CHAPTER 3 EXERCISES: SET B E3-1B Maria Diaz has prepared the following list of statements about the time period assumption. 1. Adjusting entries are necessary only if a company has made accounting errors. 2. The IRS requires companies to file annual tax returns. 3. One transaction can affect several accounting periods. 4. Accounting time periods cannot be shorter than a quarter. 5. A time period lasting less than one year is called an interim period. 6. All fiscal years are calendar years, but not all calendar years are fiscal years. Explain the time period assumption. (LO 1) Identify each statement as true or false. If false, indicate how to correct the statement. E3-2B Burris Industries collected $140,000 from customers in 2017. Of the amount collected, $30,000 was for services performed in 2013. In addition, Burris performed services worth $47,000 in 2017, which will not be collected until 2018. Burris Industries also paid $110,000 for expenses in 2014. Of the amount paid, $30,000 was for expenses incurred on account in 2016. In addition, Burris incurred $44,000 of expenses in 2017, which will not be paid until 2018. Compute cash and accrual accounting income. (LO 1) (a) Compute 2014 cash-basis net income. (b) Compute 2014 accrual-basis net income. E3-3B Edelman Corporation encounters the following situations: 1. Edelman purchased $1,400 of supplies in 2017; at year-end, $500 of supplies remain unused. 2. Edelman incurs utility expense which is not yet paid in cash or recorded. 3. Edelman s employees worked 3 days in 2017, but will not be paid until 2018. 4. Edelman performs services for customers but has not yet received cash or recorded the transaction. 5. Edelman received cash for future services to be performed in 2018. 6. Edelman paid $8,000 rent on October 1 for the 4 months starting October 1. 7. Edelman performed consulting services for a client in December 2017. On December 31, it billed the client $3,300. 8. Edelman paid cash for an expense and recorded an asset until the item was used up. 9. Edelman collects $2,000 from a customer for services to be perfomed next year. 10. Edelman purchased equipment on January 1, 2017; the equipment will be used for 5 years. 11. Edelman borrowed $20,000 on October 1, 2017, signing a 10% one-year note payable. Identify the type of adjusting entry needed. (LO 1, 2, 3) Identify what type of adjusting entry (prepaid expense, unearned revenue, accrued expense, accrued revenue) is needed in each situation, at December 31, 2017. E3-4B Shellhammer Company has the following balances in selected accounts on December 31, 2017. Accounts Receivable $ -0- Accumulated Depreciation Equipment -0- Equipment 7,000 Interest Payable -0- Notes Payable 25,000 Prepaid Insurance 2,520 Salaries and Wages Payable -0- Supplies 2,650 Unearned Service Revenue 50,000 Prepare adjusting entries from selected data. All the accounts have normal balances. The information below has been gathered at December 31, 2017. 1. Shellhammer Company borrowed $30,000 by signing a 12%, one-year note on October 1, 2017.
2 3 Adjusting the Accounts 2. A count of supplies on December 31, 2017, indicates that supplies of $700 are on hand. 3. Depreciation on the equipment for 2017 is $2,000. 4. Shellhammer Company paid $2,520 for 12 months of insurance coverage on August 1, 2017. 5. On December 1, 2017, Shellhammer collected $50,000 for consulting services to be performed from December 1, 2017, through March 31, 2018. 6. Shellhammer performed consulting services for a client in December 2017. The client will be billed $5,300. 7. Shellhammer Company pays its employees total salaries of $12,000 every Monday for the preceding 5-day week (Monday through Friday). On Monday, December 30, employees were paid for the week ending December 27. All employees worked the last 2 days of 2017. Prepare adjusting entries for the seven items described above. Identify types of adjustments and account relationships. (LO 2, 3, 4) E3-5B Duran Company accumulates the following adjustment data at December 31. 1. Supplies of $620 have been used. 2. Services provided but not recorded total $925. 3. Services related unearned service revenue of $325 were performed. 4. Advertising expense of $900 is unpaid. 5. Depreciation is $3,000. 6. Utility expenses of $175 are unpaid. For each of the above items indicate the following. (a) The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). (b) The status of accounts before adjustment (overstatement or understatement). Prepare adjusting entries from selected account data. E3-6B The ledger of Hager Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared. Debit Credit Prepaid Insurance $ 4,200 Supplies 3,400 Equipment 30,000 Accumulated Depreciation Equipment $10,500 Notes Payable 25,000 Unearned Rent Revenue 10,800 Rent Revenue 60,000 Interest Expense 0 Salaries and Wages Expense 14,000 An analysis of the accounts shows the following. 1. The equipment depreciates $300 per month. 2. The unearned rent revenue represents $10,800 collected on January 1 for the period January 1 through March 31. 3. Interest of $750 is accrued on the notes payable. 4. Supplies on hand total $1,300. 5. The company paid $4,200 on January 1 for a 2-year insurance policy. Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense. Prepare adjusting entries. E3-7B Diane Baden, D.D.S., opened a dental practice on January 1, 2017. During the first month of operations the following transactions occurred. 1. Performed services for patients who had dental plan insurance. At January 31, $1,280 of such services were performed but not yet recorded. 2. Utility expenses incurred but not paid prior to January 31 totaled $365.
Exercises: Set B 3 3. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000, 3-year note payable. The equipment depreciates $500 per month. Interest is $600 per month. 4. Purchased a one-year malpractice insurance policy on January 1 for $9,600. 5. Purchased $2,300 of dental supplies. On January 31, determined that $700 of supplies were on hand. Prepare the adjusting entries on January 31. Account titles are: Accumulated Depreciation Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable. E3-8B The trial balance for Pioneer Advertising Agency is shown in Illustration 3-3, p. xx. In lieu of the adjusting entries shown in the text at October 31, assume the following adjustment data. 1. Supplies on hand at October 31 total $900. 2. Expired insurance for the month is $75. 3. Depreciation for the month is $100. 4. Services related to unearned service revenue in October worth $800 were performed. 5. Services performed but not recorded at October 31 are $375. 6. Interest accrued at October 31 is $25. 7. Employees earn $300 per day. Three days salaries are unpaid at October 31. Prepare the adjusting entries for the items above. E3-9B The income statement of Ace Co. for the month of July shows net income of $3,000 based on Service Revenue $7,700, Salaries and Wages Expense $2,500, Supplies Expense $1,700, and Utilities Expense $500. In reviewing the statement, you discover the following. 1. Insurance expired during July of $600 was omitted. 2. Supplies expense includes $250 of supplies that are still on hand at July 31. 3. Depreciation on equipment of $225 was omitted. 4. Accrued but unpaid wages at July 31 of $350 were not included. 5. Services performed but unrecorded totaled $650. Prepare adjusting entries. Prepare correct income statement. (LO 1, 2, 3) Prepare a correct income statement for July 2017. E3-10B A partial adjusted trial balance of Palomino Company at January 31, 2017, shows the following. PALOMINO COMPANY Adjusted Trial Balance January 31, 2017 Debit Credit Supplies $ 900 Prepaid Insurance 2,000 Salaries and Wages Payable $1,000 Unearned Service Revenue 550 Supplies Expense 1,100 Insurance Expense 500 Salaries and Wages Expense 3,650 Service Revenue 3,500 Answer the following questions, assuming the year begins January 1. (a) If the amount in Supplies Expense is the January 31 adjusting entry, and $1,500 of supplies was purchased in January, what was the balance in Supplies on January 1? (b) If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for one year, what was the total premium and when was the policy purchased? (c) If $4,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2016? Analyze adjusted data. (LO 1, 2, 3, 4)
4 3 Adjusting the Accounts Journalize basic transactions and adjusting entries. (LO 2, 3, 4) E3-11B Selected accounts of Stine Company are shown below. Supplies Expense 7/31 1,900 Supplies Salaries and Wages Payable 7/1 Bal. 1,100 7/31 1,900 7/31 850 7/10 1,500 Accounts Receivable Unearned Service Revenue 7/31 900 7/31 1,800 7/1 Bal. 1,500 7/20 1,200 Salaries and Wages Expense Service Revenue 7/15 1,400 7/14 3,300 7/31 850 7/31 900 7/31 1,800 After analyzing the accounts, journalize (a) the July transactions and (b) the adjusting entries that were made on July 31. (Hint: July transactions were for cash.) Prepare adjusting entries from analysis of trial balances. (LO 2, 3, 4) E3-12B The trial balances before and after adjustment for Ramirez Company at the end of its fiscal year are presented below. RAMIREZ COMPANY Trial Balance August 31, 2017 Before After Adjustment Adjustment Dr. Cr. Dr. Cr. Cash $ 7,700 $ 7,700 Accounts Receivable 12,000 13,500 Supplies 2,800 900 Prepaid Insurance 4,200 2,800 Equipment 16,000 16,000 Accumulated Depreciation Equipment $ 4,000 $ 4,800 Accounts Payable 2,200 2,200 Salaries and Wages Payable 0 1,200 Unearned Rent Revenue 1,800 200 Owner s Capital 14,700 14,700 Service Revenue 38,000 39,500 Rent Revenue 12,000 13,600 Salaries and Wages Expense 16,000 17,200 Supplies Expense 0 1,900 Rent Expense 14,000 14,000 Insurance Expense 0 1,400 Depreciation Expense 0 800 $72,700 $72,700 $76,200 $76,200 Prepare the adjusting entries that were made. Prepare financial statements from adjusted trial balance. (LO 4) E3-13B The adjusted trial balance for Ramirez Company is given in E3-12B. Prepare the income and owner s equity statements for the year and the balance sheet at August 31.
Exercises: Set B 5 E3-14B The following data are taken from the comparative balance sheets of Fred s Pool Club, which prepares its financial statements using the accrual basis of accounting. December 31 2017 2016 Accounts receivable from members $19,000 $17,000 Unearned service revenue 18,000 22,000 Record transactions on accrual basis; convert revenue to cash receipts. Members are billed based upon their use of the club s facilities. Unearned service revenues arise from the sale of gift certificates, which members can apply to their future use of club facilities. The 2017 income statement for the club showed that service revenue of $161,000 was earned during the year. (Hint: You will probably find it helpful to use T accounts to analyze these data.) (a) Prepare journal entries for each of the following events that took place during 2017. (1) Accounts receivable from 2016 were all collected. (2) Gift certificates outstanding at the end of 2016 were all redeemed. (3) An additional $38,000 worth of gift certificates were sold during 2017. A portion of these was used by the recipients during the year; the remainder was still outstanding at the end of 2017. (4) Services provided to members for 2017 were billed to members. (5) Accounts receivable for 2017 (i.e., those billed in item [4] above) were partially collected. (b) Determine the amount of cash received by the club, with respect to member services, during 2017. *E3-15B Sappington Company has the following balances in selected accounts on December 31, 2017. Service Revenue $65,000 Insurance Expense 3,600 Supplies Expense 4,100 Journalize adjusting entries. (LO 5) All the accounts have normal balances. Sappington Company debits prepayments to expense accounts when paid, and credits unearned revenues to revenue accounts when received. The following information below has been gathered at December 31, 2017. 1. Sappington Company paid $3,600 for 12 months of insurance coverage on August 1, 2017. 2. On December 1, 2017, Sappington Company collected $65,000 for consulting services to be performed from December 1, 2017, through April 30, 2018. 3. A count of supplies on December 31, 2017, indicates that supplies of $1,200 are on hand. Prepare the adjusting entries needed at December 31, 2017. *E3-16B At Dodd Company, prepayments are debited to expense when paid, and unearned revenues are credited to revenue when received. During January of the current year, the following transactions occurred. Jan. 2 Paid $3,000 for fire insurance protection for the year. 10 Paid $2,100 for supplies. 15 Received $7,500 for services to be performed in the future. Journalize transactions and adjusting entries. (LO 5) On January 31, it is determined that $4,500 of the services were performed and that there are $900 of supplies on hand. (a) Journalize and post the January transactions. (Use T accounts.) (b) Journalize and post the adjusting entries at January 31. (c) Determine the ending balance in each of the accounts.
6 3 Adjusting the Accounts Identify accounting assumptions and principles. *E3-17B Presented below are the assumptions and principles discussed in this chapter. 1. Full disclosure principle. 4. Time period assumption. 2. Going concern assumption. 5. Historical cost principle. 3. Monetary unit assumption. 6. Economic entity assumption. Identify by number the accounting assumption or principle that is described below. Do not use a number more than once. (a) Is the rationale for why plant assets are not reported at liquidation value. (Note: Do not use the historical cost principle.) (b) Indicates that personal and business record-keeping should be separately maintained. (c) Assumes that the dollar is the measuring stick used to report on financial performance. (d) Separates financial information into time periods for reporting purposes. (e) Indicates that companies should not record in the accounts fair value changes subsequent to purchase. (f) Dictates that companies should disclose all circumstances and events that make a difference to financial statement users. Identify the assumption or principle that has been violated. *E3-18B The following situations involve accounting principles and assumptions. 1. Donkey Company owns land that is worth substantially more than it originally cost. In an effort to provide more relevant information, Donkey reports that land at fair value in its accounting reports. 2. Benjamin Company includes in its accounting records only transaction data that can be expressed in terms of money. 3. Josh Broke, owner of Josh s MovieHouse, records his personal living costs as expenses of the MovieHouse. In each situation, identify the assumption or principle that has been violated, if any, and discuss what the company should have done. Identity financial accounting concepts and principles. *E3-19B The following are characteristics, assumptions, principles, or constraint that guide the FASB when it creates accounting standards. Relevance Faithful representation Comparability Consistency Monetary unit assumption Economic entity assumption Expense recognition principle Time period assumption Going concern assumption Historical cost principle Full disclosure principle Materiality Match each item above with a description below. 1. A belief that items should be reported on the balance sheet at the price that was paid to acquire the item. 2. A company s use of the same accounting principles and methods from year to year. 3. Tracing accounting events to particular companies. 4. The reporting of all information that would make a difference to financial statement users. 5. The practice of preparing financial statements at regular intervals. 6. The quality of information that indicates the information makes a difference in a decision. 7. Ability to easily evaluate one company s results relative to another s. 8. Belief that a company will continue to operate for the foreseeable future. 9. The judgment concerning whether an item is large enough to matter to decision-makers. 10. The desire to minimize errors and bias in financial statements. 11. Reporting only those things that can be measured in dollars. 12. Dictates that efforts (expenses) be matched with results (revenues).
Exercises: Set B 7 *E3-20B Unruh Software International Inc., headquartered in Toronto, specializes in Internet safety and computer security products for both the home and commercial markets. In a recent balance sheet, it reported a deficit (negative retained earnings) of US $5,678,288. It has reported only net losses since its inception. In spite of these losses, Unruh s common shares have traded anywhere from a high of $3.70 to a low of $0.32 on the Canadian Venture Exchange. Unruh s financial statements have historically been prepared in Canadian dollars. Recently, the company adopted the U.S. dollar as its reporting currency. Comment on the objectives and qualitative characteristics of accounting information (a) What is the objective of financial reporting? How does this objective meet or not meet Unruh s investors needs? (b) Why would investors want to buy Unruh s shares if the company has consistently reported losses over the last few years? Include in your answer an assessment of the relevance of the information reported on Unruh s financial statements. (c) Comment on how the change in reporting information from Canadian dollars to U.S. dollars likely affected the readers of Unruh s financial statements. Include in your answer an assessment of the comparability of the information. *E3-21B A friend of yours, Kim Hutton, recently completed an undergraduate degree in science and has just started working with a biotechnology company. Kim tells you that the owners of the business are trying to secure new sources of financing which are needed in order for the company to proceed with development of a new health care product. Kim said that her boss told her that the company must put together a report to present to potential investors. Kim thought that the company should include in this package the detailed scientific findings related to the Phase I clinical trials for this product. She said, I know that the biotech industry sometimes has only a 10% success rate with new products, but if we report all the scientific findings, everyone will see what a sure success this is going to be! The president was talking about the importance of following some set of accounting principles. Why do we need to look at some accounting rules? What they need to realize is that we have scientific results that are quite encouraging, some of the most talented employees around, and the start of some really great customer relationships. We haven t made any sales yet, but we will. We just need the funds to get through all the clinical testing and get government approval for our product. Then these investors will be quite happy that they bought in to our company early! Comment on the objectives and qualitative characteristics of financial reporting. (a) What is accounting information? (b) Comment on how Kim s suggestions for what should be reported to prospective investors conforms to the qualitative characteristics of accounting information. Do you think that the things that Kim wants to include in the information for investors will conform to financial reporting guidelines?