Test Bank Chapter 3 The Accounting Information System.

CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM IFRS questions are available at the end of this chapter. TRUE/FALSE Description F 1. Recording transactions. T 2. Nominal accounts. F 3. Real (permanent) accounts. F 4. Internal event example. F 5. Liability and stockholders’ equity accounts. F 6. Debits and credits. F 7. Steps in accounting cycle. T 8. Purpose of trial balance. T 9. General journal. F 10. Posting and trial balance. T 11. Adjusting entries for prepayments. T 12. Example of accrued expense. F 13. Book value of depreciable assets. T 14. Reporting ending retained earnings. F 15. Post-closing trial balance. F 16. Closing entries and Income Summary. F 17. Posting closing entries. F *18. Accrual basis accounting. F *19. Purpose of reversing entries. F *20. Adjusted trial balance. MULTIPLE CHOICE—Conceptual Description d 21. Purpose of an accounting system. d 22. Necessity of accounting records. d 23. Purpose of an accounting system. d 24. Book of original entry. d 25. Purpose of trial balance. d 26. Identification of a real account. b 27. Identification of a temporary account. a 28. Temporary vs. permanent accounts. c 29. Meaning of debit. c 30. Double-entry system. a 31. Effect on stockholders’ equity. a 32. Transaction analysis. a 33. Accounting equation. b 34. Accounting process vs. accounting cycle. d 35. Accounting cycle steps. d 36. Criteria for recording events. d 37. Identification of a recordable event. c 38. Identification of internal events. d 39. External events. d 40. Limitations of trial balance. a 41. General journal. b 42. Journal entry. c 43. Journal entry. d 44. Journal entry. d 45. Imbalance in a trial balance. d 46. Purpose of unadjusted trial balance. b 47. Format of adjusting entry. b 48. Example of accrued expense. d 49. Accrual basis of accounting. c 50. Accrued expense adjusting entry. a 51. Effect of not recording accrued expense. b 52. Description of a deferral. d 53. Effect of not recording accrued revenue. a 54. Effect of not recording depreciation expense. a 55. Timing of adjustments. a 56. Prepaid expense. a 57. Expiration of prepaid expenses. b 58. Effect of depreciation entry. a 59. Unearned revenue relationships. a 60. Computation of interest expense for adjusting entry. d 61. Purpose of adjusting entries. c 62. Matching principle. a 63. Prepaid items. d 64. Accrued items. c 65. Definition of unearned revenue. d 66. Definition of accrued expense. c 67. Adjusting entry for accrued expense. d 68. Factors to consider in estimating depreciation. d 69. Adjusting entries. d 70. Effect of adjusting entries. b 71. Prepaid expense and the matching principle. c 72. Accrued revenue and the matching principle. b 73. Unearned revenue and the matching principle. b 74. Adjusted trial balance. c 75. Closing entry process. c 76. Purpose of closing entries. d 77. Cash collections vs. revenue earned. d *78. Cash basis revenue. c *79. Convert cash receipts to service revenue. c *80. Convert cash paid for operating expenses. c *81. Purpose of reversing entries. d *82. Identification of reversing entries. d *83. Identification of reversing entries. b *84. Adjusting entries reversed. d *85. Reporting inventory on a worksheet. MULTIPLE CHOICE—Computational Description c 86. Effect of transactions on owners’ equity. c 87. Effect of transactions on owners’ equity. c 88. Unearned rent adjustment. c 89. Unearned rent adjustment. d 90. Determine adjusting entry. c 91. Adjusting entry for bad debts. b 92. Adjusting entry for bad debts. c 93. Adjusting entry for interest receivable. c 94. Subsequent period entry for interest. d *95. Use of reversing entry. d 96. Adjusting entry for unearned rent. b 97. Adjusting entry for supplies. d 98. Effect of closing entries. b *99. Calculate cash received for interest. b *100. Calculate cash paid for salaries. d *101. Calculate cash paid for insurance. c *102. Calculate insurance expense. c *103. Calculate interest revenue. c *104. Calculate salary expense. d *105. Adjusting entry for supplies. c *106. Reversing entries. b *107. Unearned rent adjustment. a *108. Determine adjusting entry. d *109. Determine adjusting entry. MULTIPLE CHOICE—CPA Adapted Description c 110. Determine accrued interest payable. b 111. Determine balance of unearned revenues. a 112. Calculate subscriptions revenue. c 113. Determine interest receivable. b 114. Calculate balance of accrued payable. b 115. Calculate accrued salaries. a 116. Calculate royalty revenue. d 117. Calculate deferred revenue. b *118. Difference between cash basis and accrual method. c *119. Determine cash basis revenue. b *120. Determine accrual basis revenue. a *121. Calculate cost of goods sold. *This topic is dealt with in an Appendix to the chapter. EXERCISES Item Description E3-122 Definitions. E3-123 Terminology. E3-124 Accrued and deferred items. E3-125 Adjusting entries. E3-126 Adjusting entries. E3-127 Financial statements. *E3-128 Cash basis vs. accrual basis accounting. *E3-129 Accrual basis. *E3-130 Accrual basis. *E3-131 Accrual basis. *E3-132 Cash basis. PROBLEMS Item Description P3-133 Adjusting entries and account classifications. P3-134 Adjusting entries. P3-135 Adjusting and closing entries. *P3-136 Cash to accrual accounting. *P3-137 Accrual accounting. *P3-138 Accrual accounting. *P3-139 Eight-column work sheet. CHAPTER LEARNING OBJECTIVES 1. Understand basic accounting terminology. 2. Explain double-entry rules. 3. Identify steps in the accounting cycle. 4. Record transactions in journals, post to ledger accounts, and prepare a trial balance. 5. Explain the reasons for preparing adjusting entries. 6. Prepare financial statements from the adjusted trial balance. 7. Prepare closing entries. *8. Differentiate the cash basis of accounting from the accrual basis of accounting. *9. Identify adjusting entries that may be reversed. *10. Prepare a 10-column worksheet. SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1 1. TF 3. TF 22. MC 24. MC 26. MC 28. MC 2. TF 21. MC 23. MC 25. MC 27. MC 123. E Learning Objective 2 4. TF 6. TF 30. MC 32. MC 34. MC 5. TF 29. MC 31. MC 33. MC Learning Objective 3 7. TF 35. MC 36. MC 37. MC 38. MC 39. MC Learning Objective 4 8. TF 10. TF 40. MC 42. MC 44. MC 87. MC 9. TF 25. MC 41. MC 43. MC 86. MC Learning Objective 5 11. TF 51. MC 60. MC 69. MC 92. MC 114. MC 133. P 12. TF 52. MC 61. MC 70. MC 93. MC 115. MC 134. P 13. TF 53. MC 62. MC 71. MC 94. MC 116. MC 135. P 45. MC 54. MC 63. MC 72. MC 96. MC 117. MC 46. MC 55. MC 64. MC 73. MC 97. MC 122. E 47. MC 56. MC 65. MC 88. MC 110. MC 123. E 48. MC 57. MC 66. MC 89. MC 111. MC 124. E 49. MC 58. MC 67. MC 90. MC 112. MC 125. E 50. MC 59. MC 68. MC 91. MC 113. MC 126. E Learning Objective 6 14. TF 74. MC 127. E Learning Objective 7 15. TF 16. TF 17. TF 75. MC 76. MC 98. MC 135. P Learning Objective *8 18. TF 80. MC 102. MC 119. MC 129. E 136. P 77. MC 99. MC 103. MC 120. MC 130. E 137. P 78. MC 100. MC 104. MC 121. MC 131. E 138. P 79. MC 101. MC 118. MC 128. E 132. E Learning Objective *9 19. TF 82. MC 84. MC 105. MC 108. MC 126. E 81. MC 83. MC 95. MC 106. MC 109. Mc Learning Objective *10 20. TF 85. MC 139. P Note: TF = True/False E = Exercise MC = Multiple Choice P = Problem TRUE/FALSE 1. A ledger is where the company initially records transactions and selected other events. 2. Nominal (temporary) accounts are revenue, expense, and dividend accounts and are periodically closed. 3. Real (permanent) accounts are revenue, expense, and dividend accounts and are periodically closed. 4. An example of an internal event would be a flood that destroyed a portion of a company's inventory. 5. All liability and stockholders’ equity accounts are increased on the credit side and decreased on the debit side. 6. In general, debits refer to increases in account balances, and credits refer to decreases. 7. The first step in the accounting cycle is the journalizing of transactions and selected other events. 8. One purpose of a trial balance is to prove that debits and credits of an equal amount are in the general ledger. 9. A general journal chronologically lists transactions and other events, expressed in terms of debits and credits to accounts. 10. If a company fails to post one of its journal entries to its general ledger, the trial balance will not show an equal amount of debit and credit balance accounts. 11. Adjusting entries for prepayments record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period. 12. An adjustment for wages expense, earned but unpaid at year end, is an example of an accrued expense. 13. The book value of any depreciable asset is the difference between its cost and its salvage value. 14. The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet. 15. The post-closing trial balance consists of asset, liability, owners' equity, revenue and expense accounts. 16. All revenues, expenses, and the dividends account are closed through the Income Summary account. 17. It is not necessary to post the closing entries to the ledger accounts because new revenue and expense accounts will be opened in the subsequent accounting period. *18. The accrual basis recognizes revenue when earned and expenses in the period when cash is paid. *19. Reversing entries are made at the end of the accounting cycle to correct errors in the original recording of transactions. *20. An adjusted trial balance that shows equal debit and credit columnar totals proves the accuracy of the adjusting entries. True / False Answers — Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. F 5. F 9. T 13. F 17. F 2. T 6. F 10. F 14. T *18. F 3. F 7. F 11. T 15. F *19. F 4. F 8. T 12. T 16. F *20. F MULTIPLE CHOICE—Conceptual 21. Factors that shape an accounting information system include the a. nature of the business. b. size of the firm. c. volume of data to be handled. d. all of these. 22. Maintaining a set of accounting records is a. optional. b. required by the Internal Revenue Service. c. required by the Foreign Corrupt Practices Act. d. required by the Internal Revenue Service and the Foreign Corrupt Practices Act. 23. Debit always means a. right side of an account. b. increase. c. decrease. d. none of these. 24. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called the a. ledger. b. account. c. trial balance. d. none of these. 25. A trial balance a. proves that debits and credits are equal in the ledger. b. supplies a listing of open accounts and their balances that are used in preparing financial statements. c. is normally prepared three times in the accounting cycle. d. all of these. 26. Which of the following is a real (permanent) account? a. Goodwill b. Sales c. Accounts Receivable d. Both Goodwill and Accounts Receivable 27. Which of the following is a nominal (temporary) account? a. Unearned Revenue b. Salary Expense c. Inventory d. Retained Earnings 28. Nominal accounts are also called a. temporary accounts. b. permanent accounts. c. real accounts. d. none of these. 29. 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 a debit and a credit. d. More than one of the above. 30. When a corporation pays a note payable and interest, a. the account notes payable will be increased. b. the account interest expense will be decreased. c. they will debit notes payable and interest expense. d. they will debit cash. 31. Stockholders’ equity is not affected by all a. cash receipts. b. dividends. c. revenues. d. expenses. 32. 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. at some other point in the accounting cycle. 33. 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. 34. The difference between the accounting process and the accounting cycle is a. the accounting process results in the preparation of financial statements, whereas the accounting cycle is concerned with recording business transactions. b. the accounting cycle represents the steps taken to accomplish the accounting process. c. the accounting process represents the steps taken to accomplish the accounting cycle. d. merely semantic, because both concepts refer to the same thing. 35. An optional step in the accounting cycle is the preparation of a. adjusting entries. b. closing entries. c. a statement of cash flows. d. a post-closing trial balance. 36. Which of the following criteria must be met before an event or item should 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. All of these must be met. 37. Which of the following is a recordable event or item? a. Changes in managerial policy b. The value of human resources c. Changes in personnel d. None of these 38. Which of the following is not an internal event? a. Depreciation b. Using raw materials in the production process c. Dividend declaration and subsequent payment d. All of these are internal transactions. 39. External events do not include a. interaction between an entity and its environment. b. a change in the price of a good or service that an entity buys or sells, a flood or earthquake. c. improvement in technology by a competitor. d. using buildings and machinery in operations. 40. A trial balance may prove that debits and credits are equal, but a. an amount could be entered in the wrong account. b. a transaction could have been entered twice. c. a transaction could have been omitted. d. all of these. 41. A general journal a. chronologically lists transactions and other events, expressed in terms of debits and credits. b. contains one record for each of the asset, liability, stockholders’ equity, revenue, and expense accounts. c. lists all the increases and decreases in each account in one place. d. contains only adjusting entries. 42. A journal entry to record the sale of inventory on account will include a a. debit to inventory. b. debit to accounts receivable. c. debit to sales. d. credit to cost of goods sold. 43. A journal entry to record a payment on account will include a a. debit to accounts receivable. b. credit to accounts receivable. c. debit to accounts payable. d. credit to accounts payable. 44. A journal entry to record a receipt of rent revenue in advance will include a a. debit to rent revenue. b. credit to rent revenue. c. credit to cash. d. credit to unearned rent. 45. Which of the following errors will cause an imbalance in the trial balance? a. Omission of a transaction in the journal. b. Posting an entire journal entry twice to the ledger. c. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable. d. Listing the balance of an account with a debit balance in the credit column of the trial balance. S46. Which of the following is not a principal purpose of an unadjusted trial balance? a. It proves that debits and credits of equal amounts are in the ledger. b. It is the basis for any adjustments to the account balances. c. It supplies a listing of open accounts and their balances. d. It proves that debits and credits were properly entered in the ledger accounts. S47. An adjusting entry should never include a. a debit to an expense account and a credit to a liability account. b. a debit to an expense account and a credit to a revenue account. c. a debit to a liability account and a credit to revenue account. d. a debit to a revenue account and a credit to a liability account. 48. Which of the following is an example of an accrued expense? a. Office supplies purchased at the beginning of the year and debited to an expense account. b. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. c. Depreciation expense d. Rent earned during the period, to be received at the end of the year P49. Which of the following statements is associated with the accrual basis of accounting? a. The timing of cash receipts and disbursements is emphasized. b. A minimum amount of record keeping is required. c. This method is used less frequently by businesses than the cash method of accounting. d. Revenues are recognized in the period they are earned, regardless of the time period the cash is received. P50. An adjusting entry to record an accrued expense involves a debit to a(an): a. expense account and a credit to a prepaid account. b. expense account and a credit to Cash. c. expense account and a credit to a liability account. d. liability account and a credit to an expense account. P51. The failure to properly record an adjusting entry to accrue an expense will result in an: a. understatement of expenses and an understatement of liabilities. b. understatement of expenses and an overstatement of liabilities. c. understatement of expenses and an overstatement of assets. d. overstatement of expenses and an understatement of assets. P52. Which of the following properly describes a deferral? a. Cash is received after revenue is earned. b. Cash is received before revenue is earned. c. Cash is paid after expense is incurred. d. Cash is paid in the same time period that an expense is incurred. P53. The failure to properly record an adjusting entry to accrue a revenue item will result in an: a. understatement of revenues and an understatement of liabilities. b. overstatement of revenues and an overstatement of liabilities. c. overstatement of revenues and an overstatement of assets. d. understatement of revenues and an understatement of assets. P54. The omission of the adjusting entry to record depreciation expense will result in an: a. overstatement of assets and an overstatement of owners' equity. b. understatement of assets and an understatement of owner's equity. c. overstatement of assets and an overstatement of liabilities. d. overstatement of liabilities and an understatement of owners' equity. 55. Adjustments are often prepared a. after the balance sheet date, but dated as of the balance sheet date. b. after the balance sheet date, and dated after the balance sheet date. c. before the balance sheet date, but dated as of the balance sheet date. d. before the balance sheet date, and dated after the balance sheet date. 56. At the time a company prepays a cost a. it debits an asset account to show the service or benefit it will receive in the future. b. it debits an expense account to match the expense against revenues earned. c. its credits a liability account to show the obligation to pay for the service in the future. d. more than one of the above. 57. How do these prepaid expenses expire? Rent Supplies a. With the passage of time Through use and consumption b. With the passage of time With the passage of time c. Through use and consumption Through use and consumption d. Through use and consumption With the passage of time 58. Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for a. an unearned revenue. b. a prepaid expense. c. an accrued revenue. d. an accrued expense. 59. Unearned revenue on the books of one company is likely to be a. a prepaid expense on the books of the company that made the advance payment. b. an unearned revenue on the books of the company that made the advance payment. c. an accrued expense on the books of the company that made the advance payment. d. an accrued revenue on the books of the company that made the advance payment. 60. To compute interest expense for an adjusting entry, the formula is (principal X annual rate X a fraction). The numerator and denominator of the fraction are: Numerator Denominator a. Length of time note has been outstanding 12 months b. Length of note 12 months c. Length of time until note matures Length of note d. Length of time note has been outstanding Length of note 61. 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 their fair market value. a. 1 b. 2 c. 3 d. 1 and 2 62. Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles? a. To reduce the federal income tax liability b. To aid management in cash-flow analysis c. To match the costs of production with revenues as earned d. To adhere to the accounting constraint of conservatism 63. When an item of expense is paid and recorded in advance, it is normally called a(n) a. prepaid expense. b. accrued expense. c. estimated expense. d. cash expense. 64. When an item of revenue or expense has been earned or incurred but not yet collected or paid, it is normally called a(n) ____________ revenue or expense. a. prepaid b. adjusted c. estimated d. none of these 65. When an item of revenue is collected and recorded in advance, it is normally called a(n) ___________ revenue. a. accrued b. prepaid c. unearned d. cash 66. An accrued expense can best be described as an amount a. paid and currently matched with earnings. b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings. 67. 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 account and an expense account. c. a liability account and an expense account. d. a receivable account and a revenue account. 68. Which of the following must be considered in estimating depreciation on an asset for an accounting period? a. The original cost of the asset b. Its useful life c. The decline of its fair market value d. Both the original cost of the asset and its useful life. 69. 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 70. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries? a. Expiration of prepaid insurance b. Depreciation of fixed assets c. Accrued wages payable d. All of these 71. A prepaid expense can best be described as an amount a. paid and currently matched with revenues. b. paid and not currently matched with revenues. c. not paid and currently matched with revenues. d. not paid and not currently matched with revenues. 72. 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. 73. 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. 74. An adjusted trial balance a. is prepared after the financial statements are completed. b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. c. is a required financial statement under generally accepted accounting principles. d. cannot be used to prepare financial statements. 75. Which type of account is always debited during the closing process? a. Dividends. b. Expense. c. Revenue. d. Retained earnings. S76. Which of the following statements best describes the purpose of closing entries? a. To faciliate posting and taking a trial balance. b. To determine the amount of net income or net loss for the period. c. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period. d. To complete the record of various transactions that were started in a prior period. P77. If ending accounts receivable exceeds the beginning accounts receivable: a. cash collections during the period exceed the amount of revenue earned. b. net income for the period is less than the amount of cash basis income. c. no cash was collected during the period. d. cash collections during the year are less than the amount of revenue earned. *78. Under the cash basis of accounting, revenues are recorded a. when they are earned and realized. b. when they are earned and realizable. c. when they are earned. d. when they are realized. *79. When converting from cash basis to accrual-basis accounting, which of the following adjustments should be made to cash receipts from customers to determine accrual basis service revenue? a. Subtract ending accounts receivable. b. Subtract beginning unearned service revenue. c. Add ending accounts receivable. d. Add cash sales. *80. When converting from cash basis to accrual basis accounting, which of the following adjustments should be made to cash paid for operating expenses to determine accrual basis operating expenses? a. Add beginning accrued liabilities. b. Add beginning prepaid expense. c. Subtract ending prepaid expense. d. Subtract interest expense. *81. Reversing entries are 1. normally prepared for prepaid, accrued, and estimated items. 2. necessary to achieve a proper matching of revenue and expense. 3. desirable to exercise consistency and establish standardized procedures. a. 1 b. 2 c. 3 d. 1 and 2 *82. Adjusting entries that should be reversed include those for prepaid or unearned items that a. create an asset or a liability account. b. were originally entered in a revenue or expense account. c. were originally entered in an asset or liability account. d. create an asset or a liability account and were originally entered in a revenue or expense account. *83. Adjusting entries that should be reversed include a. all accrued revenues. b. all accrued expenses. c. those that debit an asset or credit a liability. d. all of these. S*84. A reversing entry should never be made for an adjusting entry that a. accrues unrecorded revenue. b. adjusts expired costs from an asset account to an expense account. c. accrues unrecorded expenses. d. adjusts unexpired costs from an expense account to an asset account. S*85. The worksheet for Sharko Co. consisted of five pairs of debit and credit columns. The dollar amount of one item appeared in both the credit column of the income statement section and the debit column of the balance sheet section. That item is a. net income for the period. b. beginning inventory. c. cost of goods sold. d. Net loss for the period. Multiple Choice Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 21. d 32. a 43. c 54. a 65. c 76. c 22. d 33. a 44. d 55. a 66. d 77. d 23. d 34. b 45. d 56. a 67. c *78. d 24. d 35. d 46. d 57. a 68. d *79. c 25. d 36. d 47. b 58. b 69. d *80. c 26. d 37. d 48. b 59. a 70. d *81. c 27. b 38. c 49. d 60. a 71. b *82. d 28. a 39. d 50. c 61. d 72. c *83. d 29. c 40. d 51. a 62. c 73. b *84. b 30. c 41. a 52. b 63. a 74. b *85. d 31. a 42. b 53. d 64. d 75. c Solutions to those Multiple Choice questions for which the answer is “none of these.” 23. left or left-side. 24. journal. 37. Many answers are possible. 64. accrued. MULTIPLE CHOICE—Computational 86. Maso Company recorded journal entries for the issuance of common stock for $80,000, the payment of $26,000 on accounts payable, and the payment of salaries expense of $42,000. What net effect do these entries have on owners’ equity? a. Increase of $80,000. b. Increase of $54,000. c. Increase of $38,000. d. Increase of $12,000. 87. Mune Company recorded journal entries for the declaration of $100,000 of dividends, the $64,000 increase in accounts receivable for services rendered, and the purchase of equipment for $42,000. What net effect do these entries have on owners’ equity? a. Decrease of $142,000. b. Decrease of $78,000. c. Decrease of $36,000. d. Increase of $22,000. 88. Pappy Corporation received cash of $18,000 on September 1, 2012 for one year’s rent in advance and recorded the transaction with a credit to Unearned Rent Revenue. The December 31, 2012 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $6,000. b. debit Rent Revenue and credit Unearned Rent Revenue, $12,000. c. debit Unearned Rent Revenue and credit Rent Revenue, $6,000. d. debit Cash and credit Unearned Rent Revenue, $12,000. 89. Panda Corporation paid cash of $30,000 on June 1, 2012 for one year’s rent in advance and recorded the transaction with a debit to Prepaid Rent. The December 31, 2012 adjusting entry is a. debit Prepaid Rent and credit Rent Expense, $12,500. b. debit Prepaid Rent and credit Rent Expense, $17,500. c. debit Rent Expense and credit Prepaid Rent, $17,500. d. debit Prepaid Rent and credit Cash, $12,500. 90. Tate Company purchased equipment on November 1, 2012 and gave a 3-month, 9% note with a face value of $40,000. The December 31, 2012 adjusting entry is a. debit Interest Expense and credit Interest Payable, $3,600. b. debit Interest Expense and credit Interest Payable, $900. c. debit Interest Expense and credit Cash, $600. d. debit Interest Expense and credit Interest Payable, $600. 91. Brown Company's account balances at December 31, 2012 for Accounts Receivable and the related Allowance for Doubtful Accounts are $920,000 debit and $1,400 credit, respectively. From an aging of accounts receivable, it is estimated that $25,000 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for a. $25,000. b. $26,400. c. $23,600. d. $1,400. 92. Chen Company's account balances at December 31, 2012 for Accounts Receivable and the Allowance for Doubtful Accounts are $480,000 debit and $900 credit. Sales during 2012 were $1,350,000. It is estimated that 1% of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for a. $14,400. b. $13,500. c. $12,600. d. $4,800. 93. Starr Corporation loaned $150,000 to another corporation on December 1, 2012 and received a 3-month, 8% interest-bearing note with a face value of $150,000. What adjusting entry should Starr make on December 31, 2012? a. Debit Interest Receivable and credit Interest Revenue, $3,000. b. Debit Cash and credit Interest Revenue, $1,000. c. Debit Interest Receivable and credit Interest Revenue, $1,000. d. Debit Cash and credit Interest Receivable, $3,000. 94. A company receives interest on a $40,000, 8%, 5-year note receivable each April 1. At December 31, 2012, the following adjusting entry was made to accrue interest receivable: Interest Receivable 2,400 Interest Revenue 2,400 Assuming that the company does not use reversing entries, what entry should be made on April 1, 2013 when the annual interest payment is received? a. Cash 800 Interest Revenue 800 b. Cash 2,400 Interest Receivable 2,400 c. Cash 3,200 Interest Receivable 2,400 Interest Revenue 800 d. Cash 3,200 Interest Revenue 3,200 *95. A company receives interest on a $40,000, 8%, 5-year note receivable each April 1. At December 31, 2012, the following adjusting entry was made to accrue interest receivable: Interest Receivable 2,400 Interest Revenue 2,400 Assuming that the company does use reversing entries, what entry should be made on April 1, 2013 when the annual interest payment is received? a. Cash 800 Interest Revenue 800 b. Cash 2,400 Interest Receivable 2,400 c. Cash 3,200 Interest Receivable 2,400 Interest Revenue 800 d. Cash 3,200 Interest Revenue 3,200 96. Murphy Company sublet a portion of its warehouse for five years at an annual rental of $30,000, beginning on May 1, 2012. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to Unearned Rent Revenue. Murphy reports on a calendar-year basis. The adjustment on December 31, 2012 for Murphy should be a. No entry b. Unearned Rent Revenue 10,000 Rent Revenue 10,000 c. Rent Revenue 10,000 Unearned Rent Revenue 10,000 d. Unearned Rent Revenue 20,000 Revenue Revenue 20,000 97. During the first year of Wilkinson Co.'s operations, all purchases were recorded as assets. Supplies in the amount of $25,800 were purchased. Actual year-end supplies amounted to $8,600. The adjusting entry for store supplies will a. increase net income by $17,200. b. increase expenses by $17,200. c. decrease supplies by $8,600. d. debit Accounts Payable for $8,600. 98. Big-Mouth Frog Corporation had revenues of $300,000, expenses of $180,000, and dividends of $45,000. When Income Summary is closed to Retained Earnings, the amount of the debit or credit to Retained Earnings is a a. debit of $75,000. b. debit of $120,000. c. credit of $75,000. d. credit of $120,000. *99. The income statement of Dolan Corporation for 2012 included the following items: Interest revenue $131,000 Salaries and wages expense 170,000 Insurance expense 15,200 The following balances have been excerpted from Dolan Corporation's balance sheets: December 31, 2012 December 31, 2011 Interest receivable $18,200 $15,000 Salaries and wages payable 17,800 8,400 Prepaid insurance 2,200 3,000 The cash received for interest during 2012 was a. $112,800. b. $127,800. c. $131,000. d. $134,200. *100. The income statement of Dolan Corporation for 2012 included the following items: Interest revenue $131,000 Salaries and wages expense 170,000 Insurance expense 15,200 The following balances have been excerpted from Dolan Corporation's balance sheets: December 31, 2012 December 31, 2011 Interest receivable $18,200 $15,000 Salaries and wages payable 17,800 8,400 Prepaid insurance 2,200 3,000 The cash paid for salaries during 2012 was a. $179,400. b. $160,600. c. $161,600. d. $187,800. *101. The income statement of Dolan Corporation for 2012 included the following items: Interest revenue $131,000 Salaries and wages expense 170,000 Insurance expense 15,200 The following balances have been excerpted from Dolan Corporation's balance sheets: December 31, 2012 December 31, 2011 Interest receivable $18,200 $15,000 Salaries and wages payable 17,800 8,400 Prepaid insurance 2,200 3,000 The cash paid for insurance premiums during 2012 was a. $13,000. b. $12,200. c. $16,000. d. $14,400. *102. Olsen Company paid or collected during 2012 the following items: Insurance premiums paid $ 20,800 Interest collected 67,800 Salaries paid 240,400 The following balances have been excerpted from Olsen's balance sheets: December 31, 2012 December 31, 2011 Prepaid insurance $ 2,400 $ 3,000 Interest receivable 7,400 5,800 Salaries and wages payable 24,600 21,200 The insurance expense on the income statement for 2012 was a. $15,400. b. $20,200. c. $21,400. d. $26,200. *103. Olsen Company paid or collected during 2012 the following items: Insurance premiums paid $ 20,800 Interest collected 67,800 Salaries paid 240,400 The following balances have been excerpted from Olsen's balance sheets: December 31, 2012 December 31, 2011 Prepaid insurance $ 2,400 $ 3,000 Interest receivable 7,400 5,800 Salaries and wages payable 24,600 21,200 The interest revenue on the income statement for 2012 was a. $54,600. b. $66,200. c. $69,400. d. $81,000. *104. Olsen Company paid or collected during 2012 the following items: Insurance premiums paid $ 20,800 Interest collected 67,800 Salaries paid 240,400 The following balances have been excerpted from Olsen's balance sheets: December 31, 2012 December 31, 2011 Prepaid insurance $ 2,400 $ 3,000 Interest receivable 7,400 5,800 Salaries and wages payable 24,600 21,200 Salaries expense on the income statement for 2012 was a. $194,600. b. $237,000. c. $243,800. d. $286,200. *105. The Supplies account had a balance at the beginning of year 3 of $8,000 (before the reversing entry). Payments for purchases of supplies during year 3 amounted to $50,000 and were recorded as expense. A physical count at the end of year 3 revealed supplies costing $9,500 were on hand. Reversing entries are used by this company. The required adjusting entry at the end of year 3 will include a debit to: a. Supplies Expense for $1,500. b. Supplies for $1,500. c. Supplies Expense for $48,500. d. Supplies for $9,500. *106. At the end of 2012, Drew Company made four adjusting entries for the following items: 1. Depreciation expense, $25,000. 2. Expired insurance, $2,200 (originally recorded as prepaid insurance.) 3. Interest payable, $6,000. 4. Rent receivable, $10,000. In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed is (are) a. Entry No. 3. b. Entry No. 4. c. Entry No. 3 and No. 4. d. Entry No. 2, No. 3 and No. 4. *107. Garcia Corporation received cash of $24,000 on August 1, 2012 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2012 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $10,000. b. debit Rent Revenue and credit Unearned Rent Revenue, $14,000. c. debit Unearned Rent Revenue and credit Rent Revenue, $10,000. d. debit Cash and credit Unearned Rent Revenue, $14,000. *108. Lopez Company received $9,600 on April 1, 2012 for one year's rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2012 adjusting entry is a. debit Rent Revenue and credit Unearned Rent Revenue, $2,400. b. debit Rent Revenue and credit Unearned Rent Revenue, $7,200. c. debit Unearned Rent Revenue and credit Rent Revenue, $2,400. d. debit Unearned Rent Revenue and credit Rent Revenue, $7,200. *109. Gibson Company paid $6,000 on June 1, 2012 for a two-year insurance policy and recorded the entire amount as Insurance Expense. The December 31, 2012 adjusting entry is a. debit Insurance Expense and credit Prepaid Insurance, $1,750. b. debit Insurance Expense and credit Prepaid Insurance, $4,250. c. debit Prepaid Insurance and credit Insurance Expense, $1,750 d. debit Prepaid Insurance and credit Insurance Expense, $4,250. Multiple Choice Answers—Computational Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 86. c 90. d 94. c 98. d *102. c *106. c 87. c 91. c 95. d *99. b *103. c *107. b 88. c 92. b 96. d *100. b *104. c *108. a 89. c 93. c 97. b *101. d *105. d *109. d MULTIPLE CHOICE—CPA Adapted 110. On September 1, 2012, Lowe Co. issued a note payable to National Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2013. At December 31, 2013, Lowe should record accrued interest payable of a. $36,000. b. $33,000. c. $24,000. d. $22,000. 111. Eaton Co. 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 Revenue. This account had a balance of $3,600,000 at December 31, 2012 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $900,000 at December 31, 2012. Service contracts still outstanding at December 31, 2012 expire as follows: During 2013 $760,000 During 2014 1,140,000 During 2015 700,000 What amount should be reported as Unearned Service Revenue in Eaton's December 31, 2012 balance sheet? a. $2,700,000. b. $2,600,000. c. $1,700,000. d. $1,000,000. 112. In November and December 2012, Lane Co., a newly organized magazine publisher, received $75,000 for 1,000 three-year subscriptions at $25 per year, starting with the January 2013 issue. Lane included the entire $75,000 in its 2012 income tax return. What amount should Lane report in its 2012 income statement for subscriptions revenue? a. $0. b. $4,167. c. $25,000. d. $75,000. 113. On June 1, 2012, Nott Corp. loaned Horn $600,000 on a 12% note, payable in five annual installments of $120,000 beginning January 2, 2013. In connection with this loan, Horn was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2012. Horn made timely payments through November 1, 2012. On January 2, 2013, Nott received payment of the first principal installment plus all interest due. At December 31, 2012, Nott's interest receivable on the loan to Horn should be a. $0. b. $6,000. c. $12,000. d. $18,000. 114. Allen Corp.'s liability account balances at June 30, 2013 included a 10% note payable in the amount of $3,000,000. The note is dated October 1, 2011 and is payable in three equal annual payments of $1,000,000 plus interest. The first interest and principal payment was made on October 1, 2012. In Allen's June 30, 2013 balance sheet, what amount should be reported as accrued interest payable for this note? a. $225,000. b. $150,000. c. $75,000. d. $50,000. 115. Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Colaw accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2012 are as follows: Last payroll was paid on 12/26/12, for the 2-week period ended 12/26/12. Overtime pay earned in the 2-week period ended 12/26/12 was $15,000. Remaining work days in 2012 were December 29, 30, 31, on which days there was no overtime. The recurring biweekly salaries total $270,000. Assuming a five-day work week, Colaw should record a liability at December 31, 2012 for accrued salaries of a. $81,000. b. $96,000. c. $162,000. d. $177,000. 116. Tolan Corp.'s trademark was licensed to Eddy Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Tolan received the following royalties from Eddy: March 15 September 15 2011 $5,000 $7,500 2012 6,000 8,500 Eddy estimated that sales of the trademarked items would total $30,000 for July through December 2012. In Tolan's 2012 income statement, the royalty revenue should be a. $13,000. b. $14,500. c. $19,000. d. $20,500. 117. At December 31, 2012, Sue’s Boutique had 1,000 gift certificates outstanding, which had been sold to customers during 2012 for $75 each. Sue’s operates on a gross profit of 60% of its sales. What amount of revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December 31, 2012? a. $0. b. $30,000. c. $45,000. d. $75,000. *118. Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net increase during the accounting period of the Accounts Receivable Accrued Expenses Payable a. No No b. No Yes c. Yes No d. Yes Yes *119. Gregg Corp. reported revenue of $1,250,000 in its accrual basis income statement for the year ended June 30, 2013. Additional information was as follows: Accounts receivable June 30, 2012 $400,000 Accounts receivable June 30, 2013 530,000 Uncollectible accounts written off during the fiscal year 15,000 Under the cash basis, Gregg should report revenue of a. $835,000. b. $850,000. c. $1,105,000. d. $1,135,000. *120. Jim Yount, M.D., keeps his accounting records on the cash basis. During 2013, Dr. Yount collected $300,000 from his patients. At December 31, 2012, Dr. Yount had accounts receivable of $40,000. At December 31, 2013, Dr. Yount had accounts receivable of $70,000 and unearned revenue of $10,000. On the accrual basis, how much was Dr. Yount's patient service revenue for 2013? a. $260,000. b. $320,000. c. $330,000. d. $340,000. *121. The following information is available for Ace Company for 2012: Disbursements for purchases $1,160,000 Increase in trade accounts payable 100,000 Decrease in merchandise inventory 40,000 Cost of goods sold for 2012 was a. $1,300,000. b. $1,220,000. c. $1,100,000. d. $1,020,000. Multiple Choice Answers—CPA Adapted Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 110. c 112. a 114. b 116. a *118. b *120. b 111. b 113. c 115. b 117. d *119. c *121. a DERIVATIONS — Computational No. Answer Derivation 86. c $80,000 - $42,000 = $38,000. 87. c $100,000 - $64,000 = $36,000. 88. c $18,000 x 4/12 = $6,000. 89. c $30,000 x 7/12 = $17,500. 90. d 2/12 x 9% x $40,000 = $600. 91. c $25,000 – $1,400 = $23,600. 92. b $1,350,000 x 1% = $13,500. 93. c 1/12 x 8% x $150,000 = $1,000. 94. c $40,000 x 8% = $3,200; $3,200 - $2,400 = $800 int. rev. *95. d *96. d $30,000 x 8/12 = $20,000. *97. b $25,800 – $8,600 = $17,200. *98. d $300,000 - $180,000 = $120,000. *99. b $15,000 $131,000 - $18,200 = $127,800. *100. b $8,400 $170,000 - $17,800 = $160,600. *101. d $15,200 – $3,000 $2,200 = $14,400. *102. c $20,800 $600 = $21,400. *103. c $67,800 – $5,800 $7,400 = $69,400. *104. c $240,400 – $21,200 $24,600 = $243,800. *105. d $9,500 $8,000 – $8,000 = $9,500. *106. c *107. b 7/12 x $24,000 = $14,000. *108. a 3/12 x $9,600 = $2,400. *109. d 17/24 x $6,000 = $4,250. DERIVATIONS — CPA Adapted No. Answer Derivation 110. c ($900,000 – $300,000) × 12% × 4/12 = $24,000. 111. b $760,000 $1,140,000 $700,000 = $2,600,000. 112. a $0, none of the $75,000 is earned. 113. c $600,000 × 12% × 2/12 = $12,000. 114. b $2,000,000 × 9/12 × 10% = $150,000. 115. b $15,000 ($270,000 ÷ 10 × 3) = $96,000. 116. a $8,500 ($30,000 × 15%) = $13,000. 117. d 1,000 × $75 = $75,000. *118. b Conceptual. *119. c $1,250,000 $400,000 – $530,000 – $15,000 = $1,105,000. *120. b $300,000 – $40,000 $70,000 – $10,000 = $320,000. *121. a $1,160,000 $100,000 $40,000 = $1,300,000. EXERCISES Ex. 3-122—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 3-122 1. The accrual basis of accounting recognizes revenue when earned and recognizes expenses in the period incurred. 2. An accrued expense is incurred, but will be paid in the future. 3. Accrued revenue is earned, but will be collected in the future. 4. A prepaid expense is paid, but will be incurred in the future. 5. Unearned revenue is collected, but will be earned in the future. *6. Adjusting entries that create an asset or a liability account should be reversed. This would include prepaid and unearned items originally recorded in a revenue or expense account. Ex. 3-123—Terminology. In the space provided at the right, write the word or phrase that is defined or indicated. 1. Revenue and expense accounts. 1. 2. An optional step in the accounting 2. cycle. 3. A revenue collected, but not earned. 3. 4. A revenue earned, but not collected. 4. 5. Asset, liability, and equity accounts. 5. 6. An expense paid, but not incurred. 6. 7. An expense incurred, but not paid. 7. Solution 3-123 1. Nominal (temporary) accounts. 5. Real (permanent) accounts. 2. Reversing entries. 6. Prepaid expense. 3. Unearned revenue. 7. Accrued expense. 4. Accrued revenue. Ex. 3-124—Accrued items and deferred (unearned or prepaid) items. Generally accepted accounting principles require the use of accruals and deferrals in the determination of income. How is income determined under the accrual basis of accounting? Include in your answer what constitutes an accrued item and a deferred (prepaid) item, and give appropriate examples of each. Solution 3-124 Accrual accounting recognizes and reports the effects of transactions and other events in the time periods to which they relate rather than only when cash is received or paid. Accrual accounting attempts to match revenues and the expenses associated with those revenues in order to determine net income for an accounting period. An accrued item is an item of revenue or expense that has been earned or incurred during the period, but has not yet been collected or paid in cash. An example of an accrued revenue is rent for the last month of an accounting period that has been earned by a landlord but not yet paid by the tenant. An example of an accrued expense is salaries incurred for the last week of an accounting period that are not payable until the subsequent accounting period. A deferred (unearned or prepaid) item is an item of revenue or expense that has been received or paid in cash, but has not yet been earned or consumed. An example of a deferred revenue is unearned subscription revenue collected in advance of being earned. An example of a deferred expense is an insurance premium paid at the end of an accounting period which will provide insurance coverage for the first six months of the subsequent period. Ex. 3-125—Adjusting entries. Present, in journal form, the adjustments that would be made on July 31, 2013, the end of the fiscal year, for each of the following. 1. The supplies inventory on August 1, 2012 was $7,350. Supplies costing $22,150 were acquired during the year and charged to the supplies inventory. A count on July 31, 2013 indicated supplies on hand of $8,810. 2. On April 30, a ten-month, 6% note for $20,000 was received from a customer. *3. On March 1, $12,000 was collected as rent for one year and a nominal account was credited. Solution 3-125 1. Supplies Expense 20,690 Supplies 20,690 2. Interest Receivable 300 Interest Revenue 300 *3. Rent Revenue 7,000 Unearned Rent Revenue 7,000 Ex. 3-126—Adjusting entries. Reed Co. wishes to enter receipts and payments in such a manner that adjustments at the end of the period will not require reversing entries at the beginning of the next period. Record the following transactions in the desired manner and give the adjusting entry on December 31, 2012. (Two entries for each part.) 1. An insurance policy for two years was acquired on April 1, 2012 for $12,000. 2. Rent of $15,000 for six months for a portion of the building was received on November 1, 2012. Solution 3-126 1. Prepaid Insurance 12,000 Cash 12,000 Insurance Expense 4,500 Prepaid Insurance 4,500 2. Cash 15,000 Unearned Rent Revenue 15,000 Unearned Rent Revenue 5,000 Rent Revenue 5,000 Ex. 3-127 The adjusted trial balance of Ryan Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31: 1. an income statement. 2. a retained earnings statement. 3. a balance sheet. RYAN FINANCIAL PLANNERS Adjusted Trial Balance December 31, 2012 Debit Credit Cash $ 3,900 Accounts Receivable 2,200 Supplies 1,800 Equipment 15,000 Accumulated Depreciation—Equipment $ 4,000 Accounts Payable 3,800 Unearned Service Revenue 5,000 Common Stock 10,000 Retained Earnings 4,400 Dividends 2,000 Service Revenue 3,700 Supplies Expense 600 Depreciation Expense 2,500 Rent Expense 2,900 ______ $30,900 $30,900 Solution 3-127 (20 min) 1. RYAN FINANCIAL PLANNERS Income Statement For the Month Ended December 31, 2012 Revenues Service revenue $ 3,700 Expenses Rent expense $2,900 Depreciation expense 2,500 Supplies expense 600 Total expenses 6,000 Net loss $(2,300) 2. RYAN FINANCIAL PLANNERS Retained Earnings Statement For the Month Ended December 31, 2012 Retained earnings, December 1 $ 4,400 Less: Net loss $2,300 Dividends 2,000 4,300 Retained earnings, December 31 $ 100 3. RYAN FINANCIAL PLANNERS Balance Sheet December 31, 2012 Assets Cash $ 3,900 Accounts receivable 2,200 Supplies 1,800 Equipment $15,000 Less: Accumulated depreciation—equipment 4,000 11,000 Total assets $18,900 Liabilities and Stockholders’ Equity Liabilities Accounts payable $ 3,800 Unearned service revenue 5,000 Total liabilities $ 8,800 Stockholders’ Equity Common stock 10,000 Retained earnings 100 10,100 Total liabilities and stockholders’ equity $18,900 *Ex. 3-128—Cash basis vs. accrual basis of accounting. Contrast the cash basis of accounting with the accrual basis of accounting. *Solution 3-128 The essential difference between the cash basis and the accrual basis of accounting relates to the timing of the recognition of revenues and expenses. Under the cash basis of accounting, the effects of transactions and other events are recognized and reported only when cash is received or paid. Under the accrual basis of accounting, these effects are recognized and reported in the time periods to which they relate, regardless of the time of the receipt or payment of cash. Because no attempt is made under the cash basis of accounting to match revenues and the expenses associated with those revenues, cash basis financial statements are not in accordance with generally accepted accounting principles. *Ex. 3-129—Accrual basis. Sales salaries paid during 2012 were $75,000. Advances to salesmen were $1,100 on January 1, 2012, and $800 on December 31, 2012. Sales salaries accrued were $1,360 on January 1, 2012, and $1,880 on December 31, 2012. Show the computation of sales salaries on an accrual basis for 2012. *Solution 3-129 $75,000 $1,100 – $800 – $1,360 $1,880 = $75,820. *Ex. 3-130—Accrual basis. The records for Todd Inc. showed the following for 2012: Jan. 1 Dec. 31 Accrued expenses $1,300 $2,150 Prepaid expenses 720 870 Cash paid during the year for expenses, $37,500 Show the computation of the amount of expense that should be reported on the income statement. *Solution 3-130 $37,500 – $1,300 $2,150 $720 – $870 = $38,200. *Ex. 3-131—Accrual basis. The records for Kiley Company showed the following for 2012: Jan. 1 Dec. 31 Unearned revenue $1,100 $2,160 Accrued revenue 1,260 920 Cash collected during the year for revenue, $55,000 Show the computation of the amount of revenue that should be reported on the income statement. *Solution 3-131 $55,000 $1,100 – $2,160 – $1,260 $920 = $53,600. *Ex. 3-132—Cash basis. Revenue on the income statement was $145,800. Accounts receivable were $3,500 on January 1 and $3,540 on December 31. Unearned revenue was $1,050 on January 1 and $1,670 on December 31. Show the computation of revenue for the year on a cash basis. *Solution 3-132 $145,800 $3,500 – $3,540 – $1,050 $1,670 = $146,380. PROBLEMS Pr. 3-133—Adjusting entries and account classification. Selected amounts from Trent Company's trial balance of 12/31/12 appear below: 1. Accounts Payable $ 160,000 2. Accounts Receivable 150,000 3. Accumulated Depreciation—Equipment 200,000 4. Allowance for Doubtful Accounts 20,000 5. Bonds Payable 500,000 6. Cash 150,000 7. Common Stock 60,000 8. Equipment 900,000 9. Insurance Expense 30,000 10. Interest Expense 10,000 11. Inventory 300,000 12. Notes Payable (due 6/1/13) 200,000 13. Prepaid Rent 180,000 14. Retained Earnings 818,000 15. Salaries and Wages Expense 328,000 (All of the above accounts have their standard or normal debit or credit balance.) Part A. Prepare adjusting journal entries at year end, December 31, 2012, based on the following supplemental information. a. The equipment has a useful life of 15 years with no salvage value. (Straight-line method being used.) b. Interest accrued on the bonds payable is $15,000 as of 12/31/12. c. Expired insurance at 12/31/12 is $25,000. d. The rent payment of $180,000 covered the six months from November 30, 2012 through May 31, 2013. e. Salaries and wages earned but unpaid at 12/31/12, $22,000. Part B. Indicate the proper balance sheet classification of each of the 15 numbered accounts in the 12/31/12 trial balance before adjustments by placing appropriate numbers after each of the following classifications. If the account title would appear on the income statement, do not put the number in any of the classifications. a. Current assets b. Property, plant, and equipment c. Current liabilities d. Long-term liabilities e. Stockholders' equity Solution 3-133 Part A. a. Depreciation Expense ($900,000 – 0)  15 60,000 Accumulated Depreciation—Equipment 60,000 b. Interest Expense 15,000 Interest Payable 15,000 c. Prepaid Insurance 5,000 Insurance Expense ($30,000 - $25,000) 5,000 d. Rent Expense ($180,000  6) 30,000 Prepaid Rent 30,000 e. Salaries and Wages Expense 22,000 Salaries and Wages Payable 22,000 Part B. a. Current assets—2, 4, 6, 11, 13 b. Property, plant, and equipment—3, 8 c. Current liabilities—1, 12 d. Long-term liabilities—5 e. Stockholders' equity—7, 14 Pr. 3-134—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 1/1/12 was $1,000. During 2012 cash received from debtors for interest on outstanding notes receivable amounted to $5,000. The 2012 income statement showed interest revenue in the amount of $7,400. You are to provide the missing adjusting entry that must have been made, assuming reversing entries are not made. 2. Unearned rent at 1/1/12 was $5,300 and at 12/31/12 was $8,000. The records indicate cash receipts from rental sources during 2012 amounted to $55,000, all of which was credited to the Unearned Rent Revenue Account. You are to prepare the missing adjusting entry. 3. Accumulated depreciation—equipment at 1/1/12 was $230,000. At 12/31/12 the balance of the account was $290,000. During 2012, one piece of equipment was sold. The equipment had an original cost of $40,000 and was 3/4 depreciated when sold. You are to prepare the missing adjusting entry. 4. Allowance for doubtful accounts on 1/1/12 was $50,000. The balance in the allowance account on 12/31/12 after making the annual adjusting entry was $65,000 and during 2012 bad debts written off amounted to $30,000. You are to provide the missing adjusting entry. 5. Prepaid rent at 1/1/12 was $9,000. During 2012 rent payments of $120,000 were made and charged to "rent expense." The 2012 income statement shows as a general expense the item "rent expense" in the amount of $135,000. You are to prepare the missing adjusting entry that must have been made, assuming reversing entries are not made. 6. Retained earnings at 1/1/12 was $130,000 and at 12/31/12 it was $210,000. During 2012, cash dividends of $50,000 were paid and a stock dividend of $40,000 was issued. Both dividends were properly charged to retained earnings. You are to provide the missing closing entry. Solution 3-134 1. Interest Receivable 3,400 Interest Revenue 3,400 Interest revenue per books $7,400 Interest revenue received related to 2012 ($5,000 – $1,000) 4,000 Interest accrued $3,400 2. Unearned Rent Revenue 52,300 Rent Revenue 52,300 Cash receipts $55,000 Beginning balance 5,300 Ending balance (8,000) Rent revenue $52,300 Solution 3-134 (cont.) 3. Depreciation Expense 90,000 Accumulated Depreciation—Equipment 90,000 Ending balance $290,000 Beginning balance 230,000 Difference 60,000 Write-off at time of sale 3/4 × $40,000 30,000 $ 90,000 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 15,000 Prepaid Rent 15,000 Rent expense $135,000 Less cash paid 120,000 Reduction in prepaid rent account $ 15,000 6. Income Summary 170,000 Retained Earnings 170,000 Ending balance $210,000 Beginning balance 130,000 Difference 80,000 Cash dividends $50,000 Stock dividends 40,000 90,000 $170,000 Pr. 3-135—Adjusting and closing entries. The following trial balance was taken from the books of Fisk Corporation on December 31, 2012. Account Debit Credit Cash $ 9,000 Accounts Receivable 40,000 Notes Receivable 10,000 Allowance for Doubtful Accounts $ 1,800 Inventory 44,000 Prepaid Insurance 4,800 Equipment 110,000 Accumulated Depreciation--Equip. 15,000 Accounts Payable 10,800 Common Stock 44,000 Retained Earnings 75,000 Sales Revenue 260,000 Cost of Goods Sold 126,000 Salaries and wages Expense 50,000 Rent Expense 12,800 Totals $406,600 $406,600 Pr. 3-135 (cont.) At year end, the following items have not yet been recorded. a. Insurance expired during the year, $2,000. b. Estimated bad debts, 1% of gross sales. c. Depreciation on equipment, 10% per year. d. Interest at 6% is receivable on the note for one full year. *e. Rent paid in advance at December 31, $5,400 (originally charged to expense). f. Accrued salaries and wages at December 31, $5,800. Instructions (a) Prepare the necessary adjusting entries. (b) Prepare the necessary closing entries. Solution 3-135 (a) Adjusting Entries a. Insurance Expense 2,000 Prepaid Insurance 2,000 b. Bad Debt Expense 2,600 Allowance for Doubtful Accounts 2,600 c. Depreciation Expense 11,000 Accumulated Depreciation--Equip. 11,000 d. Interest Receivable 600 Interest Revenue 600 *e. Prepaid Rent 5,400 Rent Expense 5,400 f. Salaries and Wages Expense 5,800 Salaries and Wages Payable 5,800 (b) Closing Entries Sales 260,000 Interest Revenue 600 Income Summary 260,600 Income Summary 204,800 Salaries and Wages Expense 55,800 Rent Expense 7,400 Depreciation Expense 11,000 Bad Debt Expense 2,600 Insurance Expense 2,000 Cost of Goods Sold 126,000 Income Summary 55,200 Retained Earnings 55,200 *Pr. 3-136—Cash to accrual accounting. The following information is available for Renn Corporation's first year of operations: Payment for merchandise purchases $315,000 Ending merchandise inventory 135,000 Accounts payable (balance at end of year) 60,000 Collections from customers 280,000 The balance in accounts payable relates only to merchandise purchases. All merchandise items were marked to sell at 40% above cost. What should be the ending balance in accounts receivable, assuming all accounts are deemed collectible? *Solution 3-136 Since this is the first year of operations and there were $280,000 of