Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
4-1
CHAPTER 4
Income Measurement
and Accrual Accounting
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Explain the significance of recognition and measurement 35* 20 Diff
in the preparation and use of financial statements.
37* 15 Mod
Module 2
5. Identify the four major types of adjusting entries and prepare 4 10 Easy
them for a variety of situations. 5 10 Easy
6 20 Easy
7 10 Mod
8 20 Easy
4-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 3
6. Explain the steps in the accounting cycle and the significance 26 5 Easy
of each step.
Module 4
8. Understand how to use a work sheet as a basis for preparing 33 5 Mod
financial statements (Appendix). 34 10 Mod
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-3
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
1. Explain the significance of recognition and measurement
in the preparation and use of financial statements.
Module 2
5. Identify the four major types of adjusting entries and prepare 1 20 Mod
them for a variety of situations. 2 20 Mod
3 20 Mod
Module 3
6. Explain the steps in the accounting cycle and the significance 12*# 60 Mod
of each step. 13* 90 Mod
Module 4
8. Understand how to use a work sheet as a basis for preparing 12* 60 Mod
financial statements (Appendix). 13* 90 Mod
4-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
1. Explain the significance of recognition and measurement
in the preparation and use of financial statements.
7 45 Mod
Module 2
Module 3
6. Explain the steps in the accounting cycle and the significance
of each step.
Module 4
8. Understand how to use a work sheet as a basis for preparing
financial statements (Appendix).
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-5
EXERCISES
LO 3 EXERCISE 4-1 REVENUE RECOGNITION
Cash collected at toll booth $3,000,000
Passes redeemed 1,700,000
Revenue recognized $4,700,000
LO 2 EXERCISE 4-2 COMPARING THE INCOME STATEMENT AND THE STATEMENT OF
CASH FLOWS
1. The income statement for Campus Internet Connection would show the following:
CAMPUS INTERNET CONNECTION
INCOME STATEMENT
FOR THE MONTH ENDED JANUARY 31
Revenues:
2. A partial statement of cash flows for Campus Internet Connection would show the
following:
3. On Campus’s balance sheet at the end of January, two accounts will appear:
4-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 4 EXERCISE 4-3 THE MATCHING PRINCIPLE
1. b
LO 5 EXERCISE 4-4 ACCRUALS AND DEFERRALS
1. AL 5. DE
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-7
LO 5 EXERCISE 4-5 OFFICE SUPPLIES
Journal May 31 Office Supplies Expense .............................. 1,630
Entry Office Supplies on Hand ......................... 1,630
Analysis To record office supplies used:
$1,450 + $1,100 – $920.
Supplies
May 1 Beg. Bal. 1,450
Purchased in May 1,100 X (amount of supplies used)*
4-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 4-6 PREPAID RENT—QUARTERLY ADJUSTMENTS
2.
Journal Sept. 1 Prepaid Rent ................................................ 12,000
Entry Cash ....................................................... 12,000
3.
Journal Sept. 30 Rent Expense............................................... 2,000
Entry Prepaid Rent ........................................... 2,000
Analysis To record one month of rent expense:
$12,000/6.
Balance Sheet Income Statement
LO 5 EXERCISE 4-7 WORKING BACKWARD: PREPAID INSURANCE
1. Baxter will recognize $24,000/12 = $2,000 each month in insurance expense.
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-9
LO 5 EXERCISE 4-8 DEPRECIATION
1.
Journal July 1 Computer ..................................................... 260,000
Entry Cash ....................................................... 260,000
Analysis To record purchase of computer.
2. Purchase price $260,000
Estimated salvage value 20,000
Depreciable cost $240,000
4.
Journal July 31 Depreciation Expense .................................. 5,000
Entry Accumulated Depreciation—
Analysis Computer System ................................ 5,000
To record one month’s depreciation expense.
Balance Sheet Income Statement
5. Equipment .................................................................................... $260,000
4-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 4-9 WORKING BACKWARD: DEPRECIATION
1. Accumulated depreciation on the fixtures is $15,000 on December 31, 2016, which
LO 5 EXERCISE 4-10 PREPAID INSURANCE—ANNUAL ADJUSTMENTS
1. Monthly cost: $72,000/24 months = $3,000
2.
Journal Apr. 1 Prepaid Insurance ........................................ 72,000
Entry Cash ....................................................... 72,000
Analysis To record purchase of 24-month policy.
3.
Journal Dec. 31 Insurance Expense ...................................... 27,000
Entry Prepaid Insurance ................................... 27,000
Analysis To record expiration of nine months
of insurance (9 months × $3,000).
4. Net income will be overstated by $27,000 if the accountant forgets to record an entry
on December 31, 2016, to recognize an expense (insurance used/expired).
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-11
LO 5 EXERCISE 4-11 SUBSCRIPTIONS
1.
Journal Aug. 1 Cash ............................................................. 27,000
Entry Subscriptions Received in Advance ........ 27,000
2.
Journal Aug. 31 Subscriptions Received in Advance ............. 7,500
Entry Subscription Revenue ............................. 7,500
Analysis To record subscriptions for the month of August:
$40,500 + $27,000 – $60,000.
3. If the August 31 adjusting entry for subscription revenue is not recorded, net income
for the month will be understated by $7,500.
4-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 4-12 CUSTOMER DEPOSITS
1.
Journal Apr. 1 Cash ............................................................. 9,000
Entry Customer Deposits ................................. 9,000
2.
Journal Apr. 30 Customer Deposits ....................................... 3,000
Entry Legal Fees Revenue ............................... 3,000
3. If the April 30 adjusting entry is not recorded, net income will be understated by
$3,000.
LO 5 EXERCISE 4-13 CONCERT TICKETS SOLD IN ADVANCE
1.
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-13
EXERCISE 4-13 (Concluded)
2.
Journal June 30 Customer Deposits ....................................... 600,000*
Entry Concert Festival Fees Revenue .............. 600,000
Analysis To record concert fees for three days.
*$800,000/4 days = $200,000 per day;
$200,000 × 3 days = $600,000
Balance Sheet Income Statement
3.
Journal July 31 Customer Deposits ....................................... 200,000
Entry Concert Festival Fees Revenue .............. 200,000
Analysis To record concert fees for three days.
Balance Sheet Income Statement
200,000
LO 5 EXERCISE 4-14 WORKING BACKWARD: GIFT CARD LIABILITY
Gift Card Liability
Gift cards redeemed 33,750 22,640 Bal. Dec. 31, 2015
4-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 4-15 WAGES PAYABLE
1. Weekly payroll: $10 per hour × 7 hours per day × 5 days × 50 employees = $17,500
2.
Journal Sept. 26 Wages Expense ........................................... 17,500
Entry Cash ....................................................... 17,500
Analysis To record payment of weekly payroll.
3.
Journal Sept. 30 Wages Expense ........................................... 7,000
Entry Wages Payable ....................................... 7,000
4.
Journal Oct. 3 Wages Expense ........................................... 10,500
Entry Wages Payable ............................................ 7,000
Analysis Cash ....................................................... 17,500
To record payment of weekly payroll.
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-15
LO 5 EXERCISE 4-16 INTEREST PAYABLE
1.
Journal Mar. 1 Cash ............................................................. 100,000
Entry Notes Payable ........................................ 100,000
2.
Journal Mar. 31 Interest Expense .......................................... 1,000
Entry Interest Payable ...................................... 1,000
Analysis To accrue interest due on note for one
month: $100,000 × 12% × 30/360.
Journal Apr. 30 Interest Expense .......................................... 1,000
Entry Interest Payable ...................................... 1,000
Analysis To accrue interest due on note for one month.
Balance Sheet Income Statement
4-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 4-16 (Concluded)
3.
Journal May 30 Notes Payable .............................................. 100,000
Entry Interest Payable ........................................... 2,000
Analysis Interest Expense .......................................... 1,000
Cash ....................................................... 103,000
To record payment of note and interest
at maturity date.
LO 5 EXERCISE 4-17 WORKING BACKWARD: INTEREST PAYABLE
1. The interest rate on the loan is the monthly interest of ($500 × 12 months)/$100,000
= 6%.
2.
Journal Aug. 31 Notes Payable .............................................. 100,000
Entry Interest Payable ........................................... 500
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-17
LO 5 EXERCISE 4-18 INTEREST PAYABLE—QUARTERLY ADJUSTMENTS
1.
Journal Mar. 1 Cash ............................................................. 100,000
Entry Notes Payable ........................................ 100,000
2.
Journal Mar. 31 Interest Expense .......................................... 1,000
Entry Interest Payable ...................................... 1,000
Analysis To accrue interest due on note for
one month: $100,000 × 12% × 30/360.
Balance Sheet Income Statement
3.
Journal May 30 Notes Payable .............................................. 100,000
Entry Interest Payable ........................................... 1,000
Analysis Interest Expense .......................................... 2,000
4-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 EXERCISE 4-19 PROPERTY TAXES PAYABLE—ANNUAL ADJUSTMENTS
1.
Journal 2016
Entry Dec. 31 Property Tax Expense ............................ 52,500
Analysis Property Taxes Payable ................... 52,500
2.
Journal 2017
Entry June 1 Property Taxes Payable ............................ 52,500
1.
Journal June 1 Notes Receivable ......................................... 60,000
Entry Cash ....................................................... 60,000
Analysis To record 10%, 60-day loan to MaxiDriver Inc.
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-19
EXERCISE 4-20 (Concluded)
2.
Journal June 30 Interest Receivable ...................................... 500
Entry Interest Income ....................................... 500
Analysis To accrue interest due on note for one
month: $60,000 × 10% × 30/360.
Balance Sheet Income Statement
3.
Journal July 31 Cash ............................................................. 61,000
Entry Notes Receivable .................................... 60,000
Analysis Interest Receivable ................................. 500
Interest Income ....................................... 500
To record collection of note and interest at
maturity date.
Balance Sheet Income Statement
LO 5 EXERCISE 4-21 RENT RECEIVABLE
1. On September 30, Hudson should record $2,000 of rent revenue. Another $2,000 of
revenue should be recorded on October 31.
2.
Journal Oct. 5 Cash .................................................................. 2,000
Entry Rent Receivable .......................................... 2,000
Analysis To record receipt of cash for rent revenue
in September, but payment received in October.
Journal Oct. 31 Rent Receivable ........................................... 2,000
Entry Rent Revenue ......................................... 2,000
Analysis To accrue rent revenue for one month.
LO 5 EXERCISE 4-22 WORKING BACKWARD: RENT RECEIVABLE
The amount of cash collected can be determined by examining the T account for Rent
Receivable:
LO 5 EXERCISE 4-23 THE EFFECT OF IGNORING ADJUSTING ENTRIES ON NET INCOME
