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Summary and questions

Discussion Questions

  1. Explain the sequence of financial transactions that occur continuously during an accounting time period. What is this sequence of activities called?
  2. Do you have to wait until the operating cycle is complete before you can measure income using the accrual basis of accounting?
  3. What is the relationship between the matching concept and accrual accounting? Are revenues matched to expenses, or are expenses matched to revenues? Does it matter one way or the other?
  4. What is the impact of the going concern concept on accrual accounting?
  5. Identify three different categories of expenses.
  6. What are adjusting entries and why are they required?
  7. Why are asset accounts like Prepaid Insurance adjusted? How are they adjusted?
  8. How are plant and equipment asset accounts adjusted? Is the procedure similar to the adjustment of other asset and liability accounts at the end of an accounting period?
  9. What is a contra account and why is it used?
  10. How are liability accounts like Unearned Repair Revenue adjusted?
  11. Explain the term accruals. Give examples of items that accrue.
  12. Why is an adjusted trial balance prepared?
  13. How is the adjusted trial balance used to prepare financial statements?
  14. List the eight steps in the accounting cycle.
  15. Which steps in the accounting cycle occur continuously throughout the accounting period?
  16. Which steps in the accounting cycle occur only at the end of the accounting period? Explain how they differ from the other steps.
  17. Give examples of revenue, expense, asset, and liability adjustments.
  18. In general, income statement accounts accumulate amounts for a time period not exceeding one year. Why is this done?
  19. Identify which types of general ledger accounts are temporary and which are permanent.
  20. What is the income summary account and what is its purpose?
  21. What is a post-closing trial balance and why is it prepared?

Exercises

EXERCISE 3–2 (LO1,2) Adjusting Entries

The trial balance of Lauer Corporation at December 31, 2015 follows, before and after the posting of adjusting entries.

Required:

a. Indicate in the “Adjustments” column the debit or credit difference between the unadjusted trial balance and the adjusted trial balance.
b. Prepare in general journal format the adjusting entries that have been recorded. Include descriptions.

EXERCISE 3–3 (LO1,2) AdjusƟng Entries

Additional Information:
(a) The prepaid rent consisted of a payment for three months’ rent at $200 per month for December 2015, January 2016, and February 2016.
(b) Office supplies on hand at December 31, 2015 amounted to $300.
(c) The estimated income taxes for 2015 are $5,000.
(d) All but $500 in the Unearned Commissions account has been earned in 2015.
(e) Salaries for the last three days of December amounting to $300 have not yet been recorded.

Required:

a. Prepare all necessary adjusting entries in general journal format.
b. Calculate the cumulative financial impact on assets, liabilities, equity, revenue and expense if these adjusting entries are not made.

EXERCISE 3–4 (LO1,2) Adjusting Entries

The following are general ledger accounts extracted from the records of Bernard Inc. at December 31, 2015, its year-end (‘Bal’ = unadjusted balance):

Required: Prepare in general journal format the adjusting entries that were posted. Include plausible descriptions/narratives for each adjustment.

EXERCISE 3–5 (LO1,2) Adjusting Entries

The following unadjusted accounts are extracted from the general ledger of A Corp. at December 31, 2015:

Additional Information: The truck was purchased January 1, 2015. It has an estimated useful life of 4 years.

Required: Prepare the needed adjusting entry at December 31, 2015.

EXERCISE 3–6 (LO1,2) Adjusting Entries

Additional Information:

(a) The prepaid insurance is for a one-year policy, effective July 1, 2015.
(b) A physical count indicated that $500 of supplies is still on hand.
(c) A $50 December telephone bill has been received but not yet recorded.

Required: Record all necessary adjusting entries in general journal format.

EXERCISE 3–8 (LO2) Adjusting Entries

Below are descriptions of various monthly adjusting entries:

  1. Adjusting entry for revenue earned but not yet billed to the customer.
  2. Adjusting entry for cash received from a customer for revenue not yet earned.
  3. Adjusting entry for revenue earned that was originally received as cash in advance in the previous month.
  4. Adjusting entry for services received from a supplier, but not yet paid.
  5. Adjusting entry for cash paid to a supplier for repair services not yet received.
  6. Adjusting entry for repair services received that was originally paid as cash in advance to the supplier in the previous month.
  7. Adjusting entry for salaries earned by employees, but not yet paid.
  8. Adjusting entry for annual depreciation expense for equipment.

Required: For each description above, identify the likely journal entry debit and credit account.

EXERCISE 3–9 (LO2) Adjusting Entries

Turner Empire Co. employs 65 employees. The employees are paid every Monday for work done from the previous Monday to the end-of-business on Friday, or a 5-day work week. Each employee earns $80 per day.

Required:

  1. Calculate the total weekly payroll cost and the salary adjustment at March 31, 2016.
  2. Prepare the adjusting entry at March 31, 2016.
  3. Prepare the subsequent cash entry on April 4, 2016.

EXERCISE 3–10 (LO1,2,3) Adjusting Entries

Below is a trial balance for Quertin Quick Fix Ltd. at October 31, 2016 with three sets of debit/credit columns. The first set is before the October month-end adjusting entries, and the third column is after the October month-end adjusting entries.

EXERCISE 3–11 (LO3) Prepare an Adjusted Trial Balance

Required: Prepare an adjusted trial balance at December 31, 2015.

EXERCISE 3–12 (LO6) Closing Entries

Required: Prepare the closing entries.

EXERCISE 3–13 (LO6) Prepare Closing Entries and a Post-Closing Trial Balance

The following alphabetized adjusted trial balance information is available for Willis Inc. at December 31, 2015. Assume all accounts have normal balances.

Problems

PROBLEM 3–2 (LO1,2) Adjusting Entries

The unadjusted trial balance of Lukas Films Corporation includes the following account balances at December 31, 2015, its fiscal year-end. Assume all accounts have normal debit or credit balances as applicable.

The following information applies at December 31:

a. A physical count of supplies indicates that $100 of supplies have not yet been used at December 31.
b. A $75 telephone bill for December has been received but not recorded.
c. One day of wages amounting to $125 remains unpaid and unrecorded at December 31; the amount will be included with the first Friday payment in January.
d. The equipment was purchased December 1; it is expected to last 2 years. No depreciation has yet been recorded.
e. The prepaid rent is for three months: December 2015, January 2016, and February 2016.
f. Half of the unearned advertising has been earned at December 31.
g. The $900 balance in Insurance Expense is for a one-year policy, effective August 1, 2015.

Required: Prepare all necessary adjusting entries at December 31, 2015. Descriptions are not needed.

  • A physical count indicates that $300 of supplies is still on hand at December 31.
  • (d)Interest on the bank loan is paid on the fifteenth day of each month; the unrecorded interest for the last 15 days of December amounts to $25.
  • (e)The Subscription Revenue account consists of one $9,000 cash receipt for a 6-month subscription to the corporation’s Computer Trends report; the subscription period began December 1,2015.
  • (f)Three days of salary amounting to $300 remain unpaid and unrecorded at December 31.
  • (g)The rent expense account should reflect 12 months of rent. The monthly rent expense is $300.
  • (h)A bill for December truck operation expense has not yet been received; an amount of $400 is owed.

Required: Prepare all necessary adjusting entries at December 31, 2015. Descriptions are not needed.

PROBLEM 3–4 (LO1,2) Adjusting Entries

The following accounts are taken from the records of Bill Pift Corp. at the end of its first 12 months of operations ended December 31, 2015, prior to any adjustments.

In addition to the balances in each set of accounts, additional data are provided for adjustment purposes if applicable. Treat each set of accounts independently of the others.

PROBLEM 3–5 (LO1,2,3) Adjusting Accounts

Roth Contractors Corporation was incorporated on December 1, 2015 and had the following transactions during December:

Part A

(a) Issued share capital for $5,000 cash.

(b) Paid $1,200 for three months’ rent: December 2015; January and February 2016.

(c) Purchased a used truck for $10,000 on credit (recorded as an account payable).

(d) Purchased $1,000 of supplies on credit. These are expected to be used during the month (recorded as expense).

(e)Paid $1,800 for a one-year truck insurance policy, effective December 1.

(f) Billed a customer $4,500 for work completed to date.

(g) Collected $800 for work completed to date.(h)Paid the following expenses: advertising, $350; interest, $100; telephone, $75; truck operation, $425; wages, $2,500.

(i) Collected $2,000 of the amount billed in (f) above.

(j) Billed customers $6,500 for work completed to date.

(k) Signed a $9,000 contract for work to be performed in January.

(l) Paid the following expenses: advertising, $200; interest, $150; truck operaƟon, $375; wages,$2,500.

(m) Collected a $2,000 advance on work to be done in January (the policy of the corporation is tore cord such advances as revenue at the time they are received).

(n) Received a bill for $100 for electricity used during the month (recorded as utilities expense).

Required:

  1. Open general ledger T-accounts for the following: Cash (101), Accounts Receivable (110), Prepaid Insurance (161), Prepaid Rent (162), Truck (184), Accounts Payable (210), Share Capital (320), Repair Revenue (450), Advertising Expense (610), Interest Expense (632), Supplies Expense (668), Telephone Expense (669), Truck Operation Expense (670), Utilities Expense(676), and Wages Expense (677).
  2. Prepare journal entries to record the December transactions. Descriptions are not needed.
  3. Post the entries to general ledger T-accounts.

Part B

At December 31, the following information is made available for the preparation of adjusting entries.

(o) One month of the Prepaid Insurance has expired.

(p) The December portion of the December 1 rent payment has expired.

(q) A physical count indicates that $350 of supplies is still on hand.

(r) The amount collected in transaction (m) is unearned at December 31.

(s) Three days of wages for December 29, 30, and 31 are unpaid; the unpaid amount of $1,500 will be included in the first Friday wages payment in January.

(t) The truck has an esƟmated useful life of 4 years.

Required:

4. Open additional general ledger T-accounts for the following: Supplies (173), Accumulated Depreciation – Truck (194), Wages Payable (237), Unearned Revenue (249), Depreciation Expense – Truck (624), Insurance Expense (631), and Rent Expense (654).

5. Prepare all necessary adjusting entries. Omit descriptions.

6. Post the entries to general ledger T-accounts and calculate balances.

7. Prepare an adjusted trial balance at December 31, 2015.

PROBLEM 3–6 (LO6) Closing Accounts

Required:

  1. Using the adjusted trial balance answer from Problem3–5, journalize the appropriate closing entries (create additional accounts if required).
  2. Prepare a post-closing trial balance.

PROBLEM 3–7 (LO 1, 2, 3, 4, 5, 6) Comprehensive Accounting Cycle Review Problem

The unadjusted trial balance of Packer Corporation showed the following balances at the end of its first 12-month fiscal year ended August 31, 2015:

At the end of August, the following additional information is available:

(a) The company’s insurance coverage is provided by a single comprehensive 12-month policy that began on March 1, 2015.

(b) Supplies on hand total $2,850.

(c) The building has an esƟmated useful life of 50 years.

(d) The furniture has an estimated useful life of ten years.

(e) The equipment has an estimated useful life of 20 years.

(f) Interest of $208 on the bank loan for the month of August will be paid on September 1, when the regular $350 payment is made.

(g) A review of the unadjusted balance in the unearned commissions revenue account indicates the unearned balance should be $450.

(h) A review of the unadjusted balance in the subscription revenue account reveals that $2,000 has not been earned.

(i) Salaries that have been earned by employees in August but are not due to be paid to them until the next payday (in September) amount to $325.

Required:

  1. Set up necessary general ledger T-accounts and record their unadjusted balances. Create and assign account numbers that you deem appropriate.
  2. Prepare the adjusting entries. Descriptions are not needed.
  3. Post the adjusting entries to the general ledger T-accounts and calculate balances.
  4. Prepare an adjusted trial balance at August 31, 2015.
  5. Prepare an income statement and balance sheet.
  6. Prepare and post the closing entries.
  7. Prepare a post-closing trial balance.

PROBLEM 3–8 (LO1,2,3) Challenge Question – Adjusting Entries

Below is an unadjusted trial balance for Smith and Smith Co., at June 30, 2016.

Additional information for June not yet recorded:

a. Unbilled and uncollected work to June 30 totals $45,000.

b. An analysis of prepaid advertising shows that $500 of the balance was consumed.

c. A shop supplies count on June 30 shows that $1,200 are on hand.

d. Equipment has an estimated useful life of ten years and an estimated residual value of $500.

e. The records show that fifty percent of the work, for a $10,000 fee received in advance from a customer and recorded last month, is now completed.

f. Salaries of $5,800 for employees for work done to the end of June has not been paid.

g. Utilities invoice for services to June 22 totals $3,500.h.Accrued revenues of $7,800 previously recorded to accounts receivable were collected.

i. A building was purchased at the end of May. Its estimated useful life is fifty years and has an estimated residual value of $10,000.

j. Rent expense of $5,000 cash for July has been paid and recorded directly to rent expense.

k. Interest for the 6% note payable has not yet been recorded for June.

l. Income taxes of $3,000 is owing but not yet paid.

m. Unrecorded and uncollected service revenue of $9,000 has been earned.

n. A two year, $1,800 insurance policy was purchased on June 1 and recorded to prepaid insurance expense.

o. The prior balance in the unadjusted prepaid insurance account (excluding the insurance in item n. above), shows that $300 of that balance is not yet used.

Required:

  1. Prepare the adjusting and correcting entries for June.
  2. Prepare an adjusted trial balance at June 30, 2016.

PROBLEM 3–9 (LO4) Challenge Question – Preparation of Financial Statements

Using the adjusted trial balance in PROBLEM3–8above:

Required: Prepare an income statement, statement of changes in equity and a balance sheet as at June 30, 2016. (Hint: For the balance sheet, also include a subtotal for each asset’s book value).

PROBLEM 3–10 (LO6) Closing Entries and Post-Closing Trial Balance

Required: Using the adjusted trial balance in PROBLEM3–8above:

a. Assuming that June 30, 2016, is the year-end, prepare the closing journal entries.

b.Prepare a post-closing trial balance at June 30, 2016.

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