Kieso 13th Canadian Edition v1 Test Questions & Answers - Intermediate Accounting v1 13e | Canada | Test Bank by Donald E. Kieso. DOCX document preview.
APPENDIX C
THE ACCOUNTING INFORMATION SYSTEM
CHAPTER LEARNING OBJECTIVES
1. Understand basic accounting terminology, double-entry rules, and the accounting equation. It is important to understand the following terms: (1) event, (2) transaction, (3) account, (4) permanent and temporary accounts, (5) ledger, (6) journal, (7) posting, (8) trial balance, (9) adjusting entries, (10) financial statements, (11) closing entries, and (12) reversing entries.
The left side of any account is the debit side; the right side is the credit side. All asset and expense accounts are increased on the left or debit side and decreased on the right or credit side. Conversely, all liability and revenue accounts are increased on the right or credit side and decreased on the left or debit side. Shareholders’ equity accounts, Common Shares, and Retained Earnings are increased on the credit side, whereas the shareholders’ equity related Dividends account is increased on the debit side.
In a double-entry accounting system, for every debit there must be a credit, and vice versa. This leads us to the basic accounting equation for corporations: Assets = Liabilities + Shareholders’ Equity. The effect of individual transactions on the statement of financial position can be explained using the basic accounting equation. The shareholders’ equity portion of the equation can also be expanded to illustrate the effect of transactions on components of equity such as common shares and retained earnings. Whenever a transaction occurs, the elements of the equation change, but the equality of the two sides of the equation remains unaffected.
2. Identify the steps in the accounting cycle and the steps in the recording process. The basic steps in the accounting cycle are (1) identification and measurement of transactions and other events, (2) journalizing, (3) posting, (4) the unadjusted trial balance, (5) adjustments, (6) the adjusted trial balance, (7) statement preparation, and (8) closing. The first three steps in the accounting cycle form the basis of the recording process used by most medium-sized companies on a daily basis. The simplest journal form is a chronological listing of transactions and events that are expressed as debits and credits to particular accounts. The items entered in a general journal must then be transferred (posted) to the general ledger.
To help prepare financial statements, an unadjusted trial balance should be prepared at the end of a specific period (usually a month, quarter, or year) after the entries have been recorded in the journals and posted to the general ledger.
3. Explain the reasons for and prepare adjusting entries. Adjustments achieve a proper matching of expenses and revenues, which is needed to determine the correct net income for the current period and to achieve an accurate statement of the end-of-the-period balances in assets, liabilities, and shareholders’ equity accounts. When preparing adjusting journal entries, you must first determine how the original transaction was recorded. For example, was an asset created earlier in the fiscal year (such as prepaid rent) when the initial payment was made? If so, an adjustment for the related expense is required. Alternatively, if an income statement account was used initially, an adjustment may be required to set up the proper statement of financial position account at the end of the period.
4. Explain how the type of ownership structure affects the financial statements. The type of ownership structure that a business enterprise uses determines the types of accounts that are part of the equity section. In a corporation, ordinary or common shares, contributed surplus, retained earnings, and accumulated other comprehensive income are commonly shown separately on the statement of financial position. In a proprietorship or partnership, a capital account is used to indicate the investment in the company by the owner(s). An owners’ drawings or withdrawal account may be used to indicate withdrawals by the owner(s). These two accounts are grouped or netted under owners’ equity.
5. Prepare closing entries and consider other matters relating to the closing process. In the closing process, all of the revenue and expense account balances (income statement items) are transferred to a clearing account called Income Summary, which is used only at the end of the fiscal year. Revenues and expenses are matched in the Income Summary account. The net result of this matching, which represents the net income or net loss for the period, is then transferred to a shareholders’ equity account (Retained Earnings for a corporation and capital accounts for proprietorships and partnerships). Reversing entries may be used for reversing accrued revenues and accrued expenses. Prepayments may also be reversed if the initial entry to record the transaction is made to an expense or revenue account.
6. Prepare a 10-column work sheet and financial statements. The 10-column work sheet provides columns for the first trial balance, adjustments, adjusted trial balance, statement of comprehensive income, and statement of financial position. The work sheet does not replace the financial statements. Instead, it is the accountant’s informal device for accumulating and sorting the information that is used for the financial statements.
Multiple Choice QUESTIONS
Answer No. Description
d 1. Purpose of an accounting system
b 2. Definition of transaction
d 3. Purpose of an accounting system
b 4. Identification of a temporary account
d 5. Accounting equation
a 6. Accounting equation
a 7. Criteria for recording transactions
b 8. Normal balances
d 9. Reporting under IFRS
c 10. Internal event
b 11. Definition of journal
a 12. Impact of transaction on the accounting equation
d 13. Transaction analysis
c 14. Transaction analysis
c 15. Event recording
c 16. Double-entry accounting system
d 17. Event recording
b 18. Trial balance
d 19. Trial balance
c 20. Trial balance
d 21. Event Recording
b 22. General Journal
d 23. Uses of adjusting entries
c 24. Adjusting for accrued expenses
d 25. Adjusting for accrued revenues
d 26. Adjusting entries
c 27. Factors to consider in estimating depreciation
b 28. Contra-asset account
a 29. Effect of not recording depreciation
c 30. Adjusting for bad debts
c 31. Definition of accrued revenue
c 32. Adjusting entry for prepaid lease
a 33. Adjusting entry for interest receivable
c 34. Adjusting entry for interest expense
d 35. Adjusting entry for bad debts
b 36. Adjusting entry for bad debts
b 37. Adjusting entry for unearned rent
c 38. Adjusting entry for interest receivable
d 39. Calculate property tax adjustment
c 40. Calculate balance in unearned revenue
c 41. Adjusting entry for investments
d 42. Adjusting entry for investments
c 43. Calculate cash received for interest
a 44. Calculate cash paid for salaries
c 45. Calculate cash paid for insurance
c 46. Calculate insurance expense
Answer No. Description
d 47. Calculate interest revenue
d 48. Calculate salary expense
c 49. Valuation of entity-specific asset
c 50. Calculate accrued interest payable
c 51. Calculate balance of unearned revenues
b 52. Calculate prepaid insurance
c 53. Calculate interest receivable
c 54. Calculate accrued salaries
c 55. Calculate royalty revenue
c 56. Types of ownership structure
c 57. Types of ownership structure
c 58. Types of ownership structure
b 59. Closing process
b 60. Definition of unearned revenue
c 61. Closing process
a 62. Fair value adjustments for investments
d 63. Closing process
c 64. Closing net income or loss
b 65. Post-closing trial balance
a 66. Trial balance–correct statement
a 67. Effect of understating ending inventory
a 68. Closing entry
d 69. Closing entry
b 70. Closing entry
Exercises
Item Description
EC-71 Definitions
EC-72 Definitions
EC-73 Recordable events
EC-74 The accounting cycle
EC-75 Adjusting entries
EC-76 Adjusting entries
EC-77 Adjusting entries
EC-78 Calculation of expense
EC-79 Calculation of revenue
EC-80 Preparing financial statements
EC-81 Calculation of expense
EC-82 Type of ownership structure
EC-83 Reversing entries
PROBLEMS
Item Description
PC-84 Journal entries
PC-85 Adjusting entries
PC-86 Adjusting entries
PC-87 Adjusting and closing entries
PC-88 Adjusting and closing entries
PC-89 Closing entries
PC-90 Adjusting entries
PC-91 Trial balance correction
PC-92 Accrual accounting
PC-93 Ten-column work sheet
PC-94 Preparation of financial statements
PC-95 Preparation of financial statements
MULTIPLE CHOICE
1. Which of the following statements regarding accounting information systems is true?
a) Both large and small firms should use the same type of accounting system.
b) All firms should have the same types of transactions.
c) The volume of data to be handled should not vary between firms.
d) The kind of information that management requires of an accounting system will vary, depending on the type of firm.
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
2. An external event involving a transfer or exchange between two or more entities or parties is called a(n)
a) account.
b) transaction.
c) ledger.
d) accounting system.
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
3. Which of the following does NOT influence the structure of an accounting system:
a) nature of the business
b) size of the firm
c) volume of data to be handled
d) external reporting requirements
Difficulty: Medium
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
4. An example of temporary accounts is
a) unearned revenue.
b) expenses.
c) inventory.
d) prepaid expenses.
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
5. Which of the following equations is correct?
a) Assets plus Liabilities = Equity
b) Assets = Liabilities minus Equity
c) Liabilities = Assets plus Equity
d) Equity = Assets minus Liabilities
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
6. The accounting equation must remain in balance
a) throughout each step in the accounting cycle.
b) only when journal entries are recorded.
c) only at the time the trial balance is prepared.
d) only when formal financial statements are prepared.
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
7. Which of the following criteria does NOT have to be met before an event or transaction should be recorded for accounting purposes?
a) The event or transaction must be an external event.
b) The event or transaction can be measured objectively in financial terms.
c) The event or transaction is relevant and reliable.
d) The event or transaction must meet the definition of an element.
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
8. Which of the following accounts do NOT have a normal debit balance?
a) Dividends
b) Accumulated Depreciation
c) Prepaid Expenses
d) Sales Return and Allowances
Difficulty: Medium
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
9. Which of the following statements is NOT true for a company that has fair value OCI investments?
a) If an AOCI balance represent accumulated gains it must be added to SHE.
b) AOCI is part of the expanded accounting equation.
c) AOCI functions similarly to retained earnings.
d) AOCI must be reported under IFRS and ASPE.
Difficulty: Medium
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
10. Which of the following is an internal event?
a) sale of goods or services
b) payment of dividends
c) using raw materials in production
d) purchase of materials
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
11. The book of original entry where transactions and other selected events are first recorded is called the
a) ledger.
b) journal.
c) account.
d) statement of financial position.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
12. The debit and credit analysis of a transaction normally takes place
a) before an entry is recorded in a journal.
b) when the entry is posted to the ledger.
c) when the trial balance is prepared.
d) when the financial statements are prepared.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
13. Performing a service for a client on account will
a) increase one asset and decrease another asset.
b) decrease an asset and decrease a liability.
c) increase an asset and decrease equity.
d) increase an asset and increase equity.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
14. The account credited for a receipt of cash on account is
a) Unearned Revenue.
b) Service Revenue.
c) Accounts Receivable.
d) Accounts Payable.
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
15. Which of the following in NOT a reason for not recording an event?
a) The service has been provided but the cash has not yet been received.
b) The service has not been provided but the cash has already been received.
c) The measurement is too complex.
d) The amounts are not material.
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
16. The double-entry accounting system means
a) each transaction is recorded with two journal entries.
b) each item is recorded in a journal entry, then in a general ledger account.
c) the dual effect of each transaction is recorded with debits and credits of equal amount.
d) the statements will always balance.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
17. Which of the following criteria are NOT required for an event or item to be recorded for accounting purposes?
a) The event or item can be measured objectively in financial terms.
b) The event or item is relevant and reliable.
c) The event or item is an element.
d) The cash must be collected or paid.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
18. A trial balance
a) is a list of all the accounts in the ledger.
b) is a list of all the accounts and the balances at a specific date.
c) cannot be used in the preparation of financial statements.
d) cannot be used as a basis for preparation of adjusting entries.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
19. A trial balance will NOT balance if
a) an amount is posted to the wrong account.
b) a transaction has been entered twice.
c) a transaction has been omitted.
d) only the debit side of a journal entry has been posted.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
20. The main purpose of a trial balance is
a) to serve as a basic internal control.
b) to assist in preparation of the financial statements.
c) to prove the mathematical equality of debits and credits after posting.
d) to uncover errors in journalizing and posting.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
21. Which of the following is a correct partial entry for a company that has just paid $95 for freight for an inventory purchase and uses a periodic inventory system?
a) Dr. Freight-out $95
b) Dr. Cash $95
c) Dr. Freight in $95
d) Dr. Inventory $95
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
22. The book of original entry is referred to as the
a) general ledger.
b) general journal.
c) trial balance.
d) statement elements.
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
23. Adjusting entries are necessary to
1. obtain a proper matching of revenue and expense.
2. achieve an accurate statement of assets and equities.
3. adjust assets and liabilities to fair market value.
a) 1 and 3
b) 2 and 3
c) 3
d) 1 and 2
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
24. If, during an accounting period, an expense item has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve
a) a liability account and an asset account.
b) an asset or contra-asset and an expense account.
c) a liability account and an expense account.
d) a receivable account and a revenue account.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
25. For adjusting entries relating to accrued revenues,
a) a liability-revenue account relationship exists.
b) the adjusting entry involves a credit to an asset account and a debit to a revenue account.
c) if an adjustment is not made, assets will be overstated.
d) before adjustment, both assets and revenues are understated.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
26. Which of the following would NOT be a correct form for an adjusting entry?
a) a debit to a revenue and a credit to a liability
b) a debit to an expense and a credit to a liability
c) a debit to a liability and a credit to a revenue
d) a debit to an asset and a credit to a liability
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
27. Which of the following must be considered in estimating depreciation on an asset for an accounting period?
a) only the original cost of the asset
b) only the asset’s useful life
c) both the original cost of the asset and its useful life
d) the decline in its fair market value
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
28. The type of account and normal balance of “Accumulated Depreciation -Equipment” is
a) Asset, Credit.
b) Contra-asset, Credit.
c) Contra-asset, Debit.
d) Liability, Credit.
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
29. If the accountant forgets to record an adjustment for Accumulated Depreciation–Building at the end of the accounting period, this will cause
a) an overstatement of assets.
b) an understatement of assets.
c) an overstatement of expenses.
d) an overstatement of liabilities.
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
30. An adjusting entry for bad debts will generally
a) increase an expense account and decrease an asset account.
b) increase an expense account and increase an asset account.
c) increase an expense account and increase a contra-asset account.
d) increase an expense account and increase a liability account.
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
31. An accrued revenue can best be described as an amount
a) collected and currently matched with expenses.
b) collected and not currently matched with expenses.
c) not collected and currently matched with expenses.
d) not collected and not currently matched with expenses.
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
32. On September 1, 2023, Regal Corp. made the annual lease payment of $24,000 for its fleet of delivery trucks. The payment covered the period September 1, 2023 to August 31, 2024. Assuming the entire amount had originally been debited to Lease Expense, the required adjustment at December 31, 2023 is
a) debit Lease Expense and credit Prepaid Expenses $8,000.
b) debit Prepaid Expenses and credit Lease Expense $8,000.
c) debit Prepaid Expenses and credit Lease Expense $16,000.
d) debit Lease Expense and credit Prepaid Expenses $16,000.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $24,000 – ($24,000 x 4 ÷ 12) = $16,000
33. Principle Place determines that it has NOT yet recorded the 2023 accrual for interest income to be received in 2024. Assuming the amount to be recorded for 2023 is $6,000, the required adjustment at December 31, 2023, is
a) debit Interest Receivable and credit Interest Income $6,000.
b) debit Interest Income and credit Interest Receivable $6,000.
c) debit Interest Payable and credit Interest Income $6,000.
d) No adjusting entry is required.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: No calculation necessary ($6,000 is figure given in the question.)
34. On November 1, 2023, Halton Corp. purchased equipment by signing a 6-month, 4% note for $180,000. The December 31, 2023, adjusting entry required in connection with this note is
a) debit Interest Expense and credit Interest Payable, $7,200.
b) debit Interest Expense and credit Interest Payable, $3,600.
c) debit Interest Expense and credit Interest Payable, $1,200.
d) debit Interest Expense and credit Cash, $1,200.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $180,000 x 4% × 2 ÷ 12 = $1,200
35. Tabby Corp.’s account balances at December 31, 2023, included Accounts Receivable, $192,500 debit; Allowance for Doubtful Accounts, $1,250 credit. From a review of the receivables, Blue estimates that $7,000 of the December 31 receivables will be uncollectible. The required adjusting entry would include a credit to the allowance account for
a) $ 1,250.
b) $8,250.
c) $7,000.
d) $5,750.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $7,000 – $1,250= $5,750
36. Siamese Corp.’s account balances at December 31, 2023, included Accounts Receivable, $360,000 debit; Allowance for Doubtful Accounts, $400 debit. Sales during 2023 were $920,000. It is estimated that 2% of sales will be uncollectible. The required adjusting entry would include a credit to the allowance account for
a) $14,400.
b) $18,400.
c) $7,200.
d) $15,300.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $920,000 × 2% = $18,400. (Allowance for Doubtful Accounts balance is irrelevant)
37. On September 1, 2023, Rudolph Corporation received $54,000 cash from a tenant for one year’s rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2023, required adjusting entry in connection with this would be
a) debit Rent Revenue and credit Unearned Rent, $18,000.
b) debit Rent Revenue and credit Unearned Rent, $36,000.
c) debit Unearned Rent and credit Rent Revenue, $18,000.
d) debit Cash and credit Unearned Rent, $9,000.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 8 ÷ 12 × $54,000 = $36,000
38. On October 31, 2023, Kiwi Inc. lent $63,000 to Plum Inc. in return for a three-month, 4% interest-bearing note. What adjusting entry should Kiwi Inc. make on December 31, 2023, in connection with this note?
a) Debit Interest Receivable and credit Interest Income, $630.
b) Debit Cash and credit Interest Income, $420.
c) Debit Interest Receivable and credit Interest Income, $420.
d) Debit Interest Income and credit Interest Receivable, $210.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $63,000 x 4% x 2 ÷ 12 = $420
39. Lime Limited has received an invoice for $75,000 in property taxes for the calendar year 2023. The invoice was received and paid in June 2023 and the entire amount was debited to Property Tax Expense. Assuming Lime does NOT prepare interim financial statements, the required adjustment on December 31, 2023, related to the property taxes is
a) debit Property Tax Expense and credit Prepaid Expenses $31,250.
b) debit Prepaid Expenses and credit Property Tax Expense $37,500.
c) debit Property Tax Expense and credit Prepaid Expenses $37,500.
d) No adjusting entry is required.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: No calculation necessary (No adjusting entry is required as prepaid balance at December 31 is zero)
40. On December 10, 2023, Bella Inc. received a cheque for $13,625 from a customer for services that Bella will be performing in December 2023 and January 2024. By December 31, 2023, Bella had earned 60% of that amount. Assuming the appropriate year-end adjustments were made, the 2023 balance in Bella Unearned Revenue account will be
a) $8,175.
b) $6,812.50.
c) $5,450.
d) zero.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $13,625 x 40% = $5,450
41. On May 15, 2023, Bagle Corp. purchased 1,000 common shares of Holter Inc. for $24,000, as a Fair Value through Other Comprehensive Income (FV–OCI) equity investment. At December 31, 2023, the fair value of these shares was $26,550. The required adjusting entry to reflect this is
a) debit FV–OCI Investment, credit Unrealized Gain or Loss (OCI) $26,550.
b) debit Unrealized Gain or Loss (OCI), credit FV–OCI Investment $26,550.
c) debit FV–OCI Investment, credit Unrealized Gain or Loss (OCI) $2,550.
d) debit Unrealized Gain or Loss (OCI), credit FV–OCI Investment $2,550.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $26,550 – $24,000 = $2,550 gain
42. On May 15, 2023, Croissant Corp. purchased 1,000 common shares of Holter Inc. for $24,000, as a Fair Value through Net Income (FV–NI) equity investment. At December 31, 2023, the fair value of these shares was $23,100. The required adjusting entry to reflect this is
a) debit FV-NI Investments, credit Unrealized Gain or Loss–OCI $23,100.
b) debit Unrealized Gain or Loss - OCI, credit FV-NI Investments $23,100.
c) debit FV-NI Investments, credit Investment Income or Loss $15,900.
d) debit Investment Income or Loss, credit FV-NI Investments $900.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $23,100 – $24,000 = $900 loss
Use the following information for questions 43–45.
Orange Corp reported the following items on its calendar 2023 statement of comprehensive income:
Interest income $84,200
Salaries expense 72,000
Insurance expense 10,600
As well, its comparative statement of financial position showed the following balances:
December 31, 2022 December 31, 2023
Interest receivable $10,100 $8,800
Salaries payable 9,800 5,400
Prepaid insurance 1,500 1,600
43. The cash received for interest during 2023 was
a) $82,900.
b) $84,200.
c) $85,500.
d) $74,100.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $10,100 + $84,200 – $8,800 = $85,500
44. The cash paid for salaries during 2023 was
a) $76,400.
b) $72,000.
c) $67,600.
d) $81,800.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $9,800 + $72,000 – $5,400 = $76,400
45. The cash paid for insurance premiums during 2023 was
a) $ 9,100.
b) $ 9,000.
c) $10,700.
d) $10,600.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $10,600 + $1,600 – $1,500 = $10,700
Use the following information for questions 46–48.
During the 2023 calendar year, Purple Corp. paid or collected for the following items:
Insurance premiums paid $ 14,200
Interest collected 21,700
Salaries paid 131,300
As well, the comparative statement of financial position showed the following balances:
December 31, 2022 December 31, 2023
Prepaid Insurance $ 1,400 $ 1,500
Interest Receivable 2,800 2,100
Salaries Payable 14,700 12,900
46. The insurance expense on the 2022 statement of comprehensive income was
a) $12,700.
b) $12,800.
c) $14,100.
d) $14,200.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $14,200 – $1,500 + $1,400 = $14,100
47. The interest income on the 2023 statement of comprehensive income was
a) $22,400.
b) $21,700.
c) $19,600.
d) $21,000.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $21,700 + $2,100 - $2,800 = $21,000
48. The salary expense on the 2023 statement of comprehensive income was
a) $118,400.
b) $133,100.
c) $131,300.
d) $129,500.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $131,300 +$12,900 - $14,700 = $129,500
49. Amazing Company acquires a trade name from Fantastic Ltd. Amazing estimates it will receive $7,200 per year from the name over the next 9 years. Using a discount rate of 4%, what is the value in use to Amazing for this trade name?
a) $45,528
b) $58,398
c) $53,534
d) $55,676
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $7,200 x 7.43533 = $53,534
50. On September 1, 2022, Culver Corp. issued a 9% note payable to National Bank for $750,000, payable in three equal annual principal payments of $250,000, plus interest. On this date, the bank's prime rate was 8%. The first payment for interest and principal was made on September 1, 2023. At December 31, 2023, Culver should record accrued interest payable of
a) $13,333.
b) $22,500.
c) $15,000.
d) $10,000.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
CPA: Problem Solving and Decision Making
Bloomcode: Application
AACSB: Analytic
Feedback: ($750,000 – $250,000) × 9% × 4 ÷ 12 = $15,000
51. Rathbone Corp. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenues. This account had a balance of $1,100,000 at December 31, 2023, before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $325,000 at December 31, 2023.
Service contracts still outstanding at December 31, 2023, expire as follows:
During 2024 $140,000
During 2025 210,000
During 2026 99,000
What amount should be reported as Unearned Service Revenues on Rathbone's December 31, 2023, statement of financial position?
a) $774,000
b) $325,000
c) $449,000
d) $124,000
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $140,000 + $210,000 + $99,000 = $449,000
52. On December 1, 2023, Flynn Consulting paid $27,000 for a three-year insurance policy (December 1, 2023 to November 30, 2026) and debited the entire amount to Prepaid Insurance. The December 31, 2023, required adjusting entry in connection with this policy would be
a) debit Prepaid Insurance and credit Insurance Expense $750.
b) debit Insurance Expense and credit Prepaid Insurance $750.
c) debit Insurance Expense and credit Prepaid Insurance $26,250.
d) debit Prepaid Insurance and credit Insurance Expense $26,250.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $27,000 x 1 ÷ 36 = $750
53. On June 1, 2023, Carr Corp. loaned Farr Corp. $600,000 on a 5% note, payable in five annual instalments of $120,000 (plus interest), beginning January 2, 2024. Interest on the note is payable on the first day of each month beginning July 1, 2023. Farr made timely payments through November 1, 2023. On January 2, 2024, Carr received payment of the first principal instalment plus all interest due. At December 31, 2023, Carr's interest receivable on this loan is
a) $0.
b) $2,500.
c) $5,000.
d) $7,500.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $600,000 × 5% × 2 ÷ 12 = $5,000
54. Grant Limited pays all salaried employees on a biweekly basis. However, 0vertime pay is paid in the next biweekly period. Grant accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2023 are as follows:
Last payroll was paid on Dec 27, 2023, for the two-week period ended Dec 27, 2023.
Overtime pay earned in the two-week period ended Dec 27, 2023 was $7,000.
Remaining workdays in 2023 were December 28, 29, 30, on which days there was no overtime.
The regular biweekly salaries total $100,000. Assuming a five-day work week, Grant should record a liability at December 31, 2023 for accrued salaries of
a) $24,000.
b) $29,000.
c) $37,000.
d) $53,000.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $7,000 + ($100,000 ÷ 10 × 3) = $37,000
55. Mark-Wall Corp.'s trademark was licensed to Rodgers Inc. for royalties of 12% of sales of the trademarked items. Royalties are payable semi-annually on March 15 for sales in July through December of the previous year, and on September 15 for sales in January through June of the same year. Mark-Wall received the following royalties from Rodgers:
March 15 September 15
During 2022 $5,000 $9,000
During 2023 8,000 6,000
Rodgers estimates that sales of the trademarked items would total $67,000 for July through December 2023. On its statement of comprehensive income for calendar 2023, Mark-Wall’s royalty revenue should be
a) $8,040.
b) $14,000.
c) $14,040.
d) $21,000.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $6,000 + ($67,000 × 12%) = $14,040
56. Which of the following is NOT an account appearing in the equity section of a corporation’s statement of financial position?
a) Contributed Surplus
b) Common Shares
c) Owner’s Equity
d) Accumulated Other Comprehensive Income
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
57. Zack Jones operates a sole proprietorship, selling sporting equipment. He has recently prepared financial statements for the fiscal year end of the business. Which equity accounts would you expect to see on the balance sheet?
a) Common Shares, Dividends, and Owner’s Equity
b) Common Shares, Capital, and Owner’s Drawings
c) Capital and Owner’s Drawings, grouped or added under Owner’s Equity
d) Owner’s Equity and Dividends, netted together as Retained Earnings
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
58. Marvin holds 10% of the common shares of Pink Limited. For the 2023 fiscal year end, all shareholders received a cash payment to represent their share in the net income of Pink Limited. How would this cash payment be reported in the equity section of Pink Limited’s financial statements?
a) as a reduction in the Owner’s Equity account
b) as an owner withdrawal, reducing Shareholder’s Equity of Pink Limited
c) as a dividend, reducing Shareholder’s Equity of Pink Limited
d) This payment would not impact the equity section of the financial statements.
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
59. What account are net revenues and expenses transferred to at the end of the accounting period?
a) Comprehensive Income
b) Retained Earnings
c) Accumulated Other Comprehensive Income
d) Share Capital
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
60. An unearned revenue can best be described as an amount
a) collected and currently matched with expenses.
b) collected and not currently matched with expenses.
c) not collected and currently matched with expenses.
d) not collected and not currently matched with expenses.
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
61. Which type of account is always debited during the closing process?
a) dividends
b) expense
c) revenue
d) retained earnings
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
62. Which of the following statements is INCORRECT regarding fair value adjustments for investments?
a) Both FV–NI investments and FV–OCI investments could include equity investments but not investments in debt securities.
b) FV–OCI investments include debt securities.
c) At each period end, an estimate is made of the fair value of both FV–NI and FV–OCI investments.
d) An adjusting entry is required to record a holding gain or loss on FV–NI investments.
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
63. In the closing process, all the revenue and expense accounts are transferred to a clearing account called
a) Other Comprehensive Income.
b) Common Shares.
c) Retained Earnings.
d) Income Summary.
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
64. A corporation’s net income or loss is closed at year end to
a) Accumulated Other Comprehensive Income.
b) Common Shares.
c) Retained Earnings.
d) Other Comprehensive Income.
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
65. A post-closing trial balance
a) includes temporary accounts only.
b) includes permanent accounts only.
c) includes both temporary and permanent accounts.
d) may include expense accounts.
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
66. Which of the following statements about the trial balance is correct?
a) The debits and credits must balance.
b) The equality of credits and debits ensures that no errors were made.
c) The post-closing trial balance includes temporary accounts only.
d) The post-closing trial balance is used to prepare the financial statements.
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
67. If the inventory account at the end of the year is understated, the effect will be to
a) overstate the cost of goods sold.
b) understate the net purchases.
c) overstate the gross profit on sales.
d) overstate the goods available for sale.
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
68. Frog Corporation had revenues of $300,000, expenses of $325,000, and dividends of $15,000. When Income Summary is closed to Retained Earnings, the amount of the debit or credit to Retained Earnings is a
a) debit of $25,000.
b) debit of $40,000.
c) credit of $25,000.
d) credit of $40,000.
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $300,000 – $325,000= $25,000 debit
Use the following information for questions 69–70.
Pearl Inc. is currently preparing closing entries. The company had total revenues of $2,500,000, total expenses of $1,950,000 and dividends of $10,000 for the year.
69. Which of the following partial entries would NOT be made during the closing process?
a) Cr. Income summary $2,500,000
b) Cr. Retained earnings $550,000
c) Dr. Income summary $1,950,000
d) Dr. Dividends $10,000
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2,500,000 – $1,950,000 = $550,000
70. Based on the information provided, what is the impact on the retained earnings?
a) Increase of $2,500,000
b) Increase of $540,000
c) Decrease of $10,000
d) Decrease of $1,950,000
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2,500,000 – $1,950,000 - 10,000 = $540,000
EXERCISES
Ex. C-71 Definitions
Define the following terms:
1. Event
2. Work sheet
3. Permanent accounts
4. Temporary accounts
5. Income summary
6. General ledger
Solution C-71
1. An event is something of consequence that happens. For a business, an event is generally the source or cause of changes in assets, liabilities, and equity.
2. Work sheets are used as informal tools to help accountants prepare financial statements.
3. Permanent accounts are assets, liability, and equity accounts. Unlike temporary accounts, permanent accounts are NOT closed.
4. Temporary accounts include revenue, expense and dividend accounts. Unlike permanent accounts, they are periodically closed.
5. The Income Summary is an account that is used as part of the closing process. It facilitates the closing of the temporary accounts at year end.
6. A general ledger is a collection of all the business’ accounts and may include subsidiary ledgers for specific accounts.
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex. C-72 Definitions
Provide clear, concise answers for the following:
1. What is the accrual basis of accounting?
2. What is an accrued expense?
3. What is accrued revenue?
4. What is a prepaid expense?
5. What is unearned revenue?
6. State the rule that indicates which adjusting entries for prepaid and unearned items should be reversed.
Solution C-72
1. The accrual basis of accounting recognizes revenue when the performance obligation is satisfied and recognizes expenses in the period incurred.
2. An accrued expense is an expense that is incurred but not paid in cash or recorded.
3. An accrued revenue is a revenue that is recognized but not yet received in cash or recorded.
4. A prepaid expense is an expense paid in cash and recorded as an asset before it is used.
5. Unearned revenues are the revenues received in cash and recorded as liabilities before they are recognized.
6. Reversing entries are used for accrued revenues and accrued expenses.
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. C-73 Recordable events
Before transactions are entered into a corporation's accounting system, the underlying event must be analyzed, to determine how (and if) it should be recorded. The situations below relate to Maxwell Corporation:
Instructions
Indicate whether the items listed below should be recorded.
1. A new mortgage contract for its new factory building is signed.
2. The first mortgage payment is made.
3. Wages for the current month are paid.
4. A new secretary is hired.
5. Property taxes are paid.
6. HST collections for the current month are forwarded to the CRA.
Solution C-73
1. Not recordable
2. Recordable
3. Recordable
4. Not recordable
5. Recordable
6. Recordable
Difficulty: Easy
Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation.
Section Reference: Accounting System Overview
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. C-74 The accounting cycle
Summarize the steps in the accounting cycle.
Solution C-74
The accounting cycle may be summarized in 10 steps as follows:
1. identification and measurement of transactions and other events
2. journalization of current period's entries into journals
3. posting of journals to the general ledger
4. preparation of trial balance (unadjusted)
5. preparation and posting of adjusting entries
6. preparation of adjusted trial balance
7. preparation of financial statements
8. preparation and posting of closing entries
9. preparation of post-closing trial balance
10. preparation and posting of reversing entries (optional)
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. C-75 Adjusting entries
Prepare the adjusting entries that are required on July 31, 2023, the end of the fiscal year, for each of the following:
1. The supplies inventory on August 1, 2022, was $8,350. Supplies costing $16,650 were purchased during the fiscal year and debited to Supplies Inventory. A count on July 31, 2023, indicated supplies on hand of $6,810.
2. On April 30, a ten-month, 4% note for $40,000 was received from a customer.
3. On March 1, $8,400 was collected as rent for one year and a nominal (temporary) account was credited.
Solution C-75
1. Supplies Expense (8,350 + 16,650 – 6,810) 18,190
Supplies 18,190
2. Interest Receivable (40,000 x 4% x 3 ÷ 12) 400
Interest Income 400
3. Rent Revenue (8,400 x 7 ÷ 12 unearned) 4,900
Unearned Revenue 4,900
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. C-76 Adjusting entries
Reed Co. wishes to record receipts and payments so that adjustments at the end of the period will NOT require reversing entries at the beginning of the next period.
Instructions
Record the following initial transaction and the subsequent adjusting entry on December 31, 2023 (two entries for each part).
1. An insurance policy for two years was purchased on April 1, 2023, for $18,000.
2. Rent of $12,000 for six months for a portion of the building was received on November 1, 2023.
Solution C-76
1. Prepaid Insurance 18,000
Cash 18,000
Insurance Expense (18,000 x 9 ÷ 24) 6,750
Prepaid Insurance 6,750
2. Cash 12,000
Unearned Rent Revenue 12000
Unearned Rent Revenue(12,000 x 2 ÷ 6) 4,000
Rent Revenue 4,000
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. C-77 Adjusting Entries
Road Runner Corporation prepares monthly financial statements. Below is a list of selected trial balance accounts and the corresponding balances on the March 31. No adjustments have been made for the month of March. All accounts have normal balances.
Road Runner CORPORATION
March 31, 2023
Cash $7,300
Supplies 3,000
Equipment 19,500
Accumulated depreciation–Equipment 1,200
Accounts payable 1,100
Unearned revenue 1,200
Common shares 10,000
Retained earnings 17,500
Rent revenue 6,360
Salaries expense 1,150
Insurance expense 6,600
Additional information:
1. A physical count of supplies revealed $1,200 on hand on March 31.
2. A two-year insurance policy was purchased on March 1 for $6,600 and was fully expensed.
3. The equipment was purchased on January 1 for $19,500 and has an estimated useful life of three years and a salvage value of $1,500.
- Rent received in advance that remains unearned at March 31 is $350.
- Income tax of $2,500 is owed.
Instructions
Using the above information, prepare the adjusting entries that should be made by Road Runner on March 31 (adjusting entries are made monthly).
Solution C-77
1. Supplies Expense $1,800
Supplies $1,800
($3,000 – $1,200 = $1,800)
2. Prepaid Insurance $6,325
Insurance Expense $6,325
($6,600 / 24 = $275, $6,600 – $275 = $6,325)
3. Depreciation Expense $600
Accumulated Depreciation $600
($19,500 – $1,500) / 3 years x 1/12 = $600
4. Unearned Revenue $950
Revenue $950
($1,200 – $25 0 = $950)
5. Income tax expense $2,500
Income tax payable $2,500
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. C-78 Calculation of expense
The records for Jay Inc. provided the following information for 2023:
Jan 1 Dec 31
Accrued expenses $2,000 $3,600
Prepaid expenses 900 800
Cash paid during the year for expenses $55,000
Instructions
Calculate the total amount of expenses that should be reported on the 2023 statement of comprehensive income.
Solution C-78
$55,000 – $2,000 + $3,600 + $900 – $800 = $56,700.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. C-79 Calculation of revenue
The records for Oriole Corp. provided the following information for 2023:
Jan 1 Dec 31
Unearned revenue $3,000 $3,400
Accrued revenue 1,400 1,100
Cash collected during the year from revenue $85,000
Instructions
Show the calculation of the amount of revenue that should be reported on the 2023 statement of comprehensive income.
Solution C-79
$85,000 + $3,000 – $3,400 – $1,400 + $1,100 = $84,300.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. C-80 Preparing financial statements
The adjusted trial balance of Ryan Financial Planners appears below.
Instructions
Using the information from the adjusted trial balance, prepare the following statements for the month ended December 31:
a) an income statement
b) a retained earnings statement
c) a balance sheet
Ryan Financial Planners
Adjusted Trial Balance
December 31, 2023
Debit Credit
Cash $ 2,900
Accounts Receivable 2,200
Supplies 1,800
Equipment 16,000
Accumulated Depreciation—Equipment $ 4,000
Accounts Payable 3,300
Unearned Revenue 5,000
Common Shares 10,000
Retained Earnings 4,400
Dividends 2,000
Service Revenue 4,200
Supplies Expense 600
Depreciation Expense 2,500
Rent Expense 2,900 _________
$30,900 $30,900
Solution C-80
a)
Ryan Financial Planners
Income Statement
For the Month Ended December 31, 2023
Revenues
Service revenue $ 4,200
Expenses
Rent expense $2,900
Depreciation expense 2,500
Supplies expense 600
Total expenses 6,000
Net loss $(1,800)
b)
Ryan Financial Planners
Statement of Retained Earnings
For the Month Ended December 31, 2023
Retained earnings, December 1 $ 4,400
Less: Net loss $1,800
Dividends 2,000 3,800
Retained earnings, December 31 $ 600
c)
Ryan Financial Planners
Balance Sheet
December 31, 2023
Assets
Cash $ 2,900
Accounts receivable 2,200
Supplies 1,800
Equipment $16,000
Less: Accumulated depreciation–equipment 4,000 12,000
Total assets $18,900
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 3,300
Unearned revenue 5,000
Total liabilities $ 8,300
Shareholders’ Equity
Common shares 10,000
Retained earnings 600 10,600
Total liabilities and shareholders’ equity $18,900
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. C-81 Calculation of expense
Sales salaries paid during 2023 were $90,000. Advances to salesmen were $1,300 on January 1, 2023, and $800 on December 31, 2023. Sales salaries payable were $1,300 on January 1, 2023, and $1,400 on December 31, 2023.
Instructions
Calculate the Sales Salaries Expense for calendar 2023.
Solution C-81
$90,000 + $1,300 – $800 – $1,300 + $1,400 = $90,600.
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. C-82 Type of ownership structure
Explain whether the financial statement excerpt below is from the financial statements of a corporation, a sole proprietorship, or a partnership:
Abhrams, Capital $20,000
Johnston, Capital 25,000
Zinck, Capital 20,000
Total $65,000
Solution C-82
This is an excerpt from partnership financial statements. A corporation would have share capital accounts (common shares and, possibly, preferred shares) and would report Retained Earnings of the firm. Therefore, we know that this excerpt is not a corporation. Since there are capital accounts for more than one individual, it cannot be a sole proprietorship. Therefore, based on the multiple owners’ capital accounts, it can be concluded that this is an excerpt from a partnership’s financial statements.
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
Bloomcode: Knowledge
CPA: Communication
CPA: Financial Reporting
AACSB: Communication
Ex. C-83 Reversing Entries
Wiley E Coyote Corp. has a fiscal year-end of July 31. Employees are paid bi-weekly and in the current year the bi-weekly pay period ends on July 25; the next period extends from July 26 to August 8. Total bi-weekly payroll is $21,000 and is based on a seven-day work week. Wiley E prepares reversing entries for all its accrued expenses at year-end.
Instructions:
Prepare all necessary entries related to the August 8 payroll, including any closing entries. Explain if or how the entries might be different if the company did not use reversing entries.
Solution C-83
July 31 Salaries and Wages Expense 9,000
Salaries and Wages Payable 9,000
($21,000 / 14 x 6 days)
July 31 Income Summary 9,000
Salaries and Wages Expense 9,000
Reversing entry
Aug. 1 Salaries and Wages Payable 9,000
Salaries and Wages Expense 9,000
Aug. 9 Salaries and Wages Expense 21,000
Cash 21,000
If the company did not do reversing entries, the August 1 entry would not be made and the entry on August 9 would be as follows:
Aug. 9 Salaries and Wages Expense 12,000
Salaries and Wages Payable 9,000
Cash 21,000
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
Bloomcode: Application
CPA: Financial Reporting
AACSB: Communication
PROBLEMS
Pr. C-84 Journal entries
Jonathan Green owns Gopher Greenhouses, a gardening centre (as a sole proprietorship). His first year of operations included the following selected events and transactions:
January:
1. He invested $300,000 in his business.
2. He bought a greenhouse for $100,000 cash.
May:
3. He hired a greenhouse supervisor at an annual salary of $34,000.
June:
4. He ordered and paid for a shipment of flowers with a cost of $80,000.
5. He sold flowers for $40,000. Half of these sales were made on account.
August:
6. He received a deposit of $5,000 from a customer to put merchandise "on hold".
7. He paid current month's salaries of $3,000.
Instructions
Prepare all required journal entries.
Solution C-84
1. Cash 300,000
Capital 300,000
2. Building 100,000
Cash 100,000
3. No entry required.
4. Inventory 80,000
Cash 80,000
5. Cash 20,000
Accounts Receivable 20,000
Sales 40,000
6. Cash 5,000
Unearned Revenue 5,000
7. Salaries Expense 3,000
Cash 3,000
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. C-85 Adjusting entries
The information shown below relates to Flower Corporation. At December 31, 2023, Flower's general ledger shows the following balances:
Prepaid lease $7,000 Debit
Prepaid insurance $1200 Debit
Unearned revenue $84,000 Credit
In addition, the following information is available:
1. The entire amount shown as prepaid lease has expired.
2. One-third of the amount shown as prepaid insurance has expired.
3. Half of the amount shown as unearned revenue has now been earned.
Instructions
Prepare all adjusting entries that are required at December 31, 2023.
Solution C-85
1. Lease Expense 7,000
Prepaid Expenses 7,000
2. Insurance Expense (1,200 x 1 ÷ 3) 400
Prepaid Insurance 400
3. Unearned Revenue (84,000 x ½) 42,000
Revenue 42,000
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. C-86 Adjusting entries
Part I
Maison Corp. has reported pre-tax income of $250,000 for calendar 2023, before considering the five items below. Prepare the adjusting entries needed at December 31, 2023 in order to correctly state the 2023 pre-tax income. If no entry is needed, write NONE.
1. Interest on a $42,000, 7%, six-year note payable was last paid on September 1, 2022.
2. On May 31, 2023, Maison entered a contract to provide services to a customer for 18 months beginning June 1. The customer paid the $18,000 fee in full on June 1 and Maison credited it to Service Revenue.
3. On August 1, 2023, Maison paid a year’s rent in advance on a warehouse and debited the $48,000 payment to Prepaid Rent.
4. Depreciation on office equipment for 2023 is $17,000.
5. On December 18, 2023, Maison paid the local newspaper $1,000 for an advertisement to be run in January of 2024, debiting it to Prepaid Expenses.
Part II
Show the effect of each adjusting entry in Part I on previously reported pre-tax income, and indicate the correct amount of pre-tax income.
Reported 2023 pre-tax income $250,000
Add (deduct) Item (1)
(2)
(3)
(4)
(5)
Correct 2023 pre-tax income $__________
Solution C-86
Part I
1. Interest Expense (42,000 x 7% x 4 ÷ 12) 980
Interest Payable 980
2. Service Revenue (18,000 x 11 ÷ 18 unearned) 11,000
Unearned Revenue 11,000
3. Rent Expense (48,000 x 5 ÷ 12) 20,000
Prepaid Rent 20,000
4. Depreciation Expense 17,000
Accumulated Depreciation - Equipment 17,000
5. NONE
Part II
Reported 2023 pre-tax income $250,000
Add (deduct) Item (1) (980)
(2) (11,000)
(3) (20,000)
(4) (17,000)
(5) 0 (48,980)
Correct 2023 pre-tax income $201,020
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. C-87 Adjusting and closing entries
The following trial balance was taken from the books of Kaslo Corporation at December 31, 2023:
Account Debit Credit
Cash $ 40,000
Accounts Receivable 108,000
Note Receivable 8,000
Allowance for Doubtful Accounts $ 1,800
Inventory 54,000
Prepaid Insurance 4,800
Equipment 138,000
Accumulated Depreciation–Equipment 15,000
Accounts Payable 10,800
Common Shares 44,000
Retained Earnings 65,000
Sales Revenue 410,000
Cost of Goods Sold 128,000
Salaries and Wages Expense 53,000
Rent Expense 12,800 __________
Totals $546,600 $546,600
At year end, the following items have not yet been recorded.
1. Insurance expired during the year, $3,000.
2. Estimated bad debts, 1 percent of gross sales.
3. Depreciation on equipment, 10% per year.
4. Interest at 9% is receivable on the note for one full year.
5. Rent paid in advance at December 31, $6,800 (originally debited to expense).
6. Accrued salaries at December 31, $6,200.
Instructions
a) Prepare the necessary adjusting entries.
b) Prepare the necessary closing entries.
Solution C-87
a) Adjusting Entries
1. Insurance Expense 3,000
Prepaid Insurance 3,000
2. Bad Debt Expense (410,000 x 1%) 4,100
Allowance for Doubtful Accounts 4,100
3. Depreciation Expense (138,000 x 10%) 13,800
Accumulated Depreciation - Equipment 13,800
4. Interest Receivable (8,000 x 9%) 720
Interest Income 720
5. Prepaid Rent 6,800
Rent Expense 6,800
6. Salaries and Wages Expense 6,200
Salaries and Wages Payable 6,200
b) Closing Entries
Sales 410,000
Interest Income 720
Income Summary 410,720
Income Summary 214,100
Salaries and Wages Expense 59,200
Rent Expense 6,000
Depreciation Expense 13,800
Bad Debt Expense 4,100
Insurance Expense 3,000
Cost of Goods Sold 128,000
Income Summary 196,620
Retained Earnings 196,620
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: Adjusting Entries
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. C-88 Adjusting and closing entries
Charles Corporation
Adjusted Trial Balance
December 31, 2023
Debit Credit
Cash $ 33,400
Accounts Receivable 87,400
Inventory 90,000
Supplies 7,000
Equipment 266,000
Accumulated Depreciation—Equipment $ 80,000
Notes Payable 82,000
Accounts Payable 117,000
Common Shares 200,000
Retained Earnings 16,000
Sales 1,494,400
Sales Returns and Allowances 8,400
Cost of Goods Sold 994,800
Salaries Expense 280,000
Advertising Expense 52,800
Utilities Expense 28,000
Repair Expense 24,200
Delivery Expense 33,400
Rent Expense 48,000
Supplies Expense 4,000
Depreciation Expense 32,000
Interest Expense 22,000
Interest Payable ____________ 22,000
Totals $2,011,400 $2,011,400
Instructions
1. Using the above adjusted trial balance of Charles Corporation, prepare the adjusting entries.
2. Using the above adjusted trial balance of Charles Corporation, prepare the closing entries.
Solution C-88
1. Supplies Expense 4,000
Supplies 4,000
Depreciation Expense 32,000
Accumulated Depreciation-Equipment 32,000
Interest Expense 22,000
Interest Payable 22,000
2. Sales 1,494,400
Income Summary 1,494,400
Income Summary 1,527,600
Sales Returns and Allowances 8,400
Cost of Goods Sold 994,800
Salaries Expense 280,000
Advertising Expense 52,800
Utilities Expense 28,000
Repair Expense 24,200
Delivery Expense 33,400
Rent Expense 48,000
Supplies Expense 4,000
Depreciation Expense 32,000
Interest Expense 22,000
Retained Earnings 33,200
Income Summary 33,200
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Pr. C-89 Closing entries
Below is a selection of account balances for Howard Ltd. at December 31, 2023:
Sales $856,000
Sales returns and allowances 40,000
Cost of goods sold 456,000
Advertising expense 38,000
Salaries expense 113,000
Depreciation expense 31,000
Insurance expense 9,000
Administrative expenses 10,000
All accounts have their normal balances.
Instructions
Prepare all necessary closing entries at December 31, 2023.
Solution C-89
Sales 856,000
Sales returns and allowances 40,000
Income summary 816,000
Income summary 657,000
Administrative expense 10,000
Advertising expense 38,000
Depreciation expense 31,000
Cost of goods sold 456,000
Insurance expense 9,000
Salaries expense 113,000
Income summary 159,000
Retained earnings 159,000
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Pr. C-90 Adjusting entries
Data relating to the balances of various accounts affected by adjusting or closing entries appear below. (The entries, which caused the changes in the balances, are not given.) You are asked to supply the missing journal entries, which would logically account for the changes in the account balances.
1. Interest receivable at January 1, 2023, was $2,000. During 2023, cash received from debtors for interest on outstanding notes receivable was $4,700. The 2023 statement of comprehensive income showed Interest Revenue of $4,900. You are to prepare the missing adjusting entry that must have been made, assuming reversing entries are not made.
2. Unearned rent at January 1, 2023 was $5,300, and at December 31, 2023 was $6,000. The records indicate cash receipts from rental sources during 2023 were $45,000, all of which were credited to the Unearned Rent Account. You are to prepare the missing adjusting entry.
3. Accumulated Depreciation—Equipment at January 1, 2023, was $120,000, and at December 31, 2023, was $150,000. During 2023, one piece of equipment was sold. The equipment had an original cost of $10,000 and was three-quarters depreciated when sold. You are to prepare the missing adjusting entry.
4. Allowance for doubtful accounts on January 1, 2023, was $50,000. The balance in the allowance account on December 31, 2023, after making the annual adjusting entry, was $65,000. During 2023 bad debts of $30,000 were written off. You are to provide the missing adjusting entry.
5. Prepaid rent at January 1, 2023, was $24,000. During 2023 rent payments of $160,000 were made and debited to Rent Expense. The 2023 statement of comprehensive income shows Rent Expense of $180,000. You are to prepare the missing adjusting entry that must have been made, assuming reversing entries are not made.
6. Retained earnings at January 1, 2023, was $150,000 and at December 31, 2023, it was $210,000. During 2023, cash dividends of $50,000 were paid, which were correctly debited to Retained Earnings. You are to prepare the missing closing entry to close the Income Summary account.
Solution C-90
1. Interest Receivable 2,200
Interest Income 2,200
Interest income per books $4,900
Interest income received related to 2023
($4,700 – $2,000) 2,700
Interest accrued $2,200
2. Unearned Rent Revenue 44,300
Rent Revenue 44,300
Cash receipts $45,000
Beginning balance 5,300
Ending balance (6,000)
Rent revenue $44,300
3. Depreciation Expense 37,500
Accumulated Depreciation—Equipment 37,500
Ending balance $150,000
Beginning balance 120,000
Difference 30,000
Write-off at time of sale 3 ÷ 4 × $10,000 (debit) 7,500
$ 37,500
4. Bad Debt Expense 45,000
Allowance for Doubtful Accounts 45,000
Ending balance $65,000
Beginning balance 50,000
Difference 15,000
Written off 30,000
$45,000
5. Rent Expense 20,000
Prepaid Rent 20,000
Rent expense $180,000
Less cash paid 160,000
Reduction in prepaid rent account $ 20,000
6. Income Summary 110,000
Retained Earnings 110,000
Ending balance $210,000
Beginning balance 150,000
Difference 60,000
Cash dividends 50,000
Net income must be $110,000
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare adjusting entries.
Section Reference: Adjusting Entries
Learning Objective: Prepare a 10-column work sheet and financial statements.
Section Reference: Using a Work Sheet
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Pr. C-91 Trial balance correction
The Controller of SHD Corporation asks his assistant to correct the company's December 31, 2023, trial balance.
The preliminary trial balance, which does not balance, is reproduced below:
SHD Corporation
Trial Balance
December 31, 2023
Debit Credit
Cash $ 10,000
Accounts Receivable 15,000
Prepaid Insurance 600
Equipment 40,000
Inventory 9,000
Accounts Payable $ 11,590
Common Shares 110,000
Sales 17,100
Salaries 64,000
Supplies 2,150
Depreciation Expense 2,550 __________
$143,300 $138,690
The assistant's review uncovered the following errors:
1. The accounts payable for the purchase of inventories in the amount of $6,560 was recorded as $5,650 in error.
2. Depreciation expense was understated by $450.
3. Office supplies were overstated by $150.
4. A collection from a customer in the amount of $4,000 was not posted to the receivable ledger.
Instructions
Prepare a corrected trial balance.
Solution C-91
SHD Corporation
Corrected Trial Balance
December 31, 2023
Debit Credit
Cash 10,000
Accounts Receivable ($15,000 – $4,000) 11,000
Prepaid Insurance 600
Equipment 40,000
Inventory 9,000
Accounts Payable ($11,590 + $6,560 – $5,650) 12,500
Common Shares 110,000
Sales 17,100
Salaries 64,000
Supplies ($2,150 – $150) 2,000
Depreciation Expense ($2,550 + $450) 3,000 __________
$139,600 $139,600
Difficulty: Medium
Learning Objective: Explain how the type of ownership structure affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Pr. C-92 Accrual accounting
Prudence Corp.'s records provide the following information concerning certain account balances and changes in these account balances during the current year. Transaction information is missing from each item below.
Instructions
Prepare the entry to record the missing information for each account. (Consider each independently.)
1. Accounts Receivable: Jan 1, balance $30,000, Dec 31, balance $37,000, uncollectible accounts written off during the year, $4,000; accounts receivable collected during the year, $134,000. Prepare the entry to record sales for the year.
2. Allowance for Doubtful Accounts: Jan 1, balance $3,800, Dec 31 balance $7,700, uncollectible accounts written off during the year, $28,000. Prepare the entry to record bad debt expense.
3. Accounts Payable: Jan 1, balance $20,000, Dec 31, balance $33,000, purchases on account for the year, $110,000. Prepare the entry to record payments on account.
4. Interest Receivable: Jan 1 accrued, $3,000, Dec 31 accrued, $3,500, earned for the year, $14,000. Prepare the entry to record cash interest received.
Solution C-92
1. Ending balance $ 37,000 Ending balance $ 37,000
Beginning balance 30,000 Plus: Rec. collected 134,000
Difference 7,000 Write-offs 4,000
Uncollectible accounts 4,000 OR 175,000
Receivables collected 134,000 Less: Beginning balance 30,000
Sales for period $145,000 Sales for period $145,000
Accounts Receivable 145,000
Sales 145,000
2. Ending balance $ 7,700 Ending balance $ 7,700
Beginning balance 3,800 Write-off 28,000
Difference 3,900 OR 35,700
Write-off 28,000 Beginning balance 3,800
Adjusting entry $31,900 Adjusting entry $31,900
Bad Debts Expense 31,900
Allowance for Doubtful Accounts 31,900
3. Ending balance $ 33,000 Beginning balance $ 20,000
Beginning balance 20,000 Plus purchases 110,000
Difference 13,000 OR 130,000
Purchases 110,000 Less ending balance 33,000
Payments $ 97,000 Payments $ 97,000
Accounts Payable 97,000
Cash 97,000
4. Revenue Earned $14,000 Beginning balance $ 3,000
Less: Dec. 31 accrual (3,500) Plus revenue earned 14,000
Plus: Jan. 1 accrual 3,000 OR 17,000
Cash received $13,500 Less ending balance 3,500
Cash received $13,500
Cash 13,500
Interest Income 13,500
(This entry assumes that the $14,000 interest earned was first recorded as a receivable.)
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Pr. C-93 Ten-column work sheet
The work sheet and trial balance of Santos Corporation is reproduced below. The information given below is relevant to the preparation of adjusting entries needed to both properly match revenues and expenses for the period and reflect the proper balances in the permanent and temporary accounts.
Instructions
As the accountant for Santos, you are to prepare adjusting entries based on the following data, entering the adjustments on the work sheet and completing the additional columns with respect to the income statement and statement of financial position. Carefully key your adjustments and label all items. (An adjusted trial balance is not required, but is included in the solution.) Round all calculations to the nearest dollar.
(a) After an aging of accounts receivable, it was determined that three percent of the accounts will become uncollectible.
(b) Depreciation is calculated using the straight-line method, with an eight-year life and $1,000 residual (salvage) value.
(c) Salesmen are paid commissions of 11% of sales. Commissions on sales for the last week of December have not been paid.
(d) The note was issued on October 1, 2023, with interest at 8%, due Feb. 1, 2024.
(e) A physical inventory of supplies indicated $280 of supplies currently on hand.
(f) Provisions of the company’s lease contract specify rent payments must be made one month in advance, with monthly payments of $900/mo. This provision has been complied with as at Dec. 31, 2023.
Santos Corporation
Work Sheet
Year ended December 31, 2023
Adjusted Trial Statement of Statement of
Trial Balance Adjustments Balance Comp. Income Fin. Position
Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr Cr.
Cash $ 5,400
Trading investments 4,050
Accounts Receivable 40,000
Allow. for D.Accounts $420
Inventory 16,800
Supplies 1,040
Equipment 49,000
Accum. Depr.–Equip. 9,500
Accounts Payable 4,400
Notes Payable 4,250
Common Shares 40,000
Retained Earnings 25,340
Cost of Goods Sold 238,520
Office Salaries 20,800
Sales Comm. Exp, 29,000
Rent Expense 7,200
Misc. Expense 2,200
Sales _________ 330,100
Totals $414,010 $414,010
Solution C-93
Santos Corporation
Work Sheet
December 31, 2023
Adjusted Trial Statement of Statement of
Trial Balance Adjustments Balance Comp. Income Fin. Position
Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr Cr.
Cash 5,400 5,400 5,400
Trading Investments 4,050 4,050 4,050
Accounts Receivable 40,000 40,000 40,000
Allow. for D.Accounts 420 (a)780 1,200 1200
Inventory 16,800 16,800 16,800
Supplies 1,040 (e) 760 280 280
Equipment 49,000 49,000 49,000
Accum. Depr.–Equip. 9,500 (b) 6,000 15,500 15,500
Accounts Payable 4,400 4,400 4,400
Notes Payable 4,250 4,250 4,250
Common Shares 40,000 40,000 40,000
Retained Earnings 25,340 25,340 25,340
Cost of Goods Sold 238,520 238,520 238,520
Office Salaries 20,800 20,800 20,800
Sales Commission Exp. 29,000 (c) 7,311 36,311 36,311
Rent Expense 7,200 (f) 900 6,300 6,300
Misc. Expense 2,200 2,200 2,200
Sales _________ 330,100 330,100 330,100
Totals 414,010 414,010
Bad Debt Expense (a) 780 780 780
Depr. Expense (b) 6,000 6,000 6,000
Sales Com. Payable (c) 7,311 7,311 7,311
Interest Expense (d) 85 85 85
Interest Payable (d) 85 85 85
Supplies Expense (e) 760 760 760
Prepaid Rent (f) 900 ________ 900 _________ _________ 900 ________
Totals 15,836 15,836 311,756 330,100 116,430 98,086
Net Income __________ _________ 18,344 _________ _________ 18,344 _________ _________ 18,344
Totals 428,186 428,186 330,100 330,100 116,430 116,430
Santos Corporation
Work Sheet
Adjusted Trial Balance
Accounts Debit Credit
Cash 5,400
Trading Investments 4,050
Accounts Receivable 40,000
Allowance for Doubtful Accounts. 1,200
Inventory 16,800
Supplies 280
Equipment 49,000
Accumulated Depreciation–Equipment. 15,500
Accounts Payable 4,400
Notes Payable 4,250
Common Shares 40,000
Retained Earnings 25,340
Cost of Goods Sold 238,520
Office Salaries 20,800
Sales Commission Expense 36,311
Rent Expense 6,300
Miscellaneous Expense 2,200
Sales _________ 330,100
Bad Debt Expense 780
Depreciation Expense 6,000
Sales Com. Payable 7,311
Interest Expense 85
Interest Payable 85
Supplies Expense 760
Prepaid Rent 900
Totals 428,186 428,186
Adjusting entries and explanations
1. Bad Debt Expense 780
Allowance for Doubtful Accounts 780
(3% of accounts receivable is 3% × $40,000, which is $1,200. Since the allowance account has a credit balance of $420 before adjustment, $780 must be added to the allowance account.)
2. Depreciation Expense 6,000
Accumulated Depreciation–Equipment 6,000
($49,000 – $1,000 is $48,000. One-eighth of $48,000 is $6,000.)
3. Sales Commission Expense 7,311
Sales Commissions Payable 7,311
(11% of sales is 11% × $330,100, which is $36,311. The balance in the Sales Commissions account is $29,000 before adjustment, indicating that $7,311 of commissions are accrued but unpaid.)
4. Interest Expense 85
Interest Payable 85
($4,250 × .08 × 3 ÷ 12 = $85)
5. Supplies Expense 760
Supplies 760
(The balance of $1,040 in the Supplies account before adjustment less the correct ending balance of $280 is $760.)
6. Prepaid Rent 900
Rent Expense 900
(Since the trial balance contains no account for prepaid rent, the $900 lease payment has apparently been debited to Rent Expense. An account must be set up for the Prepaid Rent.)
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Pr. C-94 Preparation of financial statements
The following is an alphabetical listing of Poison Ivy Inc.’s accounts at their year end December 31, 2023. All accounts have normal balances.
Accounts Payable $60,000
Accounts Receivable 58,000
Accrued Liabilities 12,000
Accumulated Depreciation–buildings 88,000
Accumulated Depreciation–equipment 29,250
Allowance for Doubtful Accounts 6,000
Buildings 352,000
Cash $25,000
Common Shares 250,000
Cost of Goods Sold 285,600
Equipment 117,000
Income Tax Expense 2,250
Interest Expense 3,400
Interest Income 19,750
Inventory 79,000
Land 125,000
Note payable – due in 4 years 125,000
Operating Expenses 137,000
Preferred Shares 100,000
Prepaid Expenses 7,000
Restricted Cash 21,000
Retained Earnings 124,250
Sales 420,000
Trading Investments 40,000
Unearned Revenue 18,000
Prepare the income statement and classified balance sheet assuming the company follows ASPE.
Solution C-94
Poison Ivy
Income Statement
Year Ending December 31, 2023
Revenues $420,000
Cost of Goods Sold 285,600
Gross Profit 134,400
Operating Expenses 137,000
Operating Income (2,600)
Other Revenues and Expenses
Interest Income 19,750
Interest Expense 3,400 16,350
Income before Tax 13,750
Income Tax 2,250
Net Income $11,500
Poison Ivy
Balance Sheet
December 31, 2023
Assets
Current Assets
Cash 25,000
Trading Investments 40,000
Accounts Receivable 58,000
Less: Allowance for Doubtful Accounts 6000 52,000
Inventory 79,000
Prepaid Expenses 7,000
Total Current Assets 203,000
Non-Current Assets
Restricted Cash 21,000
Land 125,000
Building 352,000
Accumulated Depreciation–building 8,000 264,000
Equipment 117,000
Accumulated Depreciation–equipment 29,250 87,750
Total Non-Current Assets 497,750
Total Assets $700,750
Liabilities and Shareholder Equity
Current liabilities
Accounts Payable $60,000
Accrued Liabilities 12,000
Unearned Revenues 18,000 90,000
Non-Current Liabilities
Notes Payable 125,000
Total Liabilities 215,000
Shareholder Equity
Preferred Shares 100,000
Common Shares 250,000
Retained Earnings *135,750
Total Shareholder Equity 485,750
Total Liabilities and Shareholder Equity $700,750
*Beginning Retained Earnings $124,250 + Net Income $11,500 =
Ending Retained Earnings $135,750
Difficulty: Medium
Learning Objective: Prepare a 10-column work sheet and financial statements.
Section Reference: Using a Work Sheet
CPA: Financial Reporting
CPA: Management Accounting
Bloomcode: Analysis
AACSB: Analytic
Pr. C-95 Preparation of financial statements
Use the following information to prepare a multi-step Statement of Comprehensive Income, a Statement of Changes in Shareholders Equity, and a classified Statement of Financial Position.
Charles Corporation
Adjusted Trial Balance
December 31, 2023
Debit Credit
Cash $ 33,400
Accounts Receivable 87,400
Inventory 90,000
Supplies 7,000
Equipment 266,000
Accumulated Depreciation–Equipment 80,000
Notes Payable 82,000
Accounts Payable 117,000
Common Shares 200,000
Retained Earnings 16,000
Sales 1,494,400
Sales Returns and Allowances 8,400
Cost of Goods Sold 994,800
Salaries Expense 280,000
Advertising Expense 52,800
Utilities Expense 28,000
Repair Expense 24,200
Delivery Expense 33,400
Rent Expense 48,000
Supplies Expense 4,000
Depreciation Expense 32,000
Interest Expense 22,000
Interest Payable ___________ 22,000
Totals $2,011,400 $2,011,400
Other Data:
1. Salaries expense is 70% selling and 30% administrative.
2. Rent expense and utilities expense are 80% selling and 20% administrative.
3. $60,000 of notes payable are due for payment within 12 months.
4. Repair expense is 100% administrative.
Solution C-95
Charles Corporation
Statement of Comprehensive Income
Year Ended December 31, 2023
Sales revenue
Sales $1,494,400
Less: Sales returns and allowances 8,400
Net sales 1,486,000
Cost of goods sold 994,800
Gross profit 491,200
Operating expenses
Selling expenses
Salaries expense $196,000
($280,000 x 70%)
Advertising expense 52,800
Rent expense 38,400
($48,000 x 80%)
Delivery expense 33,400
Utilities expense 22,400
($28,000 x 80%)
Depreciation expense 32,000
Supplies expense 4,000
Total selling expenses $379,000
Administrative expenses
Salaries expense 84,000
($280,000 x 30%)
Repair expense 24,200
Rent expense 9,600
($48,000 x 20%)
Utilities expense 5,600
($28,000 x 20%)
Total admin. expenses 123,400
Total operating expenses 502,400
Loss from operations 11,200
Other expenses and losses
Interest expense 22,000
Net loss $ 33,200
Charles Corporation | |||||
Statement of Changes in Shareholders' Equity | |||||
for Year Ended December 31, 2023 | |||||
Total | Common Shares | Comprehensive Income | Retained Earnings (Deficit) | ||
Beginning, Jan 1, 2023 | $216,000 | $200,000 | 0 | $ 16,000 | |
Net loss for 2023 | (33,200) | (33,200) | (33,200) | ||
Other comprehensive income | 0 | ||||
Comprehensive income |
|
| (33,200) |
| |
Ending, Dec 31, 2023 | 182,800 | 200,000 | (17,200) | ||
Charles Corporation
Statement of Financial Position
December 31, 2023
Assets
Current assets
Cash $ 33,400
Accounts receivable 87,400
Inventory 90,000
Supplies 7,000
Total current assets 217,800
Non-current assets
Equipment $266,000
Accumulated depreciation–equipment 80,000 186,000
Total assets $403,800
Liabilities and Shareholders’ Equity
Current liabilities
Current Portion of Debt $ 60,000
Accounts payable 117,000
Interest payable 22,000
Total current liabilities 199,000
Non-current liabilities
Notes payable 22,000
Total liabilities 221,000
Shareholders’ equity
Common Shares $200,000
Retained Earnings (17,200) 182,800
Total liabilities and shareholders’ equity $403,800
Difficulty: Medium
Learning Objective: Prepare a 10-column work sheet and financial statements.
Section Reference: Using a Work Sheet
CPA: Financial Reporting
CPA: Management Accounting
Bloomcode: Analysis
AACSB: Analytic
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