accounts Receivable
Utilities Payable
Nov. 22 3,000
750 Nov. 28
Dec. 18 150
150 Nov. 16
Dec. 15 3,500
295 Dec. 20
Adj. 1,850
295 Balance
Balance 7,600
Building
Common Stock
Dec. 1 35,000
16,000 Nov. 1
Balance 35,000
120,000 Dec. 1
136,000 Balance
Accumulated Depreciation—Building
Dividends
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P3-46, cont., Requirement 1, cont.
Canoes
Canoe Rental Revenue
Nov. 3 4,800
1,400 Nov. 7
Dec. 2 7,200
3,000 Nov. 22
Balance 12,000
4,500 Dec. 9
Dec. 31 1,800
Adj. 1,250
Balance 4,550
Utilities Expense
Nov. 16 150
Adj. 500
Balance 500
Depreciation Expense—Canoes
Adj. 200
Adj. 150
P3-46, cont.
Requirement 2
CANYON CANOE COMPANY
Adjusted Trial Balance
December 31, 2018
Accumulated Depreciation—Canoes
350
Accounts Payable
3,050
Utilities Payable
295
Telephone Payable
325
Unearned Revenue
350
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Practice Set
P3-47 Preparing adjusting entries and preparing an adjusted trial balance
This problem continues the Crystal Clear Cleaning situation from Chapter 2. Start from the unadjusted
trial balance that Crystal Clear Cleaning prepared at November 30, 2018:
Consider the following adjustment data:
a. Cleaning supplies on hand at the end of November were $50.
b. One month’s combined depreciation on all depreciable assets was estimated to be $150.
c. One month’s interest expense is $59.
Requirements
1. Using the data provided from the trial balance, the previous adjustment information, and the
information from Chapter 2, prepare all required adjusting journal entries at November 30.
2. Prepare an adjusted trial balance as of November 30 for Crystal Clear Cleaning.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Nov. 30
Supplies Expense
270*
Cleaning Supplies
270*
To record supplies used.
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P3-47, cont.
Adjusting Journal Entry Three:
$4,000
Rent prepaid on November 2 for 4 months
4
Months
$1,000
Rent expense for November
P3-47, cont.
Requirement 2
CRYSTAL CLEAR CLEANING
Adjusted Trial Balance
November 30, 2018
Accounts Payable
1,245
Unearned Revenue
14,375
Interest Payable
59
Notes Payable
36,000
Common Stock
18,000
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Critical Thinking
Tying It All Together Case 3-1
Before you begin this assignment, review the Tying It All Together feature in the chapter.
iHeartMedia, Inc. in their annual report for the year ending December 31, 2015, state that the plant
assets reported on its balance sheet includes the following:
Plant Asset
Useful Life
Buildings and improvements
10 to 39 years
Structures
5 to 15 years
Towers, transmitters, and studio
equipment
7 to 20 years
Furniture and other equipment
3 to 20 years
Depreciation is computed using the straight-line method.
Requirements
1. Suppose iHeartMedia, Inc. purchases a new advertising structure for $100,000 on August 1. The
residual value of the structure is $4,000 and the useful life is 10 years. How would iHeartMedia
record the depreciation expense on December 31 in the first year of use? What about the second
year of use?
2. What would be the book value of the structure at the end of the first year? What would be the
book value of the structure at the end of the second year?
3. What would be the impact on iHeartMedia, Inc. financial statements if they failed to record the
adjusting entry related to the structure?
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SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Year 1
Dec. 31
Depreciation Expense—Structure
4,000*
Accumulated Depreciation—Structure
4,000*
To record depreciation on structure.
Requirement 2
Year 1:
Structure
$100,000
Less: Accumulated Depreciation—Structure
(4,000)
Book value of structure
$96,000
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Tying It All Together Case 3-1, cont.
Requirement 3
If iHeartCommunications, Inc. failed to record the adjusting entry related to the structure, depreciation
Decision Case 3-1
One year ago, Tyler Stasney founded Swift Classified Ads. Stasney remembers that you took an
accounting course while in college and comes to you for advice. He wishes to know how much net
income his business earned during the past year in order to decide whether to keep the company going.
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SOLUTION
Swift Classified Ads
Income Statement
Year Ended December 31
Revenues:
Ethical Issue 3-1
The net income of Steinbach & Sons, a landscaping company, decreased sharply during 2018. Mort
Steinbach, owner and manager of the company, anticipates the need for a bank loan in 2019. Late in
2018, Steinbach instructs the company’s accountant to record $2,000 service revenue for landscape
services for the Steinbach family, even though the services will not be performed until January 2019.
Steinbach also tells the accountant not to make the following December 31, 2018, adjusting entries:
Salaries owed to employees
$ 900
Prepaid insurance that has expired
400
Requirements
1. Compute the overall effects of these transactions on the company’s reported net income for
2018.
2. Why is Steinbach taking this action? Is his action ethical? Give your reason, identifying the
parties helped and the parties harmed by Steinbach’s action.
3. As a personal friend, what advice would you give the accountant?
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SOLUTION
Requirement 1
Net income is overstated by $3,300.
Requirement 2
Students’ responses will vary. Illustrative answers follow.
Requirement 3
Students’ responses will vary. Illustrative answers follow.
Fraud Case 3-1
XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics
manufacturers. One very complex device was partially completed at the end of 2018. Barb McLauren,
head engineer, knew the experimental technology was a failure and XM would not be able to complete
the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January.
She told the controller that the device was 80% complete at year-end and on track for successful
completion the following spring; the controller accrued 80% of the contract revenue at December 31,
2018. McLauren sold the company in January 2019 and retired. By mid-year, it became apparent that
XM would not be able to complete the project successfully and the new owner would never recoup his
investment.
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Requirements
1. For complex, high-tech contracts, how does a company determine the percentage of completion and
the amount of revenue to accrue?
2. What action do you think was taken by XM in 2019 with regard to the revenue that had been
accrued the previous year?
SOLUTION
Requirement 1
Revenue could be accrued based on the percentage of completion. For a high-tech product, an engineer
Requirement 2
In 2019, XM would make an entry to debit a Loss and credit the Accounts Receivable account that had
Financial Statement Case 3-1
Target Corporation—like all other businesses—makes adjusting entries at year-end in order to
measure assets, liabilities, revenues, and expenses properly. Examine Target Corporation’s balance sheet
and income statement in its Fiscal 2015 Annual Report. Visit
http://www.pearsonhighered.com/Horngren to view a link to Target Corporation’s annual report.
Requirements
1. Which asset accounts might Target record adjusting entries for?
2. Which liability accounts might Target record adjusting entries for?
3. Review Note 14 (Property and Equipment) in the Notes to Consolidated Financial Statements.
How are property, plant, and equipment carried on the balance sheet? How is depreciation of
these assets calculated? What is the range of useful lives used when depreciating these assets?
SOLUTION
Requirement 1
Target Corporation might record adjusting entries for the following assets: Short-term investments,
Requirement 2
Target Corporation might record adjusting entries for the following liabilities: Accounts payable,
Requirement 3
Target carries property and equipment at cost less accumulated depreciation. Depreciation is provided
Communication Activity 3-1
In 75 words or fewer, explain adjusting journal entries.
SOLUTION
Under accrual basis accounting, adjusting entries are completed at the end of the accounting period to
