Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
Chapter 3
Adjusting Accounts for
Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received while the accrual
2. The accrual basis of accounting generally provides a better indication of company
3. Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it is
reported as an asset on the balance sheet.
5. The Accumulated Depreciation contra asset account is used for depreciation. It
6. Accrued revenue is revenue that is earned but is not yet received in cash (and/or other
assets) and the customer has not been billed prior to the end of the period. Therefore,
7. The four-step closing entry process is: (i) close the revenue (and gain) accounts to the
8. The Income Summary account is used to summarize the period’s revenues and
expenses. As a result, it temporarily has a balance equal to the net income (or net loss)
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
140
9. Yes, an error would have occurred because a post-closing trial balance should only
10. A company’s operating cycle is the normal time between paying cash for merchandise
11. Assets on a typical classified balance sheet include current assets and noncurrent
assets—where noncurrent assets usually include long-term investments, plant assets,
12. Unearned revenue is reported as a liability—usually a current liability.
13.A If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
14.C The following reversing entry could be made as of the first day of the next accounting
period, after the post-closing trial balance is completed and financial statements are
15. The five main categories of noncurrent assets on Apple’s balance sheet are: Long-term
16. Google’s current liability accounts: Accounts payable; Accrued compensation and
benefits; Accrued expenses and other current liabilities; Accrued revenue share;
Deferred revenue; and Income taxes payable, net.
17. Google reports $42,383 million for property and equipment. For its adjusting entry, it
18. The closing entry likely recorded to transfer the company’s net income to its Retained
Earnings account would have been (in millions of Korean won):
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
141
QUICK STUDIES
Quick Study 3-1 (10 minutes)
1. f Time period assumption 4. c Accrual basis accounting
Quick Study 3-2 (10 minutes)
Cash Accounting
Revenues (cash receipts) ……………………………………………… $37,000
Quick Study 3-3 (10 minutes)
a. UR Unearned revenue d. PE Prepaid expenses
Quick Study 3-4 (15 minutes)
Adjusting entry
Debit
Credit
1.
Accrue salaries expense.
e
c
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
142
Quick Study 3-5 (15 minutes)
a. Step 1: Prepaid Insurance equals $4,700
Record insurance coverage that expired ($4,700 – $900).
b. Step 1: Prepaid Insurance equals $5,890
c. Step 1: Prepaid Rent equals $24,000
Step 2: Prepaid Rent should equal $20,000 (the unexpired part)*
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
Quick Study 3-6 (15 minutes)
a. Step 1: Supplies equal $300 ($300 beginning + $0 purchased)
b. Step 1: Supplies equal $2,900 ($800 beginning + $2,100 purchased)
Step 2: Supplies should equal $650 (what’s left)
c. Step 1: Supplies equal $13,400 ($4,000 beginning + $9,400 purchased)
Step 2: Supplies should equal $2,660 (what’s left)
Quick Study 3-7 (10 minutes)
a. Insurance Expense ………………………………………………. 1,200
Prepaid Insurance …………………………………………. 1,200
Record 6-month insurance coverage expired.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
144
Quick Study 3-8 (15 minutes)
a. Step 1: Accumulated Depreciation equals $13,500
b. Step 1: Accumulated Depreciation equals $0
Step 2: Accumulated Depreciation should equal $8,800; adding current
c. Step 1: Accumulated Depreciation equals $0
Step 2: Accumulated Depreciation should equal $4,000; adding current
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
145
Quick Study 3-9 (10 minutes)
a. Depreciation Expense—Equipment ………………………. 3,600
Quick Study 3-10 (15 minutes)
a. Step 1: Unearned Rent Revenue equals $6,000
b. Step 1: Unearned Services Revenue equals $300
c. Step 1: Unearned Rent Revenue equals $24,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
Quick Study 3-11 (15 minutes)
a. Unearned Revenue ……………………………………………….. 7,500
Quick Study 3-12 (15 minutes)
a. Step 1: Salaries Payable equals $0
Record employee salaries earned but not yet paid.
b. Step 1: Interest Payable equals $0
Record interest incurred but not yet paid.
c. Step 1: Interest Payable equals $0
Quick Study 3-13 (10 minutes)
Salaries Expense ………………………………………………….. 400
Debit
Wages Expense
Income Statement
Credit
Wages Payable
Balance Sheet
c.
Debit
Accounts Receivable
Balance Sheet
Credit
Revenue
Income Statement
Debit
Insurance Expense
Income Statement
Credit
Balance Sheet
e.
Debit
Depreciation Expense
Income Statement
Credit
Accumulated Depreciation
Balance Sheet
Quick Study 3-14 (15 minutes)
a. Step 1: Accounts Receivable equals $0
Accounts Receivable ……………………………………………….
b. Step 1: Interest Receivable equals $0
c. Step 1: Accounts Receivable equals $0
Step 2: Accounts Receivable should equal $1,300 (not yet recorded)
Accounts Receivable ……………………………………………….
Record services revenue earned but not yet received.
Quick Study 3-15 (15 minutes)
Accounts Debited and Credited
Financial Statement
a.
Debit
Unearned Revenue
Balance Sheet
Credit
Revenue
Income Statement
148
Quick Study 3-16 (15 minutes)
The answer is b.
Explanation:
Assets
=
Liabilities
+
Equity
Equity explanation
1. Forgot to
reduce
Overstated
$0
Overstated
• Forgot to reduce Prepaid
Insur.→ Asset overstated.
Quick Study 3-17 (15 minutes)
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
No.
Account
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash………………………………..
$8,000
$8,000
106
Accounts receivable ………..
2,000
$4,000
6,000
126
Supplies ………………………….
4,500
$2,500
2,000
209
Salaries payable ………………
307
Common stock ………………..
318
Retained earnings……………
403
Consulting revenue …………
Supplies expense ……………
2,500
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
149
Quick Study 3-18 (15 minutes)
Dec. 31 Services Revenue ………………………………….. 13,000
Income Summary ……………………………. 13,000
Close revenue account.
Quick Study 3-19 (5 minutes)
a.
Included
c.
Included
e.
Excluded
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
Quick Study 3-20 (5 minutes)
1. (e) Analyzing transactions and events.
2. (h) Journalizing transactions and events.
Quick Study 3-21 (10 minutes)
1. Land held for future expansion B Long-term investments
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
151
Quick Study 3-22 (15 minutes)
SIERRA COMPANY
Income Statement
For Year Ended December 31
Consulting revenue …………………………………………….. $9,500
Expenses
SIERRA COMPANY
Statement of Retained Earnings
For Year Ended December 31
Retained earnings, December 31 prior year end …… $ 5,500
152
Quick Study 3-23 (15 minutes)
SIERRA COMPANY
Balance Sheet
December 31
Assets
Current assets
Cash ………………………………………………………. $ 5,000
Prepaid insurance ………………………………….. 500
Liabilities
Current liabilities
Accounts payable …………………………………… $ 2,500
Long-term liabilities
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
153
Quick Study 3-24 (10 minutes)
Quick Study 3-25 (5 minutes)
Current assets
Cash ……………………………………………………
$ 7,000
Accounts receivable …………………………..
18,000
Accounts payable ………………………………..
$11,000
Unearned services revenue ………………….
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
154
Quick Study 3-26A (20 minutes)
a. Recording prepayment of an expense in an asset account and recording
prepayment of revenue received in a liability account
Dec. 31 Insurance Expense …………………………………………. 6,000
Prepaid Insurance ……………………………………. 6,000
Record expiration of insurance.
Dec. 31 Unearned Revenue …………………………………………. 2,000
Revenue ………………………………………………….. 2,000
Record services provided ($2,400 x 5/6).
b. Recording a prepayment of an expense in an expense account and
recording prepayments of revenue received in a revenue account
Jan. 1 Insurance Expense …………………………………………. 6,000
Cash ……………………………………………………….. 6,000
155
Quick Study 3-27B (20 minutes)
Planta Company
Work Sheet
Adjusted
Trial Balance
Income
Statement
Balance Sheet
No.
Account
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash………………………………..
7,000
7,000
106
Accounts receivable ………..
27,200
27,200
153
Trucks …………………………..
42,000
42,000
17,500
17,500
183
Land ………………………………..
32,000
32,000
201
Accounts payable ……………
15,000
15,000
209
Salaries payable ………………
4,200
4,200
233
Unearned fees …………………
3,600
3,600
307
Common stock ………………..
20,000
20,000
318
Retained earnings……………
45,500
45,500
319
Dividends ………………………..
15,400
15,400
401
Plumbing fees earned ……..
84,000
84,000
622
Salaries expense ……………..
38,000
38,000
640
Rent expense…………………..
13,000
13,000
677
Miscellaneous expense …..
Totals ………………………………
189,800
66,200
84,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
156
Quick Study 3-28C (10 minutes)
a.
Dec. 31 Accounts Receivable …………………………………………. 12,000
Consulting Revenue ……………………………………. 12,000
Record accrued revenue.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
157
EXERCISES
Exercise 3-1 (25 minutes)
a.
Depreciation Expense—Equipment …………………………..
18,000
Accumulated Depreciation—Equipment ……………..
18,000
Record depreciation expense for the year.
b.
Insurance Expense …………………………………………………..
Prepaid Insurance* …………………………………………….
Record insurance coverage that expired
c.
Supplies Expense …………………………………………………….
Record office supplies used ($700 + $3,480 – $300).
d.
Unearned Revenue ……………………………………………………
10,000
Revenue …………………………………………………………….
10,000
Record earned portion of fee received in advance
($15,000 x 2/3).
e.
Rent Expense …………………………………………………………..
Prepaid Rent ……………………………………………………..
Record rental coverage that expired.
Wages Expense ……………………………………………………….
Wages Payable ………………………………………………….
Record wages accrued but not yet paid.
Notes:
Prepaid Insurance*
Supplies**
Bal. Bal.
6,000
Beg. Bal.
700
Purch.
Used
Used
End. Bal.
1,100
End. Bal.
300
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
158
Exercise 3-2 (15 minutes)
a. Adjusting entry:
Dec. 31
Wages Expense……………………………………………………..
1,250
Wages Payable ………………………………………………
1,250
Record accrued wages for one day.
(5 workers x $250)
b. Payday entry:
Jan. 4
Wages Expense……………………………………………………..
3,750
Wages Payable ………………………………………………………
1,250
5,000
Wages expense = 5 workers x 3 days x $250