CHAPTER 4

ACCRUAL ACCOUNTING CONCEPTS

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting P = Professional and Ethical Behaviour

AACSB: AN = Analytic E = Ethics

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting P = Professional and Ethical Behaviour

AACSB: AN = Analytic E = Ethics

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting P = Professional and Ethical Behaviour

AACSB: AN = Analytic E = Ethics

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Type: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA

CHAPTER LEARNING OBJECTIVES

1. Explain the accrual basis of accounting and the reasons for adjusting entries. Under the accrual basis of accounting, revenues are recognized (recorded) when they are earned, regardless of whether cash has been received. Expenses are recognized (recorded) when they are incurred, regardless of whether cash has been paid. This differs from the cash basis of accounting in which companies record events only in the periods in which the company receives (revenues) or pays cash (expenses).

Revenues are recognized when there is an increase in economic resources, such as an increase in assets or a decrease in liabilities in the course of the company’s ordinary activities. This happens when a company satisfies its performance obligations by providing services to customers. Under IFRS, a five-step model is used for determining when performance obligations have been satisfied and revenues can be recognized. The steps are: (1) Identify the contract with the client or customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the company satisfies the performance obligation. Under ASPE, revenues are recognized when the services have been provided to customers, the amount is measurable, and collection is reasonably assured.

Expenses are recognized when there is a decrease in economic resources, which occurs when assets are consumed or liabilities are incurred in the company’s ordinary revenue-generating activities. Expense recognition is linked to revenue recognition in that expenses are normally recognized in the same reporting period as the revenues they helped to generate.

Companies make adjusting entries at the end of each accounting period to ensure that asset and liability accounts are reported at their correct amounts, revenues have been recorded when they are earned, and expenses have been recorded when they have been incurred. There are two general types of adjusting entries: (1) prepayments, which recognize the portion of an asset’s cost that needs to be expensed or the portion of deferred revenue that has been earned and needs to be recognized as revenue on the statement of income, and (2) accruals, which record expenses incurred (but unpaid and not recorded earlier) or revenues earned (but not yet received as cash or recorded earlier) in the statement of income and the related payable or receivable in the statement of financial position.

2. Prepare adjusting entries for prepayments. Prepayments involve accounts that have previously been recorded as assets (such as when cash was paid in advance for prepaid expenses) or liabilities (such as when cash was received in advance for deferred revenues). The adjusting entry for prepaid expenses results in an increase (debit) to an expense account and a decrease (credit) to an asset account or an increase (credit) to a contra asset account. The adjusting entry for deferred revenues results in a decrease (debit) to a liability (deferred revenue) account and an increase (credit) to a revenue account.

3. Prepare adjusting entries for accruals. Adjusting entries for accruals are needed to record the expenses and revenues that apply to the current accounting period and that have not already been recognized through transaction journal entries. Accruals involve accounts for which there has been no cash received or paid as yet. The adjusting entry for accrued expenses results in an increase (debit) to an expense account and an increase (credit) to a liability (payable) account. The adjusting entry for accrued revenues results in an increase (debit) to an asset (receivable) account and an increase (credit) to a revenue account.

4. Prepare an adjusted trial balance and financial statements. An adjusted trial balance is a trial balance that shows the balances of all accounts at the end of an accounting period, including those that have been adjusted. It demonstrates that total debits equal total credits. An adjusted trial balance facilitates the preparation of the financial statements.

5. Prepare closing entries and a post-closing trial balance. One purpose of closing entries is to update the Retained Earnings account to its end-of-period balance. A second purpose is to reset the balance in all temporary accounts (revenue, expense, and dividends declared accounts) to zero for the beginning of the new accounting period. To accomplish this, entries are made to close each individual revenue and expense account to a specific-purpose temporary account called Income Summary, which summarizes net income (or net loss). The Income Summary account is then closed to the Retained Earnings account. The Dividends Declared account is closed directly to Retained Earnings (and not via the Income Summary account, because the declaration of dividends does not affect net income).

A post-closing trial balance lists only permanent accounts (statement of financial position accounts) because these account balances are carried forward to the next accounting period. The purpose of the post-closing trial balance, as with other trial balances, is to prove the equality of total debits and total credits.TRUE-FALSE STATEMENTS

1. Accounting divides the economic life of a business entity into time periods.

2. An accounting transaction never affects more than one accounting time period.

3. Revenue results when there is an increase in a liability or a decrease in an asset.

4. Revenue must be recognized when (or as) the company satisfies the performance obligation, regardless of whether or not the transaction price has been determined.

5. Revenue recognition follows expense recognition.

6. Expense recognition is tied to changes in assets and liabilities.

7. Expense recognition always coincides with revenue recognition.

8. Under the accrual basis of accounting, expenses are only recognized when they are paid.

9. Under the cash basis of accounting, revenue is only recognized when cash is received.

10. Under the cash basis of accounting, expense recognition generally does not follow revenue recognition.

11. Since some costs are not recorded, adjusting entries are necessary.

12. For a private company reporting under ASPE, adjusting entries must be prepared at least quarterly.

13. Prepaid expenses are costs that are paid for before they are used.

14. Expenses paid before being used or consumed are initially recorded as liabilities.

15. When money is received from a customer prior to the delivery of goods or the performance of a service, it is recorded as revenue.

16. The purchase of certain types of long-lived (non-current) assets is essentially a long-term prepayment for services.

17. The cost of any depreciable asset less accumulated depreciation reflects the carrying amount of the asset.

18. The carrying amount of a depreciable asset is always equal to its actual value because depreciation is a valuation technique.

19. Accumulated Depreciation is a liability account and its normal account balance is a credit.

20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

21. A contra asset account is subtracted from a related asset account in the statement of financial position and has a normal credit balance.

22. Adjusting entries never affect cash.

23. If a three-month, 6% bank loan for $5,000 is signed on October 1, the interest expense for the month of October is $25.

Ex. 136

During the year ended December 31, 2022, Blueberry Inc. received $250,000 cash for sales from customers. The company began the year with a balance in Accounts Receivable of $37,000, all of which was received in 2022. At the end of the year, customers owed Amber Inc. $52,000 for services provided in 2022.

Instructions

Calculate the revenue Amber should report in 2022 using:

(a) the cash basis of accounting.

(b) the accrual basis of accounting.

Ex. 137.

On December 31, 2020, customers owed Colleen Ltd. $150,000 for services performed in 2020. During 2021, Colleen collected $625,000 cash from customers, which included payment in full for the outstanding balance owing for the services provided in 2020. At December 31, 2021, customers owed $97,500 for services provided in 2021.

Instructions

Calculate the revenue Colleen should report in 2021 using:

(a) the cash basis of accounting.

(b) the accrual basis of accounting.

Ex. 138

Paisley Corporation had the following balances in 2023 and 2022:

2023 2022

Accounts receivable $10,800 $8,200

Prepaid rent 4,000 3,600

Supplies 900 400

Accounts payable 3,350 4,225

Deferred revenue 2,000 1,800

In addition, the company collected $62,500 cash from customers and paid $44,800 cash for operating costs during 2023.

Instructions

1. Determine Paisley Corporation’s net income on an accrual basis for 2023.
2. Determine Paisley Corporation’s net income on a cash basis for 2023.

Ex. 139

The statement of financial position for Tao Ltd. include the following as at December 31:

2023 2022

Interest receivable $2,200 $ -0-

Supplies 4,000 2,500

Salaries payable 2,600 2,800

Unearned revenue -0- 4,000

The statement of income for the year ended December 31, 2023 shows the following:

Interest revenue $15,400

Service revenue 72,700

Supplies expense 7,700

Salaries expense 37,000

Instructions

Calculate the following for 2023:

(a) Cash received for interest.

(b) Cash paid for supplies.

(c) Cash paid for salaries.

(d) Cash received for revenue.

Ex. 140

The 2023 statement of income for Paulette Corporation showed rent expense of $9,900 and salary expense of $6,350. The related statement of financial position account balances at each year end were as follows:

2023 2022

Prepaid rent $650 $450

Salaries payable 325 475

Instructions

Calculate the following for 2023:

(a) Cash paid for rent.

(b) Cash paid for salaries.

Ex. 141

Ezra Inc. prepared the following condensed statement of income using the cash basis of accounting:

EZRA INC.

Statement of Income, Cash Basis

Year Ended December 31, 2022

Service revenue $820,000

Expenses 640,000

Net income $180,000

Additional data:

1. Depreciation on a company automobile for the year amounted to $9,000. This amount is not included in the expenses above.

2. On January 1, 2022, paid for a two-year insurance policy on the automobile amounting to $1,800. This amount is included in the expenses above.

3. Service revenue does not include $50,000 of services provided on account in 2022 for which payment will be received in 2023. It does, however, include $20,000 collected in 2022 for services performed in 2021.

4. Expenses do not include $50,000 of expenses that were incurred in 2022 but won’t be paid for until 2023.

Instructions

(a) Restate the above statement of income on the accrual basis in conformity with generally accepted accounting principles. Show calculations and explain each change.

(b) Explain which basis (cash or accrual) provides a better measure of net income.

Ex. 142.

Are all costs expenses? Explain.

Ex. 143

The trial balance of Chelsea Corp. at October 31, 2022, showed an insurance expense account balance of $5,475 reflecting premium costs related to the following policies:

Policy 1, remaining cost of $750, 1-yr. term, effective May 1, 2021;
Policy 2, original cost of $3,600, 2-yr. term, effective Aug. 1, 2022;
Policy 3, original cost of $3,000, 1-yr term, effective Dec. 1, 2021

Policy 4, original cost of $2,100, 1-yr. term, effective Oct. 1, 2021.

Instructions

1. Evaluate and comment on each policy.
2. Determine the correct insurance expense account balance at October 31, 2022. If necessary, record an adjusting entry.

Ex. 144

Determine the missing information in the following table for each respective company:

Pillar Corp. Jar. Corp. Tin Corp.

Supplies on hand, October 31, 2022 $250 $480 $700

Supplies purchased during 2022 3,500 2,850 (c)

Supplies on hand, October 31, 2023 (a) 620 300

Supplies used during the year $3,250 (b) 2,000

Ex. 145

The Blue Canaries, a semi-professional football team, prepares financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions:

1. Paid $540,000 on March 15 to Burger Queen Corp. as advance rent for use of Burger Stadium for the six-month period April 1 through September 30.

2. Collected $432,000 cash on March 20 during a sales blitz for season tickets for the team's 36 home games. This amount was credited to Unearned Revenue.

During the month of April, the Blue Canaries played eight home games and five road games.

Instructions

Prepare the journal entries for March and the adjusting entries required at April 30 for the transactions above.

Ex. 146

The King Street Zoo operates a drive-through tourist attraction in Toronto. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following:

Prepaid rent $12,000

Equipment 40,000

Accumulated depreciation—Equipment 6,000

Deferred revenue 500

Other data:

1. Four months rent had been prepaid on April 1.

2. The equipment is being depreciated at $7,200 per year.

3. The deferred revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty-five of the tickets were used by customers.

Instructions

(a) Calculate the following:
1. monthly rent expense
2. the age of the equipment in months
3. the number of tickets sold on April 1.

(b) Prepare the adjusting entries that were made by the King Street Zoo on April 30.

Ex. 147

Simons Equipment Ltd. purchased a delivery truck on June 1 for $42,000, paying $8,000 cash and signing a 6%, 2-month bank loan for the remaining balance. Interest is due at maturity. The estimated useful life of the truck is expected to be 5 years. Simons prepares monthly financial statements.

Instructions

(a) Prepare the journal entry to record the purchase of the delivery truck on June 1. Simons uses the Vehicles account to record purchase of all vehicles.

(b) Prepare any adjusting journal entries that should be made on June 30.

(c) Show how the delivery truck will be reflected on Simons Equipment’s statement of financial position at June 30.

Ex. 148

Presented below is the unadjusted trial balance and adjusted trial balance for Caldion Corporation on December 31, 2022.

CALDION CORPORATION

Trial Balances

December 31, 2022

——————————————————————————————————————————

Unadjusted Adjusted

Dr. Cr. Dr. Cr.

Cash $ 2,200 $ 2,200

Accounts receivable 3,125 4,025

Prepaid rent 9,000 7,400

Supplies 1,800 800

Equipment 26,500 26,500

Accumulated depreciation—Vehicles $ 3,300 4,950

Accounts payable 1,900 2,300

Salaries payable 0 950

Deferred revenue 8,000 6,200

Income tax payable 0 3,295

Common shares 12,100 12,100

Retained earnings 3,450 3,450

Service revenue 43,175 45,875

Salaries expense 15,300 16,250

Depreciation expense 0 1,650

Rent expense 13,500 15,100

Supplies expense 500 1,500

Utilities expense 0 400

Income tax expense 0 0000 00 3,295 0000 00

Totals $71,925 $71,925 $79,120 $79,120

Instructions

Prepare in journal entry form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.

Ex. 149

Prepare the required year end adjusting entries for each independent case listed below. Assume no adjustments were made during the year.

Case 1

Ainsworth Corporation began the year with a $6,200 balance in the Supplies account. During the year, $2,750 worth of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $3,875 worth of supplies had been used during the year.

Case 2

Brownstone Co. Ltd. has a calendar fiscal year. On Oct 1, the company purchased equipment for $45,000. The estimated useful life of the equipment is 9 years.

Case 3

Michaela Management Ltd. is in the business of renting out several apartment buildings and prepares monthly financial statements. It has been determined that two tenants in $950 per month apartments and one tenant in the $1,400 per month apartment had not paid their December rent as of December 31.

Ex. 150

For each of the following oversights, state whether total assets will be understated (U), overstated (O), or not affected (NA).

_____ 1. Failure to record revenue earned but not yet received.

_____ 2. Failure to record expired prepaid rent.

_____ 3. Failure to record accrued interest on the bank savings account.

_____ 4. Failure to record depreciation.

_____ 5. Failure to record accrued salaries.

_____ 6. Failure to recognize the earned portion of deferred revenue.

Ex. 151

Before month-end adjustments are made, the February 28 trial balance of Kicker Enterprises Ltd. shows revenue of $15,000 and expenses of $8,300, excluding income tax. Adjustments are necessary for the following items:

1. Depreciation for February is $1,800.

2. Revenue earned but not yet billed is $3,200.

3. Accrued interest expense is $1,000.

4. Revenue collected in advance that is now earned is $3,700.

5. Portion of prepaid insurance expired during February is $600.

6. Assume a 50% income tax rate, calculated on income before income tax.

Instructions

Calculate the correct net income to report on Kicker Enterprises Ltd.’s statement of income for February.

Ex. 152

On December 31, 2022, Spear Limited prepared an statement of income and a statement of financial position but failed to take into account four adjusting entries. The incorrect statement of income showed net income of $40,000. The statement of financial position showed total assets of $120,000; total liabilities of $50,000; and shareholders’ equity of $70,000.

The data for the four adjusting entries were:

1. Depreciation on equipment of $5,000 was not recorded.

2. Salaries amounting to $8,000 for the last two days in December were not paid and not recorded. The next payroll will be in January 2023.

3. Rent of $12,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid.

4. Income tax expense was estimated to be $20,000 for the year.

Instructions

Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses):

Item Net income Total Assets Total Liabilities Shareholders’ Equity

Incorrect balances $40,000 $120,000 $50,000 $70,000

Effects of:

Depreciation

Salaries

Rent

Income tax

Correct balances

Ex. 153

Sheik Corporation compiles the following adjustment data at December 31:

1. Revenue of $1,000 collected in advance has been earned.

2. Salaries of $500 are unpaid.

3. Prepaid rent of $650 has expired.

4. Supplies of $550 have been used.

5. Revenue earned but unbilled totals $850.

6. Utility expenses of $200 are unpaid.

7. Interest of $250 has accrued on a bank loan payable.

Instructions

(a) For each of the above items indicate:

1. The type of adjustment (prepaid expense, deferred revenue, accrued revenue, or accrued expense).

2. The account relationship (asset/liability, liability/revenue, etc.).

3. The status of account balances before adjustment (understatement or overstatement).

4. The adjusting entry.

(b) Assume net income before the adjustments listed above (and income tax) was $16,500. Calculate the correct income before income tax.

Codes: A = Asset R = Revenue

L = Liability O = Overstatement

E = Expense U = Understatement

Prepare your answer in the tabular form presented below.

Account Balances

Before Adjustment Income Effect

Type of Account (Understatement Increase

Adjustment Relationship or Overstatement) Adjusting Entry (Decrease)

Ex. 154

Rodriguez Ltd.’s trial balance includes the following statement of financial position accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, deferred revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry.

(a) (b)

Statement of Financial Position Acct Type of Adjusting Entry Related Account

1. Supplies

2. Accounts receivable

3. Prepaid insurance

4. Accumulated depreciation

5. Interest payable

6. Salaries payable

1. Deferred revenue

8. Income tax payable

Ex. 155

State whether each situation is a prepaid expense (PE), deferred revenue (UR), accrued revenue (AR) or an accrued expense (AE).

1. Unrecorded interest on savings account is $530.

2. Property taxes that have been incurred but that have not yet been paid or recorded are $300.

3. Legal fees of $1,000 were collected in advance. By year end, 60% are still unearned.

4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40% is still unexpired.

5. Unpaid salaries earned by year end but not yet paid or recorded are $475.

Ex. 156

Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided.

TERMS:

A. Prepaid Expenses

B. Deferred Revenues

C. Accrued Revenues

D. Accrued Expenses

STATEMENTS:

1. A revenue not yet earned; collected in advance.

2. Office supplies on hand that will be used in the next period.

3. Interest revenue collected; not yet earned.

4. Rent not yet collected, but already earned.

5. An expense incurred; not yet paid or recorded.

6. Revenue earned; not yet collected or recorded.

7. An expense not yet incurred; paid in advance.

8. Interest expense incurred; not yet paid.

Ex. 157

Indicate (with "Yes" or "No") whether or not each of the following accounts could be misstated if adjusting entries are not made at December 31, 2022.

_____ 1. Accounts Receivable

_____ 2. Prepaid Expenses

_____ 3. Equipment

_____ 4. Deferred Revenue

_____ 5. Income Tax Payable

_____ 6. Common Shares

_____ 7. Retained Earnings, January 1, 2022

_____ 8. Service Revenue

_____ 9. Utilities Expense

Ex. 158

Presented below is the comparative statement of income, prepared on a cash basis, for Mingwei Ltd. for the past two years. The manager is puzzled by the fact that net income was lower in 2023 than 2022.

MINGWEI LTD.

Statement of Income, Cash Basis

Years Ended December 31

——————————————————————————————————————————

2023 2022

Service revenue $350,000 $365,000

Expenses

Salaries expense 200,000 190,000

Office expense 54,000 55,000

Repairs and maintenance expense 20,000 15,000

Interest expense 15,000 2,000

Total expenses 289,000 262,000

Income before income tax 61,000 103,000

Income tax expense 24,400 41,200

Net income $ 36,600 $ 61,800

In talking with the manager, you gather the following information, which was not reflected in the above statements:

1. The company borrowed $200,000 on June 1, 2022 and repaid the amount with interest on June 1, 2023. The interest rate was 6%. The journal entry to record the repayment on June 1, 2023 was:

Bank Loan Payable 200,000
Interest Expense 12,000
Cash 212,000

2. A customer made a deposit of $15,000 on December 1, 2022 for services to be performed in January 2023. The journal entry made on December 1, 2022 was:

Cash 15,000
Service Revenue 15,000

3. A bill for $4,000 maintenance work done in December 2022 was paid on January 15, 2023. The journal entry to record the payment in 2023 was:

Repairs and Maintenance Expense 4,000
Cash 4,000

Instructions

Assuming that no adjusting entries were made for the above transactions, prepare a revised comparative statement of income for 2022 and 2023. (Income tax is calculated at 40% of income before income tax.)

Ex. 159

Prepare adjusting entries for the following transactions. Omit explanations.

1. Depreciation on equipment is $1,850.

2. Interest incurred and owed on a loan but not paid or recorded is $680.

3. There was a beginning balance of supplies of $450 and the company purchased $760 of office supplies during the period. At the end of the year $240 of supplies were on hand.

4. Prepaid rent had a $5,300 normal balance prior to adjustment. By year end $1,500 had expired.

5. Accrued salaries at year end were $1,900.

Ex. 160

Prepare adjusting entries for the following transactions.

1. Interest accrued on notes receivable is $320.

2. Property taxes owing but not paid or recorded amount to $800.

3. Service revenue of $3,600 was collected in advance. By year end, $1,200 was earned.

4. Prepaid insurance had a $600 debit balance prior to adjustment. By year end, 30% was still unexpired.

5. Salaries owing at year end but not yet paid or recorded amounted to $1,025.

Ex. 161

Prepare adjusting entries for the following transactions. Omit explanations.

1. Accrued interest on notes receivable is $95.

2. Deferred revenues earned totals $2,000.

3. Four months’ rent, totalling $60,000, was paid in advance one month prior to the end of the year.

4. Services totalling $2,100 had been performed but not yet billed at the end of the year.

5. Equipment purchased two years ago for $18,000 had an estimated useful life of 4 years.

6. The balance in the Supplies account was $690 at the beginning of the year. By year end, only $100 in supplies remained.

7. Salaries owed to employees at the end of the year total $1,000.

Ex. 162

One part of an adjusting entry is given below. Indicate the account title for the other part of the entry.

1. Deferred Revenue is debited.

2. Prepaid Rent is credited.

3. Accounts Receivable is debited.

4. Depreciation Expense is debited.

5. Utilities Expense is debited.

6. Interest Payable is credited.

7. Service Revenue is credited (give two possible debit accounts).

8. Interest Receivable is debited.

Ex. 163

The following ledger accounts are used by the Clover Race Track:

Accounts Receivable

Prepaid Printing

Prepaid Rent

Deferred Revenue

Printing Expense

Rent Expense

Admissions Revenue

Concessions Revenue

Instructions

For each of the following transactions, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on September 30, the end of the fiscal year.

(a) On September 1, paid rent on the track facility for three months, $240,000.

(b) On September 1, sold season tickets totalling $900,000 for admission to the racetrack. The racing season is year-round with 25 racing days each month.

(c) On September 1, borrowed $150,000 from First Provincial Bank by issuing a 12% bank loan payable due in three months.

(d) On September 5, schedules for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $3,000.

1. The accountant for the company that operates the concessions (food and drink stands) reported that gross receipts for September were $140,000. Ten percent is due to Clover Race Track and will be paid by October 10.

Ex. 164

Plover Corporation prepares monthly financial statements. Below are listed some selected accounts and their balances on the September 30 trial balance before any adjustments have been made for the month of September.

PLOVER CORPORATION

Trial Balance

September 30, 2022

——————————————————————————————————————————

Debit Credit

Cash $12,300

Supplies 2,700

Prepaid insurance 5,775

Equipment 16,200

Accumulated depreciation—Equipment $ 540

Accounts payable 1,100

Deferred revenue 1,200

Common shares 10,000

Retained earnings 18,925

Rent revenue 6,360

Salaries expense 1,150 _______

Total $38,125 $38,125

An analysis of the account balances provided the following additional information:

1. A physical count of supplies revealed $1,200 on hand on September 30.

2. A two-year insurance policy was purchased on June 1 for $6,600.

3. The equipment was purchased on July 1^st for $16,200 and has an estimated useful life of five years.

1. Rent received in advance that remains unearned at September 30 is $500.
2. Income tax of $800 is owed.

Instructions

(a) Using the above additional information, prepare the adjusting entries that should be made by Plover on September 30 (adjusting entries are made on a monthly basis).

(b) Prepare an adjusted trial balance at September 30.

Ex. 165

Xiang Insurance Agency Ltd. prepares monthly financial statements. Presented below is a statement of income prepared for the month of July 2022.

XIANG INSURANCE AGENCY LTD.

Statement of Income

Month Ended July 31, 2022

——————————————————————————————————————————

Revenues

Commission revenue $60,000

Expenses

Salaries expense $5,000

Advertising expense 800

Rent expense 4,200

Depreciation expense 2,800

Total expenses 12,800

Income before income tax 47,200

Income tax expense 0

Net income $47,200

When the statement of income was prepared, the company accountant forgot to take into consideration the following information:

1. A utility bill for $800 was received on the last day of the month for electric and gas service for the month of July.

2. The company sold a life insurance policy on July 20 to a client for a premium of $28,000. The agency billed the client for the policy and is entitled to a commission of 15%.

3. Supplies on hand at the beginning of the month were $700. The agency purchased additional supplies during the month for $2,500 in cash and $2,200 of supplies were on hand at July 31.

4. The agency purchased a used car at the beginning of July for $16,800 cash. The estimated useful life of the car is 4 years.

1. The agency pays its employees each Friday. Weekly payroll is $7,200. July 31 falls on a Tuesday.
2. Estimated income tax expense owing was $10,000.

Instructions

Prepare a corrected statement of income.

Ex. 166

Presented below is the trial balance and adjusted trial balance for Sandhu Corporation on December 31, 2022.

SANDHU CORPORATION

Trial Balances

December 31, 2022

——————————————————————————————————————————

Before Adjustments After Adjustments

Dr. Cr. Dr. Cr.

Cash $ 2,000 $ 2,000

Accounts receivable 2,800 3,900

Prepaid rent 2,100 1,500

Supplies 1,200 800

Vehicles 18,000 18,000

Accumulated depreciation—Vehicles $ 1,300 $ 1,500

Accounts payable 2,700 3,000

Income tax payable 0 2,000

Bank loan payable 10,000 10,000

Interest payable 120

Salaries payable 600

Deferred revenue 4,460 4,360

Common shares 7,200 7,200

Dividends declared 3,200 3,200

Service revenue 8,000 9,200

Salaries expense 2,060 2,660

Utilities expense 1,800 2,100

Rent expense 500 1,100

Supplies expense 400

Depreciation expense 200

Interest expense 120

Income tax expense 2,000

Totals $33,660 $33,660 $37,980 $37,980

Instructions

Prepare in journal entry form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.

Ex. 167

Deng Corporation’s fiscal year ends on June 30. Deng also has a policy of paying their weekly payroll every Friday. Payroll records indicate the following salary costs were incurred late in June and early July:

Date Amount

Monday June 28 $3,000

Tuesday June 29 3,800

Wednesday June 30 2,400

Thursday July 1 3,000

Friday July 2 2,400

Instructions

(a) Prepare any necessary adjusting journal entries that should be made at year end on June 30.

(b) Prepare the journal entry to record the payment of the payroll on July 2.

Ex. 168

Each Friday, Braleigh Ltd. pays its office personnel weekly salaries of $42,500 for a five-day work week.

Instructions

(a) Prepare the necessary adjusting entry at March 31, assuming March 31 falls on a Thursday.

(b) Prepare the journal entry for the next payday, which is Friday, April 1.

Ex. 169

Explain why adjusting entries related to prepayments and accruals never affect the cash account.

Ex. 170

What information is provided from an adjusted trial balance and what purpose does it serve?

Ex. 171

The adjusted trial balance of Norfaxx Services Inc. appears below. Using the information from the adjusted trial balance, prepare, for the month ending December 31, 2022:

(a) a statement of income;

(b) a statement of changes in equity; and

(c) a classified statement of financial position.

NORFAXX SERVICES INC.

Adjusted Trial Balance

December 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $ 6,000

Accounts receivable 3,000

Supplies 1,500

Equipment 21,000

Accumulated depreciation—Equipment $ 4,800

Accounts payable 3,850

Deferred revenue 8,000

Common shares 12,100

Retained earnings 3,300

Dividends declared 1,600

Service revenue 11,000

Salaries expense 4,000

Supplies expense 500

Depreciation expense 3,000

Rent expense 2,000

Income tax expense 450

$43,050 $43,050

Ex. 172

Jacquard Industries’ adjusted trial balance for the year ending December 31, 2022 appears below.

JACQUARD INDUSTRIES

Adjusted Trial Balance

December 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $ 3,700

Accounts receivable 9,100

Prepaid rent 400

Supplies 600

Equipment 34,550

Accumulated depreciation—Equipment $ 4,600

Accounts payable 3,400

Unearned revenue 2,250

Interest payable 435

Bank loan payable (due July 1, 2020) 21,750

Common shares 10,000

Retained earnings 12,500

Dividends declared 1,000

Service revenue 60,000

Salaries expense 28,850

Supplies expense 16,650

Depreciation expense 2,400

Rent expense 17,250

Interest expense 435 _______

$114,935 $114,935

Instructions

Using the information from the adjusted trial balance, prepare the following:

(a) an statement of income;

(b) a statement of changes in equity;

(c) a classified statement of financial position;

1. prepare the closing journal entries
2. prepare a post-closing trial balance

Ex. 173

Are dividends declared an expense and closed to the income summary account?

Ex. 174

The following is a list of accounts and their balances (all normal balances) as of July 31, 2022 for Ling Chan Inc. All adjusting entries have been prepared and posted. Note that the list is in random order.

Cash $35,300

Utilities expense 800

Accounts receivable 16,000

Prepaid insurance 5,000

Service revenue 24,600

Supplies 1,500

Rent expense 3,600

Accumulated depreciation—Equipment 3,200

Accounts payable 11,000

Deferred revenue 9,800

Common shares 27,000

Retained earnings 17,000

Dividends declared 1,000

Equipment 20,000

Salaries expense 8,200

Depreciation expense 1,200

Instructions

Prepare the closing journal entries required.

Ex. 175

The adjusted trial balance for Poplar Ltd. at December 31, 2022, is shown below.

POPLAR LTD.

Adjusted Trial Balance

December 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $ 30,500

Accounts receivable 23,200

Supplies 3,950

Prepaid insurance 2,600

Equipment 48,500

Accumulated depreciation—Equipment $ 18,800

Accounts payable 3,500

Deferred revenue 8,700

Salaries payable 1,650

Income tax payable 11,430

Common shares 24,000

Retained earnings 20,600

Dividends declared 6,600

Service revenue 76,500

Salaries expense 28,850

Supplies expense 2,950

Insurance expense 800

Depreciation expense 2,400

Utilities expense 3,400

Income tax expense 11,430 ______

Total $165,180 $165,180

Instructions

Prepare the closing journal entries required.

Ex. 176

The adjusted trial balance for Chung, Ltd. at December 31, 2022, is shown below:

CHUNG LTD.

Adjusted Trial Balance

December 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $ 8,500

Accounts receivable 3,200

Supplies 950

Prepaid insurance 600

Equipment 73,500

Accumulated depreciation—Equipment $ 18,500

Accounts payable 4,500

Salaries payable 1,650

Income tax payable 630

Common shares 24,000

Retained earnings 36,000

Service revenue 33,300

Salaries expense 15,850

Supplies expense 9,850

Insurance expense 700

Depreciation expense 1,900

Utilities expense 2,900

Income tax expense 630 _______

Total $118,580 $118,580

Instructions

Prepare the closing journal entries required.