Ch3 Exam Prep Adjusting The Accounts Solution Exercises

CHAPTER 3

ADJUSTING THE ACCOUNTS

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES
AND BLOOM’S TAXONOMY

Note: C = Comprehension AN = Analysis AP = Application

* This topic is dealt with in an Appendix to the chapter.

SUMMARY OF QUESTIONS BY LEVEL OF DIFFICULTY (LOD)

Note: E = Easy M = Medium H=Hard

* This topic is dealt with in an Appendix to the chapter.

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. Revenue and expense recognition criteria provide guidance about when to recognize revenues and expenses. Revenue is recognized when the service has been performed or the goods have been sold and delivered, as long as the revenue can be reliably measured and collection is reasonably certain based on the Revenue Recognition Principle. Expenses are recorded in the same period as revenue is recognized, if there is a direct association between the revenues and expenses, to ensure that they are matched. If there is no association between revenues and expenses, expenses are recorded in the period they are incurred.

2. 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.

5. Prepare adjusting entries for the alternative treatment of prepayments (Appendix 3A). Under certain circumstances, prepayments may initially be debited (increased) to an expense account. Unearned revenues may initially be credited (increased) to a revenue account. At the end of the period, these accounts may be overstated. The adjusting entries for prepaid expenses are a debit (increase) to an asset account and a credit (decrease) to an expense account. Adjusting entries for unearned revenues are a debit (decrease) to a revenue account and a credit (increase) to a liability account. It does not matter which alternative is used to record and adjust prepayments, as the ending account balances will be the same with both methods, assuming that the entries are prepared correctly.

EXERCISES

Exercise 1

On December 31, 2013, Polski 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. Jane’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, 2013 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 2014. On February 1, 2014 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 Yin Company include the following:

Dec. 31, 2014 Dec. 31, 2013

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 2014 shows the following:

Interest Revenue $20,400

Service Revenue 41,700

Supplies Expense 8,700

Wages Expense 37,000

Instructions

Calculate the following for 2014:

1. Cash received for interest.

2. Cash paid for supplies.

3. Cash paid for wages.

4. Cash received for services.

Exercise 4

Below are two independent scenarios

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

2. Mekhi is a small private company and follows ASPE. At the end of year he has four days of unpaid and unrecorded wages amounting to $5,600. To provide for these expenses Mekhi 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 year 1 and 2 under both accrual and cash accounting.

Exercise 6

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

1. Revenue earned in 2014 will be collected in 2015 in the amount of $22,500.

2. Received bills in 2015 for $16,300 for expenses incurred in 2014.

3. Consulting services performed in 2014 for $35,000. However client only paid $2,000 in 2014 and will pay the remainder in 2015.

4. Purchased supplies for $13,000 for a job to be started on in 2015.

5. Purchased supplies for $2,300 for a job that was completed in 2014.

6. Advance payment of $88,000 received in 2014 for a contract to be completed equally in 2015 and 2016.

7. Purchased supplies for $40,000 in 2015 for a new contract that will begin in 2016.

Exercise 7

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

ROBERTS COMPANY

Income Statement, Cash Basis

Year Ended December 31, 2013

_____________________________________________________________________________

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

in 2013 because the collection will not be until 2014) $370,000

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

payment will not be made until 2014) 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, 2013, 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 Roberts 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 8

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

THE LARSON COMPANY

Income Statement, Cash Basis

Year Ended December 31, 2013

____________________________________________________________________________

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 2012, and who was billed in 2012.

2. There are an additional $15,000 of expenses that were incurred on account, for which payment will not be made until 2014.

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, 2013, paid $1,600 for two months’ rent (December and January). This amount is included in the expenses above.

Instructions

a. Prepare Larson’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

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 earned but not yet billed is $2,800.

Accrued interest expense is $700.

Revenue collected in advance that is now earned 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 10

The Shockers, a semi-professional baseball team, prepare 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 Shockers played four home games and three road games.

Instructions

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

Exercise 11

On December 1, 2014, 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 has 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, 2014. 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, 2014, 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, 2014 in the amount of $12,500 for 24 months and Policy B obtained December 15, 2014 for $7,500 for 16 months.

Pitless also paid $36,000 to rent a dump truck on December 1, 2014 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 of December 31, 2014.

Exercise 12

The Moose 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 Ticket Revenue 500

Other data:

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

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

3. The unearned ticket 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 fencing in months.

3. The number of tickets sold on April 1.

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

Exercise 13

The Upton Company accumulates the following adjustment data at December 31.

1. Revenue of $1,100 collected in advance has been earned.

2. Salaries of $600 are unpaid.

3. Prepaid rent totalling $450 has expired.

4. Supplies of $550 have been used.

5. Revenue earned 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 14

Ellis Company accumulates the following adjustment data at December 31.

1. Fees of $800 collected in advance have been earned.

2. Salaries of $600 are unpaid.

3. Prepaid rent totalling $450 has expired.

4. Supplies of $550 have been used.

5. Fees earned 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 Fee Revenue 800

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

Exercise 15

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 16

The adjusted trial balance of Amin 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 17

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.

Solution Exercise 18 (15 min.)

SPEEDWAY INSURANCE AGENCY

Income Statement

Month Ended June 30

__________________________________________________________________________

Revenues

Premium Commission Revenues ($40,000 + $5,600) $45,600

Expenses

Salary Expense ($12,000 + $5,300) $17,300

Advertising Expense 800

Rent Expense 4,200

Depreciation Expense ($2,800 + $375) 3,175

Utilities Expense ($0 + $1,200) 1,200

Supplies Expense ($0 + $1,300) 1,300

Total expenses 27,975

Profit $17,625

Exercise 19

Callison Company has an accounting fiscal year which 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 20

Allen 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. Allen 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 Allen Coat Company's balance sheet on June 30.

Exercise 21

In 2013, Florenceville Potatoes signed a $50,000 note receivable for 3 years at 5%. Interest is receivable 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 22

Bokhari 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, 2014.

BOKHARI COMPANY

Trial Balance (Selected Accounts)

September 30, 2014

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

Debit Credit

Office Supplies $ 2,700

Prepaid Insurance 5,400

Office Equipment 16,200

Accumulated Depreciation—Office Equipment $ 6,480

Unearned Rent 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 Bokhari Company on September 30.

Exercise 23

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 of August 31.

Exercise 24

The ledger of Casper Consulting at January 31, 2014 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 service revenue 8,000

Casper’s accountant is inexperienced, and he would like your help in preparing the company’s yearend January 31, 2014 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, 2014. At that time the full amount was debited to prepaid insurance.

2. A physical inventory count on January 31, 2014 revealed $800 in supplies were still remaining.

3. Land and building were purchased on February 1, 2013 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 service revenue related to a client retainer paid on January 15, 2014. On January 31, 2014, one-quarter of this amount has been earned.

Instructions

Prepare the adjusting journal entries required at January 31, 2014.

Exercise 25

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

Cash

Accounts Receivable

Prepaid Printing

Prepaid Rent

Unearned Admissions 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 26

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

Cash

Accounts Receivable

Prepaid Printing

Prepaid Rent

Unearned Admissions 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 Runway and will be remitted by December 10.

Exercise 27

Chris’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 Chris’s purchases are for cash unless stated otherwise. The following information relates to Chris’s June 30, 2014 year end, its first year of operations.

1. On July 2, 2013, Chris purchased equipment for $12,000. The equipment is expected to have a useful life of 8 years.

2. On August 1, 2013 a one-year insurance policy was purchased for $1,740.

3. On February 1, 2014 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, 2013 Chris purchased enough supplies to last the entire first year of operations for $4,400. At June 30, 2014, Chris counted the supplies on hand and calculated the cost, which amounted to $1,035.

5. On May 31, 2014 Chris 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 Chris pays her 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 Chris has to make deliveries to numerous customers. On July 5 she reviews her June billings, and realizes that she 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, 2014.

b. Assume that before making the above adjustments, Chris’s Florist Shop’s profit was $6,570.

Calculate what the correct profit is after recording all of the adjustments.

Exercise 28

In January 2014, 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, 2014. 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:

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, 2014 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 a. Indicate whether the ending balances are Debit or Credit.

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

Exercise 29

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 30

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

DIONNE COMPANY

Trial Balance

December 31

______________________________________________________________________________

Before Adjustment After Adjustment

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 Service Revenue 4,460 4,260

S. Dionne, capital 8,200 8,200

S. Dionne, 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 31

On Friday of each week, Gruppe 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 32

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 33

In 2013, 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 34

Cambrian Inc, a publicly traded company has recently fired their accountant due to several errors discovered in the accounting records. Victor, President of Cambrian 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 have not yet billed or recorded any amounts.

2. Received several operating bills which have not yet been recorded. Utilities $700, Victor’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 15 of each month. Assuming we correctly recorded our last interest payment on June 15, please 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 Friday for the 5 weekdays that they have worked.

Exercise 35

The adjusted trial balance of Owens Financial Planners appears below. Using this information, prepare for the month ending December 31:

a. an income statement.

b. a statement of owner’s equity.

c. a balance sheet.

OWENS FINANCIAL PLANNERS

Adjusted Trial Balance

December 31, 2014

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

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 fee revenue 3,000

H. Owens, capital 12,400

H. Owens, drawings 2,500

Fees earned 5,500

Office supplies expense 600

Depreciation expense 2,500

Rent expense 1,900 _______

$30,900 $30,900

Exercise 36

The adjusted trial balance of Jacks Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the year ending December 31:

1. an income statement;

2. a statement of ower’s equity; and

3. a balance sheet.

JACKS FINANCIAL PLANNERS

Adjusted Trial Balance

December 31, 2013

___________________________________________________________________________

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 Service 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

*Exercise 37

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

1. Bristol French Fry 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 Expense. On July 31, a physical count of office supplies revealed that there was $2,700 on hand. Prepare the adjusting journal entry that Bristol French Fry Company should make on July 31.

2. Hartland Bridge 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 Rental Revenue. Prepare the adjusting entry the company should make on September 30.

*Exercise 38

The following amounts are taken from the unadjusted trial balance of Candy Cane Lighting at its year end, November 30, and are their normal balance (Debit or Credit). Candy Cane records all prepaid expenses and revenue in their respective expense or revenue accounts when paid or received. Candy Cane records adjusting entries annually when preparing its year end financial statements.

Prepaid rent $ 0

Supplies 300

Unearned revenue 0

Service revenue 94,100

Rent expense 7,800

Supplies expense 300

The following transactions are included in the above account balances:

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

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 of 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 39

The following amounts are taken from the unadjusted trial balance of Woodstock Company at its year end, April 30 and are their normal balance (debit or credit). Woodstock records all prepaid expenses and revenue in their respective expense or revenue accounts when paid or received. Woodstock records adjusting entries annually when preparing its year end financial statements.

Prepaid rent 0

Supplies 250

Unearned revenue 0

Service revenue 75,200

Rent expense 12,100

Supplies expense 940

The following transactions are included in the above account balances:

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

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 of 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 40

Lamburg Company has prepared the following adjusting entries at its fiscal year end on June 30, 2014.

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.

*Exercise 41

Rubber Company prepares quarterly financial statements. It is now June 30, 2014 and you have been asked to assist. Prepare all adjusting journal entries required for June 30, 2014.

a. The balance in the Supplies account on April 1 was $1,000. On May 15 Rubber purchased $4,200 of supplies and recorded the amount to the Supplies Expense account. On June 30 a count of supplies revealed there was $1,450 of supplies on hand.

b. Rubber records all unearned revenue in the revenue account. On June 30, 2014, the Revenue account has a balance of $62,000, and of this amount $52,000 was actually earned. The remainder of the work will be performed in August 2014.

c. Rent was paid for the next 6 months on June 15, 2014 in the amount of $36,000. The rent period is from the 15 to the 15 of each month (i.e. June 15 to July 15). This amount has been debited to the Rent Expense account.

d. Two insurance policies were obtained. Policy A $19,000 purchased on April 1, 2014 for 19 months. Policy B $12,500 purchased on June 1, 2014 for 24 months. All amounts were recorded as insurance expense.