Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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 concept of expense recognition suggests that we recognize expenses in the same period as
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
3-2 Financial Accounting, 5e
Answers to Review Questions (continued)
Question 3-7 (LO 3-2)
(1) April 10th.
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)
A prepaid expense includes the purchase of supplies, prepaid insurance, and prepaid rent. At the
Question 3-12 (LO 3-3)
Deferred revenue includes a customer paying cash before receiving the related product or
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)
An accrued revenue includes recording a revenue before the related cash inflow, such as
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
3-4 Financial Accounting, 5e
Answers to Review Questions (continued)
Question 3-22 (LO 3-5)
Assets
=
Liabilities
+
Stockholders’
equity
$12,000
=
$8,000
+
$X
Question 3-23 (LO 3-6)
The two purposes of closing entries are (1) to transfer the balances of temporary accounts
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
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
3-6 Financial Accounting, 5e
BRIEF EXERCISES
Brief Exercise 3-1 (LO 3-1)
(a) $0; Cash received in advance is recorded as Deferred revenue (liability).
Brief Exercise 3-2 (LO 3-1)
(a) $600.
Brief Exercise 3-3 (LO 3-1)
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)
Receive $1,500 from
customers who were billed
for services in April.
+$1,500
+$1,500
$0
(d)
Pay $600 to workers. $400 is
for work in May and $200 is
for work in April.
−$600
−$600
−$400
Brief Exercise 3-5 (LO 3-1, 3-2)
Cash-basis
net income
Accrual
adjustments
Accrual-basis
net income
Cash inflows
$50,000
+$6,900*
$56,900
Chapter 3 - The Accounting Cycle: End of the Period
3-8 Financial Accounting, 5e
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
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
Chapter 3 - The Accounting Cycle: End of the Period
3-10 Financial Accounting, 5e
Brief Exercise 3-8 (LO 3-3)
(1)
Mar. 1
Debit
Credit
Prepaid Insurance
36,000
(2)
Dec. 31
Debit
Credit
Insurance Expense
30,000
(3)
Prepaid
Insurance
Insurance
Expense
Jan. 1
Beginning balance
$ 0
$ 0
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
(3)
Accumulated
Depreciation
Depreciation
Expense
Jan. 1
Beginning balance
$ 0
$ 0
Chapter 3 - The Accounting Cycle: End of the Period
3-12 Financial Accounting, 5e
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
Chapter 3 - The Accounting Cycle: End of the Period
Brief Exercise 3-11 (LO 3-3)
(1)
Dec. 31, 2021
Debit
Credit
Salaries Expense
1,200
(2)
Salaries
Payable
Jan. 1, 2021
Beginning balance
$ 0
Chapter 3 - The Accounting Cycle: End of the Period
3-14 Financial Accounting, 5e
Brief Exercise 3-12 (LO 3-3)
(1)
Jul. 1, 2021
Debit
Credit
(2)
Dec. 31, 2021
Debit
Credit
Interest Expense
900
(3)
Interest
Payable
Interest
Expense
Jan. 1, 2021
Beginning balance
$ 0
$ 0
Brief Exercise 3-13 (LO 3-3)
(1)
Jul. 1, 2021
Debit
Credit
(2)
Dec. 31, 2021
Debit
Credit
Interest Receivable
900
Chapter 3 - The Accounting Cycle: End of the Period
(3)
Interest
Receivable
Interest
Revenue
Jan. 1, 2021
Beginning balance
$ 0
$ 0
Chapter 3 - The Accounting Cycle: End of the Period
3-16 Financial Accounting, 5e
Brief Exercise 3-14 (LO 3-5)
Account
Financial Statement
1.
Accounts Receivable
Balance Sheet
2.
Deferred Revenue
Balance Sheet
Brief Exercise 3-15 (LO 3-5)
1.
(b)
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, 2021
Service revenue
$275,000
Expenses:
Brief Exercise 3-17 (LO 3-5)
Spiders Corporation
Statement of Stockholders’ Equity
For the year ended December 31, 2021
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Balance at January 1
$30,000
$ 8,000
$38,000
3-18 Financial Accounting, 5e
Blue Devils Corporation
Balance Sheet
December 31, 2021
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 5,000
Accounts payable
$ 26,000
*
Assets
=
Liabilities
+
Stockholders’ equity
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)
Brief Exercise 3-20 (LO 3-7)
Hilltoppers Corporation
Post-Closing Trial Balance
Accounts
Debit
Credit
Cash
$ 5,000
* Retained Earnings
(before closing)
+
Revenues
−
Expenses
−
Dividends
=
Retained
Earnings
Chapter 3 - The Accounting Cycle: End of the Period
3-20 Financial Accounting, 5e
EXERCISES
Exercise 3-1 (LO 3-1)
1.
August 16.
Exercise 3-2 (LO 3-1)
1.
August 16.
2.
January 27.
Exercise 3-3 (LO 3-2)
1.
June 12.
