Ch3 Adjusting the Accounts Solution Complete Test Bank

CHAPTER 3

ADJUSTING THE ACCOUNTS

CHAPTER STUDY OBJECTIVES

1. Explain accrual basis accounting, and when to recognize revenues and expenses. In order to provide timely information, accountants divide the life of a business into specific time periods. Therefore, it is important to record transactions in the correct time period. Under accrual basis accounting, events that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash. The revenue recognition principle provides guidance about when to recognize revenues. In general, revenues are recorded when the goods are delivered or services are performed. Expenses are recorded in the same period as revenue is recognized, if there is a direct association between the revenues and expenses. If there is no association between revenues and expenses, expenses are recorded in the period they are incurred.

2. Describe adjusting entries and prepare adjusting entries for prepayments. Prepayments are either prepaid expenses or unearned revenues. Adjusting entries for prepayments record the portion of the prepayment that applies to the expense or revenue of the current accounting period. The adjusting entry for prepaid expenses debits (increases) an expense account and credits (decreases) an asset account. For a long-lived asset, the contra asset account Accumulated Depreciation is used instead of crediting the asset account directly. The adjusting entry for unearned revenues debits (decreases) a liability account and credits (increases) a revenue account.

3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues and expenses that apply to the current accounting period and that have not yet been recognized through daily journal entries. The adjusting entry for accrued revenue debits (increases) a receivable account and credits (increases) a revenue account. The adjusting entry for an accrued expense debits (increases) an expense account and credits (increases) a liability account.

4. Describe the nature and purpose of an adjusted trial balance, and prepare one. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. It proves that the total of the accounts with debit balances is still equal to the total of the accounts with credit balances after the adjustments have been posted. Financial statements are prepared from an adjusted trial balance in the following order: (1) income statement, (2) statement of owner’s equity, and (3) balance sheet.

EXERCISES

Exercise 1

On December 31, 2021, Eagle Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed profit of $40,000. The incorrect balance sheet showed total assets, $130,000; total liabilities, $60,000; and owner’s equity, $70,000.

The data for the three adjusting entries were:

1. Depreciation of $9,000 was not recorded on equipment.

2. Wages amounting to $10,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.

3. Rent of $7,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid.

Instructions

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

Item Profit Total Assets Total Liabilities Owner’s Equity

Incorrect balances $40,000 $130,000 $60,000 $70,000

Effects of:

Depreciation

Wages

Rent

Correct Balances

Exercise 2

The following situations are independent:

1. Lisa’s Drywall Installation completes a $4,000 contract, starting work on June 16, and completing the work on July 15. The home builder pays them $1,000 in advance on June 15, $2,600 on July 15, and the balance ($400) when the home is sold in September.

2. An interior designer signs a contract in December 2020 to provide design services to a home builder, related to decorating a new show home. The contract is valued at $25,000 and the designer receives a 10% down payment upon signing the contract. All design work is done during January 2021. On February 1, 2021, the show home opens to the public and the home builder pays the 90% balance remaining on the contract.

3. A lawyer has a meeting with a new client on April 15 and agrees to represent her in a legal case. The fee negotiated is to be based on the number of hours the lawyer spends on the case. At the end of the meeting, the client pays the lawyer $500 as a “retainer.” The case involves research and negotiations that take place in May. On June 2, the lawyer invoices the client for $3,200 and the client pays the balance due ($2,700) in two equal instalments on June 15 and July 15.

4. On January 1 an insurance company receives $4,200 for a one-year insurance policy that will expire on December 31.

Instructions

For each situation, state in which month(s) the revenue will be recognized and calculate how much is recognized in each month, and explain why.

Exercise 3

The balance sheets of Evergreen Company include the following:

Dec 31, 2021 Dec 31, 2020

Interest Receivable $6,300 $ -0-

Supplies 5,000 3,500

Wages Payable 3,600 3,800

Unearned Revenue -0- 4,000

The income statement for 2021 shows the following:

Interest Revenue $20,400

Service Revenue 41,700

Supplies Expense 8,700

Wages Expense 37,000

Instructions

Calculate the following for 2021:

a) Cash received for interest.

b) Cash paid for supplies.

c) Cash paid for wages.

d) Cash received for services.

Exercise 4

Below are two independent scenarios:

1. KES Inc. is a public company and is required to follow IFRS. The company recently received $50,000 for work to be performed next quarter. The bookkeeper recorded this transaction as a Debit to Cash and a Credit to Revenue.

2. Victory Visors is a small private company and follows ASPE. At the end of the year the company has four days of unpaid and unrecorded wages amounting to $5,600. To provide for these expenses Victory records a Debit to Wages Expense and a Credit to Wages Payable.

Instructions

a) Determine the basis of accounting used (accrual basis or cash basis).

b) Prepare the correct entry for the opposite basis of accounting. (i.e., If cash basis is currently used, you must prepare the entry that would be recorded under accrual basis accounting)

Exercise 5

You receive $45,000 in year 1 for a job to be started and completed in year 2. However, you purchase materials and supplies to prepare for the upcoming job. Materials and supplies purchased in year 1 cost $33,000. In year 2, you determine that you would need to purchase an additional $29,000 in supplies.

Instructions

Determine the profit for years 1 and 2 under both accrual and cash accounting.

Exercise 6

Umbrella & Associates, a well-established law firm, performed work and recognized $450,000 in revenues during the year. The total cash collected from customers in the year was $560,000. The company incurred expenses of $217,500, but had not paid for $29,170 of them at year-end. In addition, Umbrella & Associates prepaid $34,000 for expenses that would be incurred the next year.

Instructions

Calculate Umbrella & Associates net income under both the cash basis and accrual basis of accounting.

Exercise 7

For each situation, state the correct revenue or expense amount to record each year following the revenue/ expenses recognition criteria.

1. Revenue recognized in 2021 will be collected in 2022 in the amount of $22,500.

2. Received bills in 2022 for $16,300 for expenses incurred in 2021.

3. Consulting services performed in 2021 for $35,000. However, client only paid $2,000 in 2021 and will pay the remainder in 2022.

4. Purchased supplies for $13,000 for a job to be started and completed in 2022.

5. Purchased supplies for $2,300 for a job that was completed in 2021.

6. Advance payment of $88,000 received in 2021 for a contract to be completed equally in 2022 and 2023.

7. Purchased supplies for $40,000 in 2022 for a new contract that will begin and end in 2023.

Exercise 8

Telecom Company prepared the following income statement using the cash basis of accounting:

TELECOM COMPANY

Income Statement, Cash Basis

Year Ended December 31, 2021

Service revenue (does not include $40,000 of services performed on account

in 2021 because the collection will not be until 2022) $370,000

Expenses (does not include $25,000 of expenses incurred on account because

payment will not be made until 2022) 220,000

Profit $150,000

Additional data:

1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above.

2. On July 1, 2021, paid for a one-year insurance policy on the automobile amounting to $1,800. This amount is included in the expenses above.

Instructions

a) Prepare Telecom Company’s income statement 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 profit.

Exercise 9

The Fox Company prepared the following income statement using the cash basis of accounting:

THE FOX COMPANY

Income Statement, Cash Basis

Year Ended December 31, 2021

Service revenue $460,000

Expenses 220,000

Profit $240,000

Additional data:

1. Service revenue includes $40,000 collected from a customer for whom services were provided in 2020, and who was billed in 2020.

2. There are an additional $15,000 of expenses that were incurred on account, for which payment will not be made until 2022.

3. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above.

4. On December 1, 2021, paid $1,600 for two months’ rent (December and January). This amount is included in the expenses above.

Instructions

a) Prepare Fox’s income statement 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 profit.

Exercise 10

Before month-end adjustments are made, the February 28 trial balance of Joe's Enterprise contains revenue of $9,000 and expenses of $4,400. Adjustments are necessary for the following items:

Depreciation for February is $1,300.

Revenue for services provided but not yet billed is $2,800.

Accrued interest expense is $700.

Revenue collected in advance that the service has now been performed is $3,500.

Portion of prepaid insurance expired during February is $400.

Instructions

Calculate the correct profit for Joe's income statement for February.

Exercise 11

The Fluffy Bunnies , a semi-professional baseball team, prepares financial statements on a monthly basis. Its season begins in April, but in February the team engaged in the following transactions:

1. Paid $200,000 to the city of Toronto as advance rent for use of a stadium for the six-month period April 1 through September 30.

2. Collected $600,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue.

During the month of April, the Fluffy Bunnies played four home games and three road games.

Instructions

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

Exercise 12

On December 1, 2021, Pitless Corp., a privately owned corporation, started operations. They signed a large contract to build a factory over a 2-year time period. Their client Mr. Falconi paid them $150,000 in advance. Pitless will begin construction in 2 months’ time. In order to begin construction Pitless purchased the following items:

1. Crane for $160,000 on December 1, 2021. They expect this crane to be useful for 7 years.

2. Bulldozer for $36,000 to be used for 11 years.

3. On December 15, 2021, Pitless got an exceptional price on a plot of land. The land cost $275,000 and will be held for 10 years. At that point Pitless will expand operations and possibly change locations.

4. Pitless obtained two insurance policies: policy A obtained December 1, 2021 in the amount of $12,500 for 24 months and policy B obtained December 15, 2021 for $7,500 for 16 months.

Pitless also paid $36,000 to rent a dump truck on December 1, 2021 to be used in construction for the next 2 years.

Instructions

a) Record all the transactions.

b) Prepare the year-end adjusting journal entries.

c) Show how the Property, Plant, and Equipment will be reported on the balance sheet as at December 31, 2021.

Exercise 13

The Beaver Zoo operates a drive-through tourist attraction in Manitoba. 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 $ 8,000

Fencing 30,000

Accumulated Depreciation—Fencing 5,500

Unearned Revenue 500

Data used in preparing adjusting entries:

1. Three months' rent had been prepaid on April 1.

2. The fencing is being depreciated over a five-year period.

3. The unearned revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, 25 of the tickets were used by customers.

Instructions

a) Calculate the following:

1. Monthly rent expense.

2. The age of the fencing in months.

3. The number of tickets sold on April 1.

b) Prepare the adjusting entries that were made by the Beaver Zoo on April 30.

Exercise 14

For the following independent situations, prepare the required adjusting journal entries.

1. Larry’s Television Restoration Company prepares monthly financial statements. On July 1, the Office Supplies account had a balance of $3,000. During July, additional office supplies were purchased for $3,800 and that amount was debited to Office Supplies. On July 31, a physical count of office supplies revealed that there was $2,700 on hand. Prepare the adjusting journal entry that Larry should make on July 31.

2. Amberville Lumber Co. prepares monthly financial statements. On September 1, a cheque for $9,600 was received from a tenant for six months’ rent. The full amount was credited to Unearned Revenue. Prepare the adjusting entry the company should make on September 30.

Exercise 15

The Franklin Company accumulates the following adjustment data at December 31:

1. Services of $1,100 have been performed, the $1,100 was collected in advance and recorded as unearned revenue

2. Salaries of $600 are unpaid.

3. Prepaid rent totalling $450 has expired.

4. Supplies of $550 have been used.

5. Services provided but unbilled totals $750.

6. Utility expenses of $300 are unpaid.

7. Interest of $250 has accrued on a note payable.

Instructions

a) For each of the above items indicate:

i. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).

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

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

iv. The accounts that will be affected.

v. The profit effect.

Prepare your answer in the tabular form presented below. The first item is shown for illustrative purposes.

Account Balances

Before Adjustment Income Effect

Type of Account (Understatement Increase

Adjustment Relationship or Overstatement) Accounts Affected (Decrease)

1. Unearned revenue L/R Liab. O Unearned Revenue

Rev. U Service Revenue 1,100

b) Assume profit before the adjustments listed above was $21,500. What is the adjusted profit?

Exercise 16

Ellis Company accumulates the following adjustment data at December 31:

1. Services of $800 have been provided, of the $800 was collected in advance.

2. Salaries of $600 are unpaid.

3. Prepaid rent totalling $450 has expired.

4. Supplies of $550 have been used.

5. Services provided but unbilled total $750.

6. Utility expenses of $200 are unpaid.

7. Interest of $250 has accrued on a note payable.

8. Depreciation of office equipment is $300.

Instructions

a) For each of the above items indicate:

i. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).

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

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

iv. The accounts that will be affected.

v. The profit effect.

Prepare your answer in the tabular form presented below. The first item is shown for illustrative purposes.

Account Balances

Before Adjustment Profit Effect

Type of Account (Understatement Increase

Adjustment Relationship or Overstatement) Accounts Affected (Decrease)

1. Unearned revenue L/R Liab. O Unearned Revenue

Rev. U Service Revenue 800

b) Assume profit before the adjustments listed above was $16,500. What is the adjusted profit?

Exercise 17

One part of an adjusting entry is given below:

1. Unearned 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.

Instructions

Indicate the account title for the other part of the entry.

Exercise 18

The adjusted trial balance of Savana Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate

a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses), and

b) the related account in the adjusting entry.

a) b)

Balance Sheet Account Type of Adjusting Entry Related Account

1. Supplies

2. Accounts Receivable

3. Prepaid Insurance

4. Accumulated Depreciation

—Equipment

5. Interest Payable

6. Salaries Payable

7. Unearned Revenue

Exercise 19

Pierson Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered.

PIERSON INSURANCE AGENCY

Income Statement

Month Ended June 30

Revenues

Premium commission revenues $35,000

Expenses

Salary expense $6,000

Advertising expense 800

Rent expense 4,200

Depreciation expense 2,800

Total expenses 13,800

Profit $21,200

Additional data: When the income statement was prepared, the company accountant neglected to take into consideration the following information:

1. A utility bill for $2,000 was received on the last day of the month for electric and gas service for the month of June.

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

3. Supplies on hand at the beginning of the month were $3,000. The agency purchased additional supplies during the month for $2,500 in cash and $2,200 of supplies were on hand at June 30.

4. The agency purchased a new car at the beginning of the month for $16,800 cash. The car is expected to have a useful life of four years.

5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5.

Instructions

Prepare a correct income statement.

Exercise 20

The Speedway Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered:

SPEEDWAY INSURANCE AGENCY

Income Statement

Month Ended June 30

Revenues

Premium Commission Revenues $40,000

Expenses

Salary Expense $12,000

Advertising Expense 800

Rent Expense 4,200

Depreciation Expense 2,800

Total Expenses 19,800

Profit $20,200

Additional data: When the income statement was prepared, the agency’s accountant neglected to take into consideration the following information:

1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June.

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

3. Supplies on hand at the beginning of the month were $2,000. The agency purchased additional supplies during the month for $1,500 in cash and $2,200 of supplies were on hand at June 30.

4. The agency purchased a new car at the beginning of the month for $18,000 cash. The car will depreciate $4,500 per year.

5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5.

Instructions

Prepare a corrected income statement. Show calculations.

Exercise 21

Callison Company has an accounting fiscal year that ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred:

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

The company also purchased a used car at the beginning of the month (June 1) for $6,000 cash. The car has a useful life of 5 years.

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 weekly payroll on July 2.

Exercise 22

Caleb Coat Company purchased a delivery truck on June 1 for $18,000, paying $8,000 cash and signing a 5%, two-month note for the remaining balance, interest to be paid at maturity. The truck is expected to have a six-year useful life. Caleb Coat Company prepares monthly financial statements.

Instructions

a) Prepare the general journal entry to record the acquisition of the delivery truck on June 1.

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

c) Show how the delivery truck will be reflected on Caleb Coat Company's balance sheet on June 30.

Exercise 23

In 2021, Florenceville Potatoes signed a $50,000 note receivable for 3 years at 5%. Interest is due monthly on the 20^th of each month. Florenceville has a December 31 year end, and adjusting entries are prepared at year end only. For calculation purposes assume each month has 30 days, and round amounts to the nearest dollar.

Instructions

Prepare the journal entries to record the following:

a) receipt of interest on December 20

b) the adjusting entry to accrue interest at December 31

c) receipt of interest on January 20

Exercise 24

Jonah Company prepares annual financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the year ended September 30, 2021.

JONAH COMPANY

Trial Balance (Selected Accounts)

September 30, 2021

Debit Credit

Office Supplies $ 2,700

Prepaid Insurance 5,400

Office Equipment 16,200

Accumulated Depreciation—Office Equipment $ 6,480

Unearned Revenue 1,200

(Note: Debit column does not equal credit column because this is a partial listing of selected account balances.)

An analysis of the account balances by the company's accountant provided the following additional information:

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

2. A one-year life insurance policy was purchased on June 1 for $5,400.

3. Office equipment is expected to have a life of 5 years. Depreciation is recorded monthly.

4. The amount of rent received in advance that remains unearned at September 30 is $500.

Instructions

Prepare the adjusting entries that should be made by Jonah Company on September 30.

Exercise 25

Harvey Auto Parts purchased a new crane on September 1 for $35,000, paying $10,000 cash and signing a 7%, 12-month note for the remaining balance, interest to be paid at maturity. The crane is expected to have a 20-year useful life. Harvey Auto Parts prepares annual financial statements every December 31.

Instructions

a) Prepare the general journal entry to record the acquisition of the crane on September 1.

b) Prepare any adjusting journal entries that should be made at year end, December 31.

c) Show how the crane will be reflected on Harvey Auto Parts’ balance sheet on December 31.

Exercise 26

One part of an adjusting entry is given below:

1. Interest Expense is debited.

2. Insurance Expense is debited.

3. Salaries Payable is credited.

4. Accumulated Depreciation – Equipment is credited.

5. Unearned Revenue is debited.

6. Interest Receivable is debited.

7. Accounts Receivable is debited.

8. Interest Payable is credited.

Instructions

Indicate the account title for the other part of the entry.

Exercise 27

Presented below are the trial balance and adjusted trial balance for Anger Company on December 31:

ANGER COMPANY

Trial Balance

December 31

Before Adjustment After Adjustment

Dr. Cr. Dr. Cr.

Cash $ 23,000 $ 23,000

Accounts Receivable 10,000 10,000

Prepaid Insurance 5,000 3,900

Supplies 4,500 3,300

Equipment 59,000 59,000

Accumulated Depreciation—

Equipment $ 6,000 $ 6,600

Accounts Payable 1,800 1,800

Salaries Payable 0 1,200

Unearned Revenue 3,700 2,500

F. Anger, Capital 90,700 90,700

F. Anger, Drawings 14,000 14,000

Service Revenue 30,700 31,900

Salaries Expense 9,900 11,100

Utilities Expense 5,800 5,800

Insurance Expense 0 1,100

Supplies Expense 0 1,200

Depreciation Expense 0 600

Interest Expense __1,700 _______ __1,700 _______

Totals $132,900 $132,900 $134,700 $134,700

Instructions

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

Exercise 28

The following entries were omitted from NC State Auto’s accounting records.

1. Repair services of $6,000 has been not been recorded or collected.

2. Shop equipment has depreciated in the amount of $2,200.

3. Shop supplies totalling $5,200 have been purchased and received but not yet been paid to the supplier.

4. Services of $1,750 relating to Unearned revenue were provided during the period

5. Insurance premiums paid during the period includes $1,000 of coverage relating to the following period.

Instructions

State the effect (over/under and amount) of the omissions listed above on assets, liabilities, equity, and net income by completing the chart below.

Exercise 29

Prepare the required end-of-period adjusting entries for each independent case listed below:

Case 1

Thomas Company, a private company, began the year with a $3,000 balance in the Office Supplies account. During the year, $8,500 worth of additional office supplies were purchased. A physical count of office supplies on hand at the end of the year revealed that $5,100 worth of office supplies were on hand at year end. No adjusting entry has been made until year end.

Case 2

Carson Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $28,800. It is estimated that the office equipment will have a useful life of six years. No adjusting entry has been made until year end.

Case 3

Chan Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $600 per month apartments and one tenant in a $1,000 per month apartment had not paid their August rent as at August 31.

Exercise 30

The ledger of Casper Consulting at January 31, 2021 includes the following selected accounts:

Debit Credit

Prepaid insurance $ 3,600

Supplies 1,800

Building 100,000

Land 60,000

Notes payable $90,000

Unearned revenue 8,000

Casper’s accountant is inexperienced, and he would like your help in preparing the company’s year end January 31, 2021 financial statements. Casper follows ASPE and makes adjusting entries only at year end. The accountant has provided you with the following information:

1. A one-year insurance policy costing $3,600 was purchased on January 1, 2021. At that time the full amount was debited to prepaid insurance.

2. A physical inventory count on January 31, 2021 revealed $800 in supplies were still remaining.

3. Land and building were purchased on February 1, 2020 at a cost of $160,000. The building has an expected useful life of 20 years. The purchase was financed by paying $70,000 in cash and the balance on a 2-year, 8% note payable. Interest on the note is due at maturity.

4. Unearned revenue related to a client retainer paid on January 15, 2021. On January 31, 2021, services for one-quarter of this amount have been provided

Instructions

Prepare the adjusting journal entries required at January 31, 2021.

Exercise 31

The following ledger accounts are used by Crawford Indoor Paintball Park:

Cash

Accounts Receivable

Prepaid Printing

Prepaid Rent

Unearned Revenue

Interest Payable

Interest Expense

Printing Expense

Rent Expense

Admissions Revenue

Concessions Revenue

Instructions

For each of the transactions below, 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 indoor park facility for three months, $180,000.

b) On September 1, sold season tickets for admission to the indoor park. The tickets can be used for a period of one year. Season ticket sales totalled $900,000.

c) On September 1, borrowed $150,000 from First Canadian Bank by issuing a 5% note payable due in three months, interest due on maturity.

d) On September 6, schedules for 8 competition days in September, 10 days in October, and 7 competition days in November were printed for $3,000.

e) Concessions are operated by an independent company, who pays Crawford 10% of the gross receipts. The accountant for the concessions company reported that gross receipts for September were $140,000. The amount due to Crawford will be remitted by October 11.

Exercise 32

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

Cash

Accounts Receivable

Prepaid Printing

Prepaid Rent

Unearned Revenue

Note Payable

Interest Payable

Admissions Revenue

Concessions Revenue

Interest Expense

Printing Expense

Rent Expense

Instructions

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

a) On November 1, paid rent on the track facility for three months, $105,000.

b) On November 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totalled $900,000.

c) On November 1, borrowed $150,000 from their bank by issuing a 6% note payable due in three months. Interest is payable at maturity.

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

e) The accountant for the concessions company reported that gross receipts for November were $140,000. Ten percent is due to Shawanda and will be remitted by December 10.

Exercise 33

Frank’s Florist Shop records all prepaid costs as assets and all revenue collected in advance as liabilities, and makes adjustments only at its fiscal year end, which is June 30. All of Frank’s purchases are for cash unless stated otherwise. The following information relates to Frank’s June 30, 2021 year end, its first year of operations.

1. On July 2, 2020, Frank purchased equipment for $12,000. The equipment is expected to have a useful life of 8 years.

2. On August 1, 2020 a one-year insurance policy was purchased for $1,740.

3. On February 1, 2021 a corporate customer paid $2,080 as full payment for a one-year contract for fresh flowers to be delivered to its offices every Monday morning. At June 30, 21 of the required 52 deliveries had been completed.

4. On July 2, 2020 Frank purchased enough supplies to last the entire first year of operations for $4,400. At June 30, 2021, Frank counted the supplies on hand and calculated the cost, which amounted to $1,035.

5. On May 31, 2021 Frank borrows $20,000 from the bank to increase the amount of inventory and expand the business. The interest rate on the loan is 6% and requires monthly payments of interest on the first of each month. The principal is due in one year’s time. The first interest payment is due July 1.

6. Frank pays his store assistant on alternate Fridays. The last pay day in June was June 20 and the first pay day after year end is July 4. The assistant worked 30 hours during this period, of which 20 were in July, and the rest in June. The assistant earns $9.50 an hour.

7. June 28 is a busy day and Frank has to make deliveries to numerous customers. On July 5 he reviews his June billings, and realizes that he made one large sale for $325 on June 30 for flowers that were delivered, but for which no invoice was issued. The sale was to a regular customer who will pay promptly when the invoice is sent.

Instructions

a) For each transaction, prepare any adjusting entries required at June 30, 2021.

b) Assume that before making the above adjustments, Frank’s Florist Shop’s profit was $6,570. Calculate what the correct profit is after recording all of the adjustments.

Exercise 34

In January 2021, Edward started a business providing home repair services. The business is called Helpful Handyman, and the service is so popular that he has already hired 10 additional employees after being in business for just six months. On May 1 he rented an office with storage space for tools and supplies. It is now the end of June and he must prepare financial statements to present to his banker. The following amounts are taken from Helpful Handyman’s unadjusted trial balance at June 30, 2021. Assume all accounts are their normal balance (debit or credit).

Loan receivable $ 1,500

Accounts receivable 2,650

Accounts payable 3,500

Bank loan payable 9,000

Service revenue 385,600

Wages expense 38,400

Rent expense 2,000

Additional information about the accounting records follows:

1. The loan receivable was made to an employee on June 1 and the employee is to pay interest at 12% annually in monthly instalments starting July 1.

2. Edward normally invoices customers when the jobs are complete. At June 30, there was $5,000 of work that had been completed near month end for which invoices had not yet been issued.

3. The bank loan bears interest at 6% and was taken out on April 1. Interest payments are due quarterly, so no interest has yet been paid.

4. The last pay day before June 30 was on June 25. Since then, the 10 employees have worked an average of 25 hours each, at a wage of $8.50 per hour.

5. Rent is $2,000 per month. The June rent has not yet been paid.

Instructions

a) Prepare any adjusting entries required at June 30, 2021 based on the above information. Accounts not listed above may need to be set up.

b) Calculate the adjusted balances of the accounts listed above and any new accounts set up in part. Indicate whether the ending balances are a debit or credit.

c) Assume that the unadjusted profit of Helpful Handyman is $60,000. Calculate the adjusted profit after the adjustments above have been made.

Exercise 35

The following amounts are taken from the unadjusted trial balance of Fitzpatrick Fashion at its year end, November 30, and are their normal balance (debit or credit). Fitzpatrick records adjusting entries annually when preparing its year-end financial statements.

Prepaid rent $ 1,200

Supplies 525

Unearned revenue 4,600

Service revenue 89,500

Rent expense 6,600

Supplies expense 75

The following transactions are included in the above account balances:

1. On November 1, through a $1,200 cheque, Fitzpatrick’s bookkeeper paid both November and December rent and posted the full amount to Prepaid Rent.

2. On November 15 supplies were purchased on account for $225. On November 30 a count of actual supplies on hand shows the remaining supplies to be $60.

3. On August 31 a customer paid $4,600 in advance for a service contract. As at November 30 $2,300 of the work was complete.

Instructions

a) Journalize the transactions described as (1) through (3). Include the date, but no explanation is required.

b) Prepare any adjusting entries required at November 30.

c) Determine the adjusted ending balances of the accounts listed above. Indicate whether the ending balance is a debit or credit.

d) Assuming that profit before adjusting entries were made is $4,600, calculate the adjusted profit.

Exercise 36

The following amounts are taken from the unadjusted trial balance of Poloski Company at its year end, April 30 and are their normal balance (debit or credit). Poloski records adjusting entries annually when preparing its year-end financial statements.

Prepaid rent 2,100

Supplies 990

Unearned revenue 8,000

Service revenue 67,200

Rent expense 10,000

Supplies expense 200

The following transactions are included in the above account balances:

1. On April 1, through a $2,100 cheque, Poloski’s accountant paid both April and May rent and posted the full amount to Prepaid Rent.

2. On April 22 supplies were purchased on account for $740. On April 30 a count of actual supplies on hand shows the remaining supplies to be $81.

3. On January 1 a customer paid $8,000 in advance for a service contract. As at April 30 the work was 40% complete.

Instructions

a) Journalize the transactions described as (1) through (3). Include the date, but no explanation is required.

b) Prepare any adjusting entries required at April 30.

c) Determine the adjusted ending balances of the accounts listed above. Indicate whether the ending balance is a debit or credit.

d) Assuming that profit before adjusting entries were made is $12,850, calculate the adjusted profit.

Exercise 37

Presented below are the trial balance and adjusted trial balance for Lankford Company on December 31:

LANKFORD COMPANY

Trial Balance

December 31

Before Adjustment After Adjustment

Dr. Cr. Dr. Cr.

Cash $ 4,000 $ 4,000

Accounts Receivable 5,600 7,800

Prepaid Insurance 4,200 3,000

Supplies 2,400 1,600

Automobile Equipment 36,000 36,000

Accumulated Depreciation—

Automobile Equipment $ 2,600 $ 3,000

Accounts Payable 5,400 6,000

Notes Payable 20,000 20,000

Interest Payable 0 240

Salaries Payable 0 1,200

Unearned Revenue 8,920 8,720

J. Lankford, Capital 14,400 14,400

J. Lankford, Drawings 6,400 6,400

Service Revenue 16,000 18,400

Salaries Expense 4,120 5,320

Utilities Expense 3,600 4,200

Insurance Expense 1,000 2,200

Supplies Expense 0 800

Depreciation Expense 0 400

Interest Expense ______0 _______ ____240 _______

Totals $67,320 $67,320 $71,960 $71,960

Instructions

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

Exercise 38

Presented below are the trial balance and adjusted trial balance for Game Company on December 31.

GAME COMPANY

Trial Balance

December 31

Dr. Cr. Dr. Cr.

Cash $ 3,000 $ 3,000

Accounts Receivable 2,800 3,900

Prepaid Rent 2,100 1,500

Supplies 1,200 500

Automobile Equipment 18,000 18,000

Accumulated Depreciation —

Automobile Equipment $ 1,300 $ 1,800

Accounts Payable 2,700 3,000

Notes Payable 10,000 10,000

Interest Payable 0 120

Salaries Payable 0 400

Unearned Revenue 4,460 4,260

S. Champagne, Capital 8,200 8,200

S. Champagne, Drawings 3,200 3,200

Service Revenue 8,000 9,300

Salaries Expense 2,060 2,460

Utilities Expense 1,800 2,100

Rent Expense 500 1,100

Supplies Expense 0 700

Depreciation Expense 0 500

Interest Expense ______0 _______ ____120 _______

Totals $34,660 $34,660 $37,080 $37,080

Instructions

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

Exercise 39

On Friday of each week, Nala Company pays its factory personnel weekly wages amounting to $40,000 for a five-day work week.

Instructions

a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday.

b) Prepare the journal entry for payment of the week's wages on the payday which is Friday, January 2 of the next year.

Exercise 40

The following three situations require adjusting journal entries to prepare financial statements as at May 31, 2021:

1. The company has a $660,000 note payable that requires 12% annual interest (1% per month) to be paid each month on the 20th of the month. The interest was last paid on May 1 and the next payment is due on June 1.
2. The total weekly salaries expense for all employees is $12,600. This amount is paid at the end of the day on Friday of each week with five working days. May 31 falls on a Wednesday this year, which means that the employees had worked three days since the last payday. The next payday is June 2.
3. On May 1, the company retained a professional accountant at a flat fee of $2,200 for various services throughout the month of May. This amount is payable on June 10th.

Instructions

For each situation, present the adjusting entry and the entry that would be made to record the payment of the accrued liability during June 2021.

Exercise 41

The total weekly payroll for Fly-By Airlines is $700,000 ($100,000 per day). The company operates seven days a week and pays employees each Wednesday for the previous Monday-Sunday work week. Salaries were last paid on Wednesday, January 28 for the pay period ended January 25. The next pay date is Wednesday February 4. The company’s year end is January 31.

Instructions

Prepare the journal entries to record the following:

a) the payment of salaries on January 28

b) the adjusting entry to accrue salaries at year end

c) the payment of salaries on February 4

Exercise 42

In 2021, Micro Marvels signed a $70,000 note payable for 2 years at 5%. Interest is payable monthly on the 10^th of each month. Micro has a December 31 year end, and adjusting entries are prepared at year end only. For calculation purposes assume each month has 30 days, and round amounts to the nearest dollar.

Instructions

Prepare the journal entries to record the following:

a) payment of interest on December 10

b) the adjusting entry to accrue interest at December 31

c) payment of interest on January 10

Exercise 43

Castona Inc., a publicly traded company, has recently fired their accountant due to several errors discovered in the accounting records. Bill, President of Castona Inc., has asked you to prepare the adjusting entries for the following transactions:

1. Signed a $72,000 contract to provide our services over 7 weeks. As of today, we have only completed 2 weeks of services, however we have not yet billed or recorded any amounts.

2. Received several operating bills which have not yet been recorded. Utilities $700, Bill’s personal cell phone $350, and property taxes $1,750.

3. A note payable was obtained in the amount of $100,000 for 2 years. Interest is 4.75% annually. Interest on a note payable is due the 15th of each month. Assuming we correctly recorded our last interest payment on June 15, record the proper entry (if any) for June 30.

4. Fired one employee on Wednesday. I have 4 remaining employees. Each employee is paid $125 per day. I pay all my employees every Monday for the 5 previous weekdays that they have worked. June 30 is a Friday.

Exercise 44

The adjusted trial balance of Kramer’s Legal Practice appears below:

KRAMER’S LEGAL PRACTICE

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $ 6,400

Accounts receivable 1,200

Office supplies 1,800

Office equipment 8,000

Accumulated depreciation—office equipment $ 2,500

Computer equipment 6,000

Accumulated depreciation—computer equipment 1,500

Accounts payable 6,000

Unearned revenue 3,000

H. Kramer, capital 12,400

H. Kramer, drawings 2,500

Service earned 5,500

Office supplies expense 600

Depreciation expense 2,500

Rent expense 1,900 _______

$30,900 $30,900

Instructions

Using this information, prepare for the month ended December 31:

a) an income statement;

b) a statement of owner’s equity; and

c) a balance sheet.

Exercise 45

The adjusted trial balance of Jacks Financial Planners appears below:

JACKS FINANCIAL PLANNERS

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $ 15,200

Accounts Receivable 2,200

Office Supplies 1,800

Office Equipment 15,000

Accumulated Depreciation—Office Equipment $ 4,000

Accounts Payable 4,000

Unearned Revenue 5,000

S. Jacks, Capital 24,400

S. Jacks, Drawings 2,500

Service Revenue 6,500

Office Supplies Expense 600

Depreciation Expense 2,500

Telephone Expense 400

Wages Expense 1,800

Rent Expense 1,900 ______

$43,900 $43,900

Instruction

Using the information from the adjusted trial balance, you are to prepare for the year ended December 31:

a) an income statement;

b) a statement of owner’s equity; and

c) a balance sheet.

Exercise 46

Lamburg Company has prepared the following adjusting entries at its fiscal year end on June 30, 2021:

1. Wages Expense 17,000

Wages Payable 17,000

2. Unearned Revenue 22,500

Service Revenue 22,500

3. Interest Expense 175

Interest Payable 175

4. Rent Expense 1,100

Prepaid Rent 1,100

5. Insurance Expense 175

Prepaid Insurance 175

The adjustment for depreciation has not yet been prepared for the current year. Lamburg’s building was purchased 7 years ago. Lamburg follows straight-line depreciation and for the past 6 years depreciation has been properly recorded. The Land was purchased 11 years ago.

Instructions

a) Prepare an adjusting entry to record depreciation expense.

b) Using the chart below prepare an adjusted trial balance in the last two columns. Use the middle two columns to record any increases and decreases to the account from the adjusting entries. If additional accounts are needed, add them at the bottom of the list of accounts in the trial balance.

c) Prepare an income statement, statement of owner’s equity, and a balance sheet.