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 Fantastic 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 Fantastic Catering? Why?
SOLUTION
Requirement 1
Amount of Revenue (Expense) for May
Date
Cash Basis Amount of
Revenue (Expense)
Accrual Basis Amount of
Revenue (Expense)
May
1
($1,800)
($0)
(1,300)
Requirement 2
Net income (loss) under cash basis is ($3,400).
Calculations:
Net income (loss) under accrual basis is $3,345.
Calculations:
Requirement 3
Accrual basis accounting gives the best picture of the true earnings of Fantastic Catering, because
revenues are recorded when earned and expenses are recorded when incurred, as dictated by the
revenue recognition principle and the matching principle.
E3-20 Determining the amount of prepaid expenses
Learning Objective 3
Situation A. Rent Expense $1,200
Consider the facts presented in the following table for Island View:
SOLUTION
Missing values shown in italics.
Situation
Beginning Prepaid Rent
Payments for Prepaid Rent during the year
Total amount to account for
Subtract: Ending Prepaid Rent
Rent Expense
E3-21 Journalizing adjusting entries
Learning Objective 3
b. DR Salaries Expense $1,600
Consider the following situations:
a. Business receives $3,800 on January 1 for 10-month service contract for the period January 1
through October 31.
b. Total salaries for all employees is $3,200 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 $1,000.
d. The company pays interest on its $15,000, 8% note payable of $100 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
380*
(a)
Service Revenue
380*
was collected in advance.
Date
Accounts and Explanation
Debit
Credit
Jan. 31
Salaries Expense
1,600*
(b)
Salaries Payable
To accrue salaries expense.
Date
Accounts and Explanation
Debit
Credit
Jan. 31
Accounts Receivable
1,000
(c)
Service Revenue
1,000
To accrue service revenue.
Date
Accounts and Explanation
Debit
Credit
Jan. 31
Interest Expense
(d)
Interest Payable
To accrue interest expense.
E3-22 Journalizing adjusting entries
Learning Objective 3
e. DR Insurance Expense $750
Consider the following independent situations at December 31:
a. On July 1, a business collected $6,600 rent in advance, debiting Cash and credit- ing 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 $1,300 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 $2,600. Office supplies on hand total
$1,800.
d. Equipment depreciation was $200.
e. On October 1, when the business prepaid $6,000 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.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Unearned Revenue
3,300*
Rent Revenue
3,300*
b. Dec. 31
5,200*
5,200*
c. Dec. 31
E3-22, cont.
d. Dec. 31
Depreciation Expense—Equipment
200
Accumulated Depreciation—Equipment
200
To record depreciation on equipment.
e. Dec. 31
Insurance Expense
To record insurance expense.
* Calculations:
Situation a:
$6,600
Rent collected in advance on July 1 for 1 year
12
Months
$ 550
Rent revenue earned per month
$ 550
Rent revenue earned per month
Months
$3,300
Rent revenue earned during July through December
$1,300
Salaries expense per day
Days
$5,200
Salaries expense for Monday through Thursday
Situation c:
$2,600
Office supplies prior to adjustment
(1,800)
Office supplies on hand
$ 800
Supplies expense (cost of office supplies used)
24
Months
$ 250
Insurance expense per month
Insurance expense per month
Months
Insurance expense for October through December
E3-23 Journalizing adjusting entries
Learning Objective 3
c. DR Supplies Expense $3,300
Consider the following situations for Kirkland Welding Services:
a. Depreciation for the current year includes equipment, $2,700.
b. Each Monday, Kirkland pays employees for the previous week’s work. The amount of weekly
payroll is $3,500 for a seven-day workweek (Monday to Sunday). This year, December 31 falls on
Thursday.
c. The beginning balance of Office Supplies was $2,600. During the year, Kirkland purchased office
supplies for $2,500, and at December 31 the office supplies on hand totaled $1,800.
d. Kirkland prepaid a two full years’ insurance on October 1 of the current year,
$6,480. Record insurance expense for the year ended December 31.
e. Kirkland had earned $3,400 of unearned revenue.
f. Kirkland had incurred (but not recorded) $150 of interest expense on a note payable. The interest
will not be paid until February 28.
g. Kirkland billed customers $9,000 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
2,700
Accumulated Depreciation—Equipment
2,700
To record depreciation on equipment.
b.
Salaries Expense
2,000*
2,000*
To accrue salaries expense.
c.
Supplies Expense
3,300*
3,300*
To record office supplies used.
d.
Insurance Expense
To record insurance expense.
e.
Unearned Revenue
3,400
3,400
collected in advance.
f.
Interest Expense
To accrue interest expense.
E3-23, cont.
* Calculations:
Situation b:
$3,500
Payroll for a 7-day work week
7
work days
$ 500
Salaries expense per work day
$ 500
Salaries expense per work day
work days
$2,000
Salaries expense for Monday through Thursday
Situation c:
$2,600
Beginning balance of office supplies
2,500
Office supplies purchased
(1,800)
Office supplies on hand
$3,300
Supplies expense (cost of office supplies used)
$6,480
Insurance for two years
$ 270
Insurance expense per month
Insurance expense per month
Months
Insurance expense for October through December
E3-24 Journalizing adjusting entries and posting to T-accounts
Learning Objective 3
3. Unearned Revenue bal. $600 CR
The accounting records of Galvin Architects include the following selected, unadjusted balances at
March 31: Accounts Receivable, $1,100; Office Supplies, $1,000; Prepaid Rent, $1,000; Equipment,
$9,000; Accumulated Depreciation—Equipment, $0; Salaries Payable, $0; Unearned Revenue, $700;
Service Revenue, $4,100; Salaries Expense, $1,400; 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, $600.
b. Unearned revenue that has been earned, $100.
c. Office Supplies on hand, $500.
d. Salaries owed to employees, $300.
e. One month of prepaid rent has expired, $500.
f. Depreciation on equipment, $135.
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.
1,100
0
Bal.
4,100
Bal.
Salaries Expense
Bal.
1,000
700
Bal.
Bal.
1,400
Bal.
1,000
Bal.
0
Equipment
Rent Expense
Bal.
9,000
Bal.
0
0
Bal.
Bal.
0
E3-24, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Mar. 31
Accounts Receivable
600
Service Revenue
600
To accrue service revenue.
b. Mar. 31
Unearned Revenue
100
Service Revenue
100
advance.
c. Mar. 31
Supplies Expense
Office Supplies
To record office supplies used.
d. Mar. 31
Salaries Expense
300
Salaries Payable
300
To accrue salaries expense.
e. Mar. 31
Rent Expense
500
Prepaid Rent
500
To record rent expense.
f. Mar. 31
Depreciation Expense—Equipment
135
135
To record depreciation on equipment.
* Calculations:
$1,000
Office supplies prior to adjustment
(500)
Office supplies on hand
$ 500
Supplies expense (cost of office supplies used)
E3-24, cont.
Requirement 3
Accounts Receivable
Salaries Payable
Service Revenue
Bal.
1,100
0
Bal.
4,100
Bal.
a.
600
300
d.
600
a.
Bal.
1,700
300
Bal.
100
b.
4,800
Bal.
Salaries Expense
Bal.
1,000
c.
b.
100
700
Bal.
Bal.
1,400
Bal.
500
600
Bal.
d.
300
Bal.
1,700
Supplies Expense
Bal.
1,000
e.
Bal.
0
Bal.
500
c.
500
Bal.
500
Equipment
Rent Expense
Bal.
9,000
Bal.
0
Bal.
9,000
e.
500
Bal.
500
0
Bal.
Bal.
0
135
Bal.
Bal.
135
E3-25 Journalizing adjusting entries and posting to T-accounts
Learning Objective 3
3. Office Supplies bal. $1,100 DR
The unadjusted trial balance for First Class Maids Company, a cleaning service, is as follows:
During the 12 months ended December 31, 2016, First Class Maids:
a. used office supplies of $1,900.
b. used prepaid insurance of $560.
c. depreciated equipment, $510.
d. accrued salaries expense of $250 that hasn’t been paid yet.
e. earned $420 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.
SOLUTION
Requirement 1
Cash
Accounts Payable
Service Revenue
Bal.
1,200
2,200
Bal.
17,000
Bal.
Bal.
3,000
Bal.
6,000
Unearned Revenue
Bal.
600
Bal.
Equipment
Common Stock
Depreciation Expense—
Equipment
Bal.
20,000
8,100
Bal.
Dividends
6,000
Bal.
Bal.
3,000
E3-25, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
a. Dec. 31
Supplies Expense
1,900
Office Supplies
1,900
To record office supplies used.
b. Dec. 31
To record insurance expense.
c. Dec. 31
To record depreciation on equipment.
d. Dec. 31
To accrue salaries expense.
e. Dec. 31
Unearned Revenue
Service Revenue
collected in advance.
E3-25, cont.
Requirement 3
Cash
Accounts Payable
Service Revenue
Bal.
1,200
2,200
Bal.
17,000
Bal.
Bal.
1,200
2,200
Bal.
420
e.
17,420
Bal
Office Supplies
Salaries Payable
Salaries Expense
Bal.
3,000
1,900
a.
d.
Bal.
Bal.
1,100
Bal.
250
Bal.
Unearned Revenue
Bal.
700
560
b.
Bal.
a.
Bal.
140
Bal.
Bal.
Equipment
Common Stock
Depreciation Expense—
Equipment
Bal.
20,000
8,100
Bal.
c.
510
Bal.
20,000
8,100
Bal.
Bal.
510
Equipment
510
c.
Bal.
3,000
Bal.
560
6,510
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
Adjusted trial balance $34,660 total
Refer to the data in Exercise E3-25, and prepare an adjusted trial balance.
SOLUTION
FIRST CLASS MAIDS COMPANY
Adjusted Trial Balance
December 31, 2016
Account Title
Balance
Debit
Credit
Cash
$ 1,200
Office Supplies
1,100
Prepaid Insurance
Equipment
Accumulated Depreciation—Equipment
Accounts Payable
Salaries Payable
Unearned Revenue
Common Stock
Dividends
3,000
Service Revenue
Salaries Expense
6,250
Supplies Expense
1,900
Depreciation Expense—Equipment
Insurance Expense
E3-27 Identifying the impact of adjusting entries on the financial statements
Learning Objective 5
Austin Acoustics recorded the following transactions during October 2016:
a. Received $2,500 cash from customer for three months of service beginning October 1, 2016, and
ending December 31, 2016. The company recorded a $2,500 debit to Cash and a $2,500 credit to
Unearned Revenue.
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 30 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 an $2,500 credit to Cash.
SOLUTION
Item
Adjusting
Entry
Needed?
Specific Category
of Accounts on the
Balance Sheet
Over /
Underst
ated
Specific Category
of Accounts on the
Income Statement
Over /
Understat
ed
E3-28 Journalizing adjusting entries and analyzing their effect on the income statement
Learning Objectives 3, 5
1. d. DR Salaries Expense $10,400
The following data at July 31, 2016, are given for XYZ:
a. Depreciation, $400.
b. Prepaid rent expires, $800.
Requirements
1. Journalize the adjusting entries needed on July 31, 2016.
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.