Section 8.

1 Review
Questions (Page 275)

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Completing the Accounting Cycle

SECTION 8.1 REVIEW QUESTIONS (page 275)

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1. Year-end financial statements are superior to interim financial statements because all
accounts are brought up to date, all late transactions are taken into account, all calculations
have been made correctly, and all accounting principles and standards have been followed.

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2. The aim of accounting principles and standards is to produce financial statements that are
theoretically and mathematically accurate.

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3. According to the International Financial Reporting Standards, a financial statement must
be relevant, reliable, and comparable.
4. Accrual accounting is the practice of recording revenues and expenses when they happen
regardless of whether cash is received or paid.
5. Dividing financial reporting into equal periods of time allows businesses to compare current
financial statements to previous ones.
6. An adjusting entry is a journal entry that assigns an amount of revenue or expense to the
appropriate accounting period and brings a related balance sheet account to its true value.
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7. Adjusting entries are necessary because they bring the accounts to their true value. This
means the financial statements for that period will be accurate and up-to-date.
8. Accounts are allowed to be inexact between statement dates because it too time consuming
and expensive to keep the accounts exact all the time.
9. From the income statement perspective, adjusting entries allow the correct expenses to be
subtracted from revenue, which produces a correct net income.
10. From the balance sheet perspective, the chief aim of adjusting entries is to accurately state
assets, liabilities, and equity.
11. Knowledge of the income statement and balance sheet perspectives is helpful when learning
about adjusting entries because every adjusting entry will affect at least one income
statement account and at least one balance sheet account.

12. To determine the balance of the Supplies account at the end of the fiscal period, take an
inventory of the supplies that remain in the business and then calculate their dollar value.

13. A prepaid expense is an expense paid for in advance that will be used up in the future.
14. The most common prepaid expense is insurance.

Copyright © 2013 Pearson Canada Inc. Chapter 8 Completing the Accounting Cycle 221

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SECTION 8.1 REVIEW QUESTIONS (continued)

15. Prepaid expenses are listed under current assets on the balance sheet.
16. Prepaid Insurance is debited when insurance is paid for in advance.
17. To determine the balance of Prepaid Insurance at the end of the fiscal period, calculate the
amount of insurance used during the fiscal period and subtract it from the total amount
paid. This will give you the amount of prepaid insurance that has yet to be used.

18. A late-arriving purchase invoice is an invoice that arrived in the current fiscal period but
belongs to the previous fiscal period.
19. The matching principle states that expenses are to be recognized in the same fiscal period as
the revenue that they helped to earn.
20. During the two to three weeks after year-end, the accounting department examines all
purchase invoices in order to find the ones that affect the fiscal period that just ended. These
are the late-arriving purchase invoices.

21. Accounts Payable is credited when preparing the adjusting entry for late-arriving invoices.

22. Unearned Revenue is a liability account. This classification makes sense because a customer
has a claim on the company’s funds until the company provides the promised services that
the customer bought.

SECTION 8.1 EXERCISES (page 276)

Exercise 1, p. 276

Supplies
Unadjusted Inventory Supplies
Balance Count Expense
1. $ 300 $100 $200
2. $1 400 $650 $750
3. $ 425 $175 $250
4. $ 950 $210 $740

222 Accounting 1 Teacher’s Key Copyright © 2013 Pearson Canada Inc.

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SECTION 8.1 EXERCISES (continued)

Exercise 1, p. 276 (continued)

Prepaid Insurance
Unadjusted Year-end Insurance
Balance Prepaid Calculation Expense
1. $ 875 $325 $ 550
2. $9 600 $800 $8800
3. $ 925 $610 $ 315
4. $ 785 $410 $ 375

Exercise 2, p. 277
A.

Balance Sheet Income Statement

Adjustments Adjustments

1. Supplies Supplies Expense

Dr Cr Dr Cr
Dec. 31, 20–3 5 050
3 600 3 600
1 450

2. Prepaid Insurance Insurance Expense

Dr Cr Dr Cr
Dec. 31, 20–3 2 100
1 050 1 050
1 050

3. Accounts Payable Advertising Expense

Dr Cr Dr Cr
10 000 10 000

4. Unearned Revenue Fees Earned

Dr Cr Dr Cr
Dec. 15, 20–3 20 000
14 000 14 000
6 000

Copyright © 2013 Pearson Canada Inc. Chapter 8 Completing the Accounting Cycle 223

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SECTION 8.1 EXERCISES (continued)

Exercise 2, p. 277 (continued)
B.

GENERAL JOURNAL PAGE

DATE PARTICULARS P.R. DEBIT CREDIT

20–3
Dec. 31 Supplies Expense 3 6 0 0 –
Supplies 3 6 0 0 –
To adjust for the inventory count of $1450

31 Insurance Expense 1 0 5 0 –
Prepaid Insurance 1 0 5 0 –
To adjust for six months of expired insurance

31 Advertising Expense 10 0 0 0 –
Accounts Payable 10 0 0 0 –
To record a 20–3 invoice that arrived in 20–4

31 Fees Earned 14 0 0 0 –
Unearned Revenue 14 0 0 0 –
To adjust for the cash advances received

C.

Adjustment Omission Assets Liabilities Net Income

1. Supplies overstated correctly stated overstated

2. Insurance overstated correctly stated overstated

3. Late Invoices correctly stated understated overstated

4. Unearned Revenue correctly stated understated overstated

224 Accounting 1 Teacher’s Key Copyright © 2013 Pearson Canada Inc.

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SECTION 8.1 EXERCISES (continued)

Exercise 3, p. 277

Inventory Item Quantity Unit Price Value

Rubber bands 3 boxes $ 1.50 per box $ 4 50
Envelopes #8 10 boxes 32.00 per box 320 00
Envelopes #10 4 1/2 boxes 36.00 per box 162 00
Envelopes, manila 2 boxes 28.00 per box 56 00
Printer cartridges 2 boxes 31.20 per box 62 40
Letterhead 10M sheets 22.50 per M 225 00
Copy paper 4M sheets 10.00 per M 40 00
File folders 2 boxes 6.00 per box 12 00
Paper clips 12 boxes 1.50 per box 18 00
Staples 15 boxes 4.10 per box 61 50
Pencils, regular 4 dozen 5.50 per dozen 22 00
Pencils, red 2 dozen 6.10 per dozen 12 20
Total $995 60

Supplies Supplies Expense

Dr Cr Dr Cr
2 018.00 1 022.40 1 022.40
995.60

Exercise 4, p. 278
A. $648 × 7 ÷ 12 = $378
The prepaid insurance is $378 as of December 31, 20–1.

B.
Year Insurance Expense Prepaid Insurance (Dec. 31)
20–1 $648 × 5 ÷ 12 = $270 $648 × 7 ÷ 12 = $378
20–2 $648 × 7 ÷ 12 = $378 0
Total $648 $378

Copyright © 2013 Pearson Canada Inc. Chapter 8 Completing the Accounting Cycle 225

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SECTION 8.1 EXERCISES (continued)

Exercise 5, p. 278
A.
Total number of months of Total number of months of Value of the prepaid
insurance used as of the insurance unused as of the insurance at the
designated year-end designated year-end designated year-end
a. 3 9 $360 × 9 ÷ 12 = $270
b. 15 9 $360 × 9 ÷ 24 = $135
c. 1 11 $456 × 11 ÷ 12 = $418
d. 10 2 $720 × 2 ÷ 12 = $120
e. 1 11 $900 × 11 ÷ 12 = $825
f. 18 6 $1080 × 6 ÷ 24 = $270

B.
GENERAL JOURNAL PAGE

DATE PARTICULARS P.R. DEBIT CREDIT

20–4
a. Dec. 31 Insurance Expense 9 0 –
Prepaid Insurance 9 0 –
(360 × 3 ÷ 12)

20–5
b. Dec. 31 Insurance Expense 2 2 5 –
Prepaid Insurance 2 2 5 –
(360 × 12 ÷ 24)

20–4
c. Oct. 31 Insurance Expense 3 8 –
Prepaid Insurance 3 8 –
(456 × 1 ÷ 12)

20–1
d. Dec. 31 Insurance Expense 6 0 0 –
Prepaid Insurance 6 0 0 –
(720 × 10 ÷ 12)

226 Accounting 1 Teacher’s Key Copyright © 2013 Pearson Canada Inc.

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SECTION 8.1 EXERCISES (continued)

Exercise 5, p. 278 (continued)
B.

GENERAL JOURNAL PAGE

DATE PARTICULARS P.R. DEBIT CREDIT

20–6
e. Jun. 30 Insurance Expense 7 5 –
Prepaid Insurance 7 5 –
(900 × 1 ÷ 12)

20–5
f. Dec. 31 Insurance Expense 8 1 0 –
Prepaid Insurance 8 1 0 –
(1080 × 12 ÷ 24)

Exercise 6, p. 278
A.
Prepaid Licenses Bank
Dr Cr Dr Cr
Jan. 1, 20–1 720 Jan. 1, 20–1 720

B. $720 × 3 ÷ 12 = $180
The prepaid license was $180 as of September 30, 20–1.
C. $720 × 9 ÷ 12 = $540
The truck license expense was $540 as of September 30, 20–1.
D.
Prepaid Licenses Truck License Expense
Dr Cr Dr Cr
720
Sep. 30, 20–1 540 Sep. 30, 20–1 540
Sep. 30, 20–1 180 Sep. 30, 20–1 540

Copyright © 2013 Pearson Canada Inc. Chapter 8 Completing the Accounting Cycle 227

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SECTION 8.1 EXERCISES (continued)

Exercise 6, p. 278 (continued)
E.
Prepaid Licenses Bank
Dr Cr Dr Cr
180
Jan. 1, 20–2 720 Jan. 1, 20–2 720
Jan. 1, 20–2 900

F. $900 × 3 ÷ 15 = $180
The prepaid license was $180 as of September 30, 20–2.
G.
Truck License
Prepaid Licenses Expense
Dr Cr Dr Cr
900
Sep. 30, 20–2 720 Sep. 30, 20–2 720
Sep. 30, 20–2 180 Sep. 30, 20–2 720

SECTION 8.2 REVIEW QUESTIONS (page 288)

Note: After the first printing of the student textbook, question 2 was deleted and the ques-
tions renumbered. If working with the first printing, answer questions 1, 3, 4, and 5 only.
All other printings will list the four correct questions only.

1. Adjusting entries are first recorded in the worksheet.

2. The process of extending the worksheet involves assigning each line on the worksheet to one
of the last four columns. Evaluate each item in the first four columns. Add or subtract the
adjustments to arrive at a single figure. Then transfer this figure to the appropriate Income
Statement or the Balance Sheet column.

3. Adjusting entries must be journalized and posted to update the ledger accounts.

4. The last day of the fiscal period is the date used for journalizing the adjusting entries.

228 Accounting 1 Teacher’s Key E Copyright © 2013 Pearson Canada Inc.

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SECTION 8.2 EXERCISES (page 288)

Exercise 1, p. 288
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Copyright © 2013 Pearson Canada Inc. Chapter 8 Completing the Accounting Cycle 229

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SECTION 8.2 EXERCISES (continued)

Exercise 1, p. 288 (continued)
B. P. TANG AND COMPANY
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 20–4

REVENUE
Fees Earned $69 9 2 5 –

OPERATING EXPENSES
Car Expense $ 4 0 7 5 –
General Expense 3 1 5 0 –
Insurance Expense 6 9 5 –
Miscellaneous Expense 7 0 0 –
Rent Expense 17 2 0 0 –
Supplies Expense 3 0 0 –
Wages Expense 28 0 0 0 –
Total Expenses 54 1 2 0 –
NET INCOME $15 8 0 5 –

230 Accounting 1 Teacher’s Key Copyright © 2013 Pearson Canada Inc.

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SECTION 8.2 EXERCISES (continued)

Exercise 1, p. 288 (continued)
B. (continued)
P. TANG AND COMPANY
BALANCE SHEET
DECEMBER 31, 20–4

ASSETS
Current Assets
Bank $ 1 9 0 0 –
Accounts Receivable 19 5 0 0 –
Supplies 7 0 0 –
Prepaid Insurance 9 7 3 –
Total Current Assets $23 0 7 3 –
Long-Term Assets
Equipment $22 0 0 0 –
Automobile 21 0 0 0 –
Total Long-Term Assets 43 0 0 0 –
Total Assets $66 0 7 3 –

LIABILITIES
Accounts Payable $ 4 8 3 5 –
Bank Loan 5 0 0 0 –
HST Payable $ 2 3 2 5 –
Less: HST Recoverable 9 5 0 –
HST Owed 1 3 7 5 –
Total Liabilities $11 2 1 0 –

OWNER’S EQUITY
P. Tang, Capital
Balance January 1 $54 0 5 8 –
Net Income $15 8 0 5 –
Less: Drawings (15 0 0 0 –)
Increase in Capital 8 0 5 –
Balance December 31 54 8 6 3 –
Total Liabilities and Equity $66 0 7 3 –

Copyright © 2013 Pearson Canada Inc. Chapter 8 Completing the Accounting Cycle 231

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SECTION 8.2 EXERCISES (continued)

Exercise 2, p. 289
A.

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– – – – – –
0 0 0 5 0 5 5
2 r 8 8 7 0 3 3
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D N – – – – – – – – – – –
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31 1 81 3 59 3 53 53
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232 Accounting 1 Teacher’s Key Copyright © 2013 Pearson Canada Inc.

Name Date

SECTION 8.2 EXERCISES (continued)

Exercise 2, p. 289 (continued)
B. MISSION MARKETING
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 20–3

REVENUE
Fees Earned $133 7 0 0 –

OPERATING EXPENSES
Car Expense $13 3 6 4 –
Miscellaneous Expense 1 6 1 3 –
Insurance Expense 5 7 4 –
Rent Expense 18 0 0 0 –
Utilities Expense 3 1 1 5 –
Supplies Expense 3 3 0 0 –
Wages Expense 95 2 3 9 –
Total Expenses 135 2 0 5 –
NET LOSS $ (1 5 0 5 –)

Copyright © 2013 Pearson Canada Inc. Chapter 8 Completing the Accounting Cycle 233