SUE
170 Chapter 4 The Avccunting Cyclo: Accruals and Doterrals
Brief Exercises
Prepaid Expenses anc BRIEF EXERCISE 4.1 On 1 November, Able Corporation purchased a six-month insurance
Unearned Revenve policy from The Baylor Agency for $3,000
109, 104 fa. Prepare the necessary adjusting entry for Able Corporation on 30 November, assuming it
recorded the | November expenditure as Unexpired Insurance
b, Prepare the necessary auusting entzy for The Baylor Agency on 30 November, assuming it
recorded Able's payment as Uneamed Insurance Premiums.
Prepac Expenses and BRIEF EXERCISE 4.2 On 1 February, Watson Storage agreed t rent Hillhourne Manufacturing
Uneamed Revenue warehouse space for $175 per month. Hillbourne Manufacturing paid the first thtee months’
103,104 in advance.
fa, Prepare the necessary adjusting entry for Hiliboume Manufacturing on 28 February, assuming
it recorded the expenditure on 1 February as Prepaid Rent
by Prepare the necessary adjusting entry for Watson Storage on 28 February, assuming it recorded
Hillourne Manufacturing’s payment as Unearned Rent Revens
accounting for Suooles «BRIEF EXERCISE 4.3. On 1 March, Ditlmore Corporation bad ofice supplies on hind of
us S500, Dung the month, Dilimoe purchased ionasuples costing 8500. Approximately
$400 of use offe supplies remain on han atthe end of the anonth, Prepare the necessary
Ajusng entry on 31 Maeh fo account fr office supple
Accounting or Depreciation BRIEF EXERCISE 44 On Jansary 2008, Hagen Crpoitionpushased equipment costing
te STLODD Hagen performs sdjsing enies Non
a. Record his equipment’ depreciation expense on 31 December 2013 assuming is estimated
life was igh yur on 2 January 2008,
tu Detemin th onto the eipmets accumulated deprecation reputed in the sttement
of financiel postion dated 31 December 2013 |
coring Unesected BRIEF EXERCISE 45. Marvin's Tx Service had eamed—butotyetrccorded—the folowing |
Rovere clint eve revenue ue end of The cunt accountng pero |
we 7
bitatie Hourly
Account Numbor siting Rte
fccout We 5
pecunt #3 a
fect ws &
Prepare the acessary adjusting entry trend Marvin's uni client service even.
Learned Revenue BRIEF EXERCISE 4.6 Jaspers unjusted tial balance reports Uneamed Client Revenue
rm Of $3,200 and Chen Revenve Earned of $29,000. An examination of cent records sees that
$2800 of weviosly eared rvenbe his ou ben eed.
Pepa the acesary tjuting entry pertaining tates accounts
TL _-Atihacamount will Client Revenue Earned be reported in Jaspers income statement?
Acening Unpaid Salares BRIEF EXERCISE 47 Milford Compomtion pays its employees on the fiteenth of eash month,
os [Accrued bucunpaid saree on 31 December 201 toued S175 000 Salaries eared by Minds
oployect rom | January through Ts Janary 2014 ed $180.00.
a Prepare the necessary austing en for sare expense on 31 December 2013
Resor the company's payment of trie on 15 Sawa 2018
fccxing Unpaiiterest «BRIEF EXERCISE 4.8 Norbert Corporation borrowed $24,000 on 1 December 2013, by
us Sssuing a two-month, 8 percent note payable to Service One Credit Unio, The entre amount of
the loan, plus interes, is due 1 February 2014,chapter 4 The Accounting Gyole: Acruals and Deterals "1
‘a. Prepare the necessary adjusting entry for interest expense on 31 December 2013.
Record the repayment ofthe Joan plus interest on 1 February 2014
BRIEF EXERCISE 4.9 Normington’s unadjusted trial balance dated 31 December 2013, Acoruing Unpsil Income Taxes
repons Income Taxes Expense of $57,200, and Income Taxes Payable of $144,300. The company’s 05
ecountane estimates that income taxes expense for the entire year ended. 31 December 2013, is
$362,800.
fa. Prepare the necessary adjusting entry for income taxes expense on 31 December 2013.
b._Determine the amount of income taxes payable reported inthe statement of financial position
dated 31 December 2013.
BRIEF EXERCISE 4.10 The concept of materiality is an underlying principle of financial Concopt of Materiaity
reporting, 108
‘a. Briefly explain the concept of materiality
b. 15 $2,500 a “materia!” dollar amount? Explain,
fe. Describe two ways in which the concept of material
in making adjusting entries.
may save accountants!
and effort
EXERCISE 4.1 Listed below are nine technical accounting terms used in this chapter: ‘Accounting Terminctogy
Unrecorded revenue Aciusting entries ‘Accrued expenses or, Loz, 109,104, 105,
Book value Matching principle Accumulated depreciation 108, 07, 108, 08
‘Unearned revenue Matensality
Each of the following statements may (or may net) deseribe one ofthese technical terms. For each
statement, indicate the accounting term described, or answer “None” if the statement does rot
correctly describe any of the terms.
aid expenses
fa. Thenet amount at which an assets carried io the accounting recotds as distinguished from its
market value
b, An accounting concept that may justify
poses of convenience and economy.
ce. The offsetting of revenue with expenses incurred in generating that revenue.
4. Revenue eamed dosing the current accounting period bat not yet recorded or billed, which
requires an adjusting entry al the end of the period
fe. Entries made atthe end of the period to achieve the goals of accrual accounting by recording
revenve when its earned and by recording expenses when the selated goods and services
are used,
fA type of account credited when customers pay in advance for services to be rendered in
the future
A statement of financial position category used for reporting advance payments of such items
a insurance, rent, and oifice supplies.
An expense representing the systematic allocation of an asset's cost over its useful life
feparture from other accounting principles for pur-
EXERCISE 4.2 Security Service Company adjusts its aocounts at the end of the month. On Effects of Adjusting Entries
30 November, adjusting entries are prepared to record 101, t02, 198, 104,
‘a, Depreciation expense for November: 106, Loe, L09
bb. Interest expense that has accrued during November
cRevenue earned during November that has not yet been billed'to customers.
ries, payable fo Company eraployees, that have accrued since the last payday in November.
fe. The portion of the company's prepaid insurance that has expired during November:
£, Earning a portion of the amount collected in advance from a customer, Harbor Restaurant,
Indicate the effect of each of these adjusting entries on the major elements of the company
income statement and statement of financial position that is, on revenue, expenses, profit asset
Liabilities, and equity. Organize your answer in tabular form, using the column headings shown and‘chapter 4 The Accounting Cycle: Accruals and Detorats
‘ec Assume tht, in a recent Flight, passengers of the ailine used tickets that they had purchased
jn advance for HKS200,000. Record the entry Cathay Pacific would make upon completion
of this fig.
EXERCISE 4.7 Sweeney & Associates, a lange marketing firm, adjusts its accounts at the end
‘Greach month. The following information is available forthe year ending 31 December 2013:
4, A bank loan had been obtained on 1 December. Accrued interest on the loan at 31 December
“arvounts to $1,200, No interest expense has yet been recorded.
Depreciation a the firm's office building is based on an estimated life of 25 years. The build-
ing was purchased in 2009 for $330,000
3, Accrued, but unbilled, revenue during December amounts to $64,000.
ZL. On March, the firm paid $1,800 to renew a 12-month insurance policy. The entire amount
was revonded as Prepaid Insurance.
‘5, The firm received $14,000 from King Biscuit Company in advance of developing a six-month
marketing campaign, The entire amount was initially recorded as Unearned Revenue, At
31 December, $3,500 had actually been earned by the firm.
6. The company’s poliey #s to pay its employees every Friday. Since 31 December fell on a
‘Weduesdiy, there was an accrued liability for salaties amounting to $2,400.
Record the necessary adjusting journal entries on 31 December 2013,
By how much did Swiceney & Associates's profit increase or deerease asa result of the adjust
ing entries peeformed in part a? (Ignore income taxes.)
ee
EXERCISE 4.8 Ventura Company adjusts its accounts monthly and closes its accounts on 31
December, On 31 October 2013, Ventura Company signed a note payable and borrowed $120,000
from a bank for & period of six months at an annual interes rate of 9 percent.
fa. How much is the total interest expense over the life ofthe note? Hiow much is the monthly
interest expense? (Asstime equal amounts of interest expense each month.)
bh. In the company’s annval statement of financial position at 31 December 2013, what is the
amount of the Tisbiliy to the bank?
cc. Prepave the journal entry to record issuance ofthe note payable on 31 Ociober 2013,
@._Propare the adjusting entry to accrue interest on the note at 31 December 2013.
fe. Assume the company prepared a statement of financial position at 31 March 2014, State the
amount ofthe Liability to the bank at this date.
EXERCISE 4.9 Amoug the ledger accounts used by Glenwood Speedway are the following:
Prepaid Rent, Rent Exgense, Uneamed Admissions Revenue, Admissions Revenue, Prepeid Print-
ing, Printing Expense, Concessions Receivable, and Concessions Revenue. For each ofthe follow
ing items, provide the journal entay (i one is needed) 1 record the initial transection and provide
the adjusting entry if any, required on 31 May, the end of the fiscal year,
‘a. On | May bosroved $300,000 cash from National Bank by issuing a 12 percent note payable
due in three months.
b. Ont May paid rent for six months beginning | May at $30,000 per month,
cL On2 May sold season tickets for a total of $910,040 cash. The season includes 70 racing days
20 in May, 25 in June, and 25 in July
4d. On 4 May an agreement was reached with Sack-Bars Limited, allowing that company to sel
refreshments atthe track in emu for 10 percent of the gross rbceipts from refreshment sales,
EXERCISE 4.10 The following information was reported ina rscent statement of financial
postion issued ty: China Mobile Limited:
1. The book value of property and equipment is lited at 959 billion yuan (net of deprecation.
Related notes to the financial stafements reveal that accumulated depreciation on property and
equipment totals 528 bill yuan,
‘Acerued salaries, wages and benefits of 5.6 billion yum i Tied as lability
‘Carent deferred revena Is reported a 58 billion yuan, whereas noncarrent deferred revenne
is seporied a 0.33 bilion yuan. The curent igure willbe converted to revenue within a yeu.
‘The noncurtent figure will be converted to revenue over severa) years, Related notes tothe
financial statements reveal that deferred sevenue includes prepaid service fees received from
subscriber
‘a. Determine the original historical cost of property, plant, and equipment reported in China
‘Mohile Limited's statement of financial position.
173
Preparing Various Adjusting
Entries
1, Loz, 103,104,
5, Loe, 107
Notes Payable anc Interest
101,102, L05
Relationship of Adiusting
Entries to Business
Transactions
101, 102, 09,104,
105, L0G, 107, 108
‘Adjusting Entves and the
‘Statement of Financial Postion
101,108, Ls, L0, 107‘chapter 4 The Accourting Oye: Accruals and Deferrals 175
EXERCISE 4.13 Four iypes of adjusting entrias were identified in this chapter: Effects of Adiusting Entries
Typet Converting Assets to Expenses 101, 2, L93, 104,
‘Type Converting Lilies to Revenue 106,106
‘Type ‘Aceruing Unpaid Expensas
Type lV Accruing Uncallected Revenue
Complete the following table by indicating the effect of each adjusting entry type on the major
elements of the income statement and statement of financial position, Use the symbols I for
increase, D for decrease, and NE for no effect,
Aaueeitie Income Statoment Statomont of Financial Position
Type __Revenue Expenses Profit Assets Liabilities Equity
Type! ea
‘Tre it | a
ype i Pee | dt i
Type + HEHE
EXERCISE 4.14 For each of the sitations described below, indicate the underlying account- Accounting Principles
ing principle that is being violated. Choose from the Following principles 101, 02, 108,104,
‘Matching Materality us, 10g, 107,108
Cost Recognition
Objectivity
AF you do not believe thatthe practice violates any ofthese principles, answer “None” and explain:
a. The bookkeeper of a large metropolitan auto dealership depreciates the $7.20 cost of metal
wastebaskets over a period of 10 years
b. A small commuter airline recognizes no depreciation expense on its aircraft because the
planes are maintained in “as good as new” condition,
Palm Beach Hotel recognizes room rental revenue on the date that @ reservation is received
For the winter season, many guests make reservations as much as @ year in advance,
EXERCISE 4.15 The financial statements of adidas AG, Herzogenaurach appear in Using the Financial
“Appendix A at the end ofthis textbook. Examine the company’s consolidated statement of financial Statements of adides AG,
position and identify specific accounts that may have reguiced adjusting entries at the end of Herzogenaurach
the year 101, woe
‘GROUF
connect
aL aa
Problem 4.1A Singapore Palms Country Club adjusts its accounts monthly. Club members pay Preparing Adjusting
their annual dues in advance by 4 January. The entire amount is initially credited to Unearned 01, 12,103,104,
‘Membership Dues. At he end of each month, an appropriate portion ofthis amount is credited (0 4g epg, xy
‘Membership Dues Earned, Guests of the club normally pay green fees before being allowed on the
course. ‘The amounts collected are credited to Green Fee Revenue atthe time of receipt. Certain
guests, however, ae billed for green fees al the end of the month, The following information is
available as a source for preparing adjusting enisies at 31 December!
1, Salaries eamed by golf course employees that have not yet been recorded or paid amount to
$9,600.
2. The Tampa University go team used Singapore Palms for a tournament played on 30 December
of the current year. A(31 December, the $1,800 owed by the tea for geen fees had net yet heen
recorded or billed.
anne RE in Shere176
Preparing andl Analyzing the
Effects of Acjusting Entries
101, 2, ta, L08,
105, L06, to
‘Chapter 4 The Accounting Cyels: Ascrusie and Deforals
‘Membership dues earned in December, far collections received in January, amount to
$106,000.
4. Depreciation of the country club's golf carts is based on an estimated life of 15 years. The
‘carts had originally been purchased for $180,000. The straight-line method is used!
(Note: The clubhouse building was constructed in 1925 and is fully depreciated.)
8. A 12-month bank loan in the amount of $45,000 had been obtained by the country club on
1 November. Interest is computed at an annual rate of 8 percent. The entire $45,000, plus all
‘of the intorest accrued over the 12-month life ofthe loan, is due in full on 31 October of the
upcoming year, The necessary adjusting entry was made on 30 November o record the first
rmoath of accrued interest expense. However, no adjustment has been made to record interest
‘expense accrued in December.
6 Acone-year property insurance policy had been purchased on | Marc, The entre premium of
$7,800 was intially recorded as Unexpired Insurance.
7. In December, Singapore Palms Country Club entered into an agreement to host the annual
tomament of the Singapore Seniors Golf Association. The country club expects fo generate
green fees of $4,500 from this event
8. Unrecorded Income Taxes Expense accrued in December amounts to $19,000. This amount
will aot be paid until 15 January
Instructions
‘a, For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
‘an explanation). If ne adjusting entry is requized, explain why.
Four types of adjusting entries are described at the beginning of the chapter. Using these
descriptions, identify the type of each adjusting entry prepared in parta above.
¢ Although Singapore Palms’s clubhouse building is fully depreciated, itis in excellent physical
condition. Explain how this ean be.
Problem 4.2A Enchanted Forest, a large campground in Malaysia, adjusts its accounts monthly
“Most guests of the campground pay at the time they check out, and the amounts collected are
credited to Camper Revenue. The following information is available as a source for preparing the
adjusting entries at 31 December:
1, Enchanted Forest invests some ofits excess cash in cetifcates of deposit (CDs) with its local
bank, Accrued interest revenue on its CDs at 31 December is $400. None ofthe interest has
yet been received. (Debit Interest Receivable.)
2. ‘Asix-month bank loan in the amount of $12,000 had been obtained an | September: Interest
{s to be computed at an anoual rate of 8.5 percent and is payable when the loan becomes due.
3. Depreciation on buildings owned by the campground is based on a 25-year life. The original
cost of the buildings was $600,000. The Accurnulated Depreciation: Buildings account has @
credit balance of $310,000 at 31 December, prior to the adjusting entry process. The stcaight-
line method of depreciation is used.
4, Management signed an agreement to let Boy Scout Troop 538, use the campground in June
of next year. The agreement specifies that the Boy Scouts will pay a daily rate of $15 per
campsite, with a clause providing @ minimum tol charge of $1,475.
5. Salaries eared by campground employees that have not yet been paid amount to $1,250.
6 As-at 31 December, Enchanted Forest has earned $2,400 of revenue from current campers
who will not be billed until they check out. (Debit Camper Revenue Receivable.)
7. Several lakefront campsites are currently being leased on a long-term basis by 2 group of
senior citizens. Six months’ reat of $5,400 was collected in advance and credited 10 Unearned
‘Camper Revenue on 1 October of the current year.
8 A bust camry campers to and from town and the airport had been rented the first week of
December ata daily rate of $40, At31 December, no rental payment has been mace, although
the campground has had use ofthe bus for 25 days.
9. Unrecorded Income Taxes Expense accrued in December amounts to $8,400. This amount
‘will not be paid unt 15 Januarychapter 4 The Accounting Oye: Accruals and Deferals
Instructions
a, For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation}.
b, Referto the balances shown in the unadjusted trial balance at 31 August. How many months of
expense are included in each ofthe following account balances? (Remember, Campus Theater
adjusts its accounts montily. Thus, the accounts shown were last adjusted on 31 July 2008.)
1. Utilities Expense
2, Depreciation Expense
3. Accumulated Depreciation: Building
‘Assume the theater has been operating profitably all year. Although the 31 August trial
balance shows substantial income taxes expense, income taxes payable is a much smaller
‘amount. Ths relationship is quite normal throughout much ofthe year. Explain,
Problem 4.5A ‘Terrific Temps fills temporary employment positions for local businesses.
Some businesses pay in advance for services; others ae billed after services have been performed.
‘Advanced payments are credited to an account entitled Unearned Fees. Adjusting entries are
performed on a monthly basis, An unsdjusted tial balance dated 31 December 2013, follows.
(Bear in mind that adjusting entries have already been made for the first 11 months of 2013, but
znot for December)
Peace
Pt
Eero
ash 8 27.020
‘Accounts receivable 50,200
Uneapited insurance... 900
Prepaid rent 3,000
Office suppios 800
Equipment... 60,000
‘Accumulated depreciation: equipment § 29.500
Accounts payable 4.180
Notes peyatie 12,000
Interest payable 380
Uneames fees 6,000
Income taxes payable. 4,000
Uneaened revenue 20,000
Retained earnings 49,000
Share capt 2,000
Divisende 3.000
Foes earned 75,000
Teavel expense 5,000
Ineurance expense 2.980
Ront expense 9.900
Office suppies expense : "760
Unites expense 4800
Depreciation expense: equipment 5.500
Selaries expense 30,000
Interest expense ae ‘320
Income taxes expense 12.000
3a25.000 SEBE.0H
179
Preparing Adjusting Entries
and Determining Recount
Balances:
wr 2,188, L04,
85, Log 167, Lo180
Preparing Adjusting Entries and
Determining Account Balances
at, Loz, 109, 104,
ns, 106, 107, 108,
Chapter4 The Accounting Cycle: Accruals and Detetals
Other Data
1. Accrued but unrecorded fees earned as at 31 Devember 2013, amount 10 $1,500.
2 Records show that $2.500 of cash receipts originally recorded as unearned fees had beea
ceamed as at 31 December,
3. The company purchased a six-month insurance policy on I September 2013, for $1,800.
4 On| December 2013, the company paid its rent through 28 February 2014.
5. Office supplies on hand at 31 December amount to $400.
6. All equipment was purchased when the business first formed. The estimated life of the
equipment at that time was 10 years (or 120 months).
Gn 1 August 2013, the company borrowed $12,000 by signing a six-month, 8 percent note
payable, The entire note, plus six months" accrued interest, is due on 1 Febuary 2014,
8. ‘Accrued hut unrecorded salaries at 31 December amount 10 $2,700.
9, Estimated income taxes expense for the entire year totals $15,000. Taxes are de in the first
‘quarter of 2014,
Instructions
fa. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation),
b. Determine that amount at which each of the following accours will be reported in the
company’s 2013 income statement
A. Fees Eamed
“Travel Expense
3. Insurance Expense
4. Rent Expense
5. Office Supplies Expense
6
1
8.
Utlides Expense
Depreciation Expense: Equipment
Interest Expense
Salaries Expense
10, Income Taxes Expense
The unadjosted trial balance reposts dividends of $3,000, As at $1 December 2013, have these
vidends been paid? Explain
Problem 4.6A Alpine Expeditions operates a mountain climbing school in Malaysia, Some