Answers level 1 October

1. DEFERRAL
2. REVENUE
3. FRAMEWORK
4. EXPENSE
5. PERIODICITY CONCEPT
6. ACCURAL BASIS
7. IMMATERIAL
8. CASH BASIS
9. PREPAID EXPENSE
10. ADJUSTMENT
11. WORKSHEET
12. SOLVENCY
13. FINANCIAL FLEXIBILITY
14. ACCOUNT FORMAT
15. FINANCIAL POSITION

DEBIT OR CREDIT

1.CREDIT- Since revenues cause stockholders' equity to increase, revenues are increased with a credit
entry. [Stockholders' equity appears on the right side of the accounting equation. Credit entries appear
on the right side of a T-account.]

2. CREDIT- The amount owed for accrued expenses is reported in a liability account such as Accrued
Expenses Payable. Since a liability account is expected to have a credit balance, a credit entry will
increase the normal balance. [Recall that liabilities are on the right side of the accounting equation.
Credit entries appear on the right side of a T-account.]

3.DEBIT- Expenses are recorded in expense accounts with a debit entry. The reason is that expenses will
cause a decrease in stockholders' (or owner's) equity

4.CREDIT- Receivables normally have debit balances. Therefore to decrease the debit balance in a
receivable account you will need to credit the account.

5. DEBIT- Since Deferred Revenues is a liability account, the normal credit balance will be decreased with
a debit entry. For example, when some of the deferred revenues become earned, the company will
debit the Deferred Revenues and will credit a revenue account such as Service Revenues.

6.CREDIT- Since Prepaid Insurance and Prepaid Expenses are asset accounts, their normal debit balance
will be decreased with a credit entry. Since expenses usually have debit balances, Insurance Expense will
be decreased with a credit entry.

7. CREDIT- Since contra asset accounts have credit balances, the credit balance will become larger when
a credit entry is recorded.
PROBLEM:

CORPO

1. December 31 (the last day of the accounting period)

2. Two

3. Interest Expense (an income statement account)

4. Interest Payable (a balance sheet account)

5. $1,000.
Computation:
12% per year is 1% per month X $100,000 = $1,000 per month.

Another method is Principal X Rate X Time = $100,000 X .12 X 1/12 = $1,000.

As of December 31 the company owes just one month of interest. When the note becomes due, the company will
have to remit six months of interest for a total of $6,000 ($100,000 X .12 X 6/12).

6. If the company fails to make the December 31 adjusting entry there will be four consequences:

1) Interest Expense will be understated (too little expense being reported) by $1,000.
2) Net Income will be overstated (too much net income being reported) by $1,000.
3) Owner's equity will be overstated by $1,000.
4) Interest Payable will be understated by $1,000.

The accounting equation and balance sheet will show liabilities (Interest Payable) understated by $1,000 and owner's
equity overstated by $1,000.

AMBROCIO

7. December 31

8. Two

9. Unearned Revenues (a balance sheet account)

10. Service Revenues (an income statement account)

11. $200.

Calculation:

$2,400 divided by the 12 months of coverage = $200 per month. As of December 31 one month has gone by, so one
month of insurance has been earned and belongs in revenue. (This means that the Unearned Revenues account
should have a balance of $2,200—11 months still unearned X $200 per month

12 If XYZ Insurance Co. fails to make the December 31 adjusting entry there will be four consequences:

1) Unearned Revenues will be overstated by $200.

2) Service Revenues will be understated by $200.

3) Net Income will be understated by $200.

4) Owner's equity will be understated by $200.

The accounting equation and balance sheet will show liabilities (Unearned Revenues) overstated by $200 and
owner's equity understated by $200.

PIGGYBANK

13. December 31

14. Two

15. Supplies Expense (an income statement account)

16. Supplies (a balance sheet account)

17. $800.

Calculation:

The balance in the current asset account Supplies before any adjustment is a debit balance of $1,500. The actual
amount of supplies on hand (unused) was determined to be $700. Therefore, the balance in the current asset
account Supplies should be a debit balance of $700, not the present balance of $1,500. To reduce the Supplies
account from a debit balance of $1,500 to become a debit balance of $700, you will need to credit Supplies for $800.
The other half of the entry needs to be a debit of $800 to Supplies Expense. Since expenses are costs that have
been used up, the $800 debit balance in Supplies Expense is proper. (Your company bought $1,500 and has $700 on
hand/unused. Therefore, $800 must have been used up.)

18. If Piggybank company fails to make the December 31 adjusting entry there will be four consequences:

1) Supplies will be overstated by $800.

2) Supplies Expense will be understated by $800.

3) Net Income will be overstated by $800.

4) Owner's equity will be overstated by $800.

The accounting equation and balance sheet will show assets (Supplies) overstated by $800 and owner's equity
overstated by $800.