CHAPTER 3

Adjusting the Accounts

Learning Objectives
1. Explain the accrual basis of accounting and the reasons for adjusting entries.
2. Prepare adjusting entries for deferrals.
3. Prepare adjusting entries for accruals.
4. Describe the nature and purpose of an adjusted trial balance.
*5. Prepare adjusting entries for the alternative treatment of deferrals.
*6. Discuss financial reporting concepts.

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter.

© 2022 John Wiley & Sons, Inc. All rights reserved. Weygandt, Financial Accounting 12e, Solutions Manual (For Instructor Use Only) 3-1
 ANSWERS TO QUESTIONS
1. How does the time period assumption affect an accountant’s analysis of business transactions?
(a) Under the time period assumption, an accountant is required to determine the relevance of each
business transaction to specific accounting periods.

Explain the terms fiscal year, calendar year, and interim periods.
(b) An accounting time period of one year in length is referred to as a fiscal year. A fiscal year that
extends from January 1 to December 31 is referred to as a calendar year. Accounting periods of
less than one year are called interim periods.

2. Identify and state two generally accepted accounting principles that relate to adjusting the accounts.
The two generally accepted accounting principles that relate to adjusting the accounts are:
The revenue recognition principle, which states that revenue should be recognized when the
performance obligation is satisfied. The expense recognition principle which requires that expenses
be recognized in the period in which the company makes efforts (consumes assets or incurs liabilities)
to generate revenue.

3. What are the five steps of the revenue recognition principle?

The five steps of the revenue recognition process are:
Step 1: Identify the contract with customers.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations.
Step 5: Recognize revenue when each performance obligation is satisfied.

4. Susan Zupan, a lawyer, accepts a legal engagement in March, performs the work in April, and is paid in
May. If Zupan’s law firm prepares monthly financial statements, when should it recognize revenue from
this engagement? Why?
The law firm should recognize the revenue in April. The revenue recognition principle states that
revenue should be recognized in the accounting period when the performance obligation is satisfied (at
the time service is performed.)

5. Why do accrual-basis financial statements provide more useful information than cash-basis
statements?
Information presented on an accrual basis is more useful than on a cash basis because it reveals
relationships that are likely to be important in predicting future results. To illustrate, under accrual
accounting, revenues are recognized when the performance obligation is satisfied so they can be
related to the economic environment in which they occur. Trends in revenues are thus more
meaningful.

6. In completing the engagement in Question 4, Zupan incurs and pays no costs in March, incurs and
pays $2,000 of costs in April, and pays $2,500 of costs in May (incurred in April). How much expense
should the firm deduct from revenues in the month when it recognizes the revenue? Why?
Expenses of $4,500 should be deducted from the revenues in April. Under the expense recognition
principle, companies recognize expenses in the period in which they make efforts (consuming assets or
incurring liabilities) to generate revenue.
 7. “Adjusting entries are required by the historical cost principle of accounting.” Explain why this statement
is true or false.
False. Adjusting entries are required by the revenue recognition and expense recognition principles.

8. Why may a trial balance not contain up-to-date and complete financial information?
A trial balance may not contain up-to-date information for financial statements because:
(1) Some events are not journalized daily because it is not efficient to do so.
(2) The expiration of some costs occurs with the passage of time rather than as a result of daily
transactions.
(3) Some items may be unrecorded because the transaction data are not yet known.

9. Distinguish between the two categories of adjusting entries and identify the types of adjustments
applicable to each category.
The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaid
expenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses.

10. What is the debit/credit effect of a prepaid expense adjusting entry?

In the adjusting entry for a prepaid expense, an expense is debited and an asset is credited.

11. “Depreciation is a valuation process that results in the reporting of the fair value of the asset.” Explain
why this statement is true or false.
False. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a
rational and systematic manner. Depreciation results in the presentation of the book value of the asset,
not its fair value.

12. Explain the differences between depreciation expense and accumulated depreciation.
Depreciation Expense is an expense account whose normal balance is a debit. This account shows the
cost that has expired during the current accounting period. Accumulated Depreciation is a contra asset
account whose normal balance is a credit. The balance in this account is the depreciation that has been
recognized from the date of acquisition to the balance sheet date.

13. J. Brownlee Company purchased equipment for $18,000. By the current balance sheet date, $6,000
had been depreciated. Indicate the balance sheet presentation of the data.
Equipment........................................................................................ $18,000
Less: Accumulated Depreciation—Equipment................................. 6,000 $12,000

14. What is the debit/credit effect of an unearned revenue adjusting entry?

In the adjusting entry for an unearned revenue, a liability is debited and a revenue is credited.

15. Whistler Corp. performed services for a customer but has not yet recorded payment or recorded any
entry related to the work. Which of the following accounts are involved in the adjusting entry: (a) asset,
(b) liability, (c) revenue, or (d) expense? For the accounts selected, indicate whether they would be
debited or credited in the entry.
(a) Asset and (c) revenue. An asset would be debited and a revenue would be credited.

16. A company fails to recognize an expense incurred but not paid. Indicate which of the following
accounts is debited and which is credited in the adjusting entry: (a) asset, (b) liability, (c) revenue, or
(d) expense.
An expense (d) is debited and a liability (b) is credited in the adjusting entry.
17. A company makes an accrued revenue adjusting entry for $900 and an accrued expense adjusting
entry for $700. How much was net income understated prior to these entries? Explain.
Net income was understated $200 because prior to adjustment, revenues are understated by $900 and
expenses are understated by $700. The difference, in this case, is $200 ($900 – $700).

18. On January 9, a company pays $5,000 for salaries and wages of which $2,000 was reported as
Salaries and Wages Payable on December 31. Give the entry to record the payment.
The entry is:
Jan. 9 Salaries and Wages Payable................................................. 2,000
Salaries and Wages Expense................................................ 3,000
Cash............................................................................... 5,000

19. For each of the following items before adjustment, indicate the type of adjusting entry (prepaid
expense, unearned revenue, accrued revenue, or accrued expense) that is needed to correct the
misstatement. If an item could result in more than one type of adjusting entry, indicate each of the
types.
a. Assets are understated.
b. Liabilities are overstated.
c. Liabilities are understated.
d. Expenses are understated.
e. Assets are overstated.
f. Revenue is understated.

(a) Accrued revenues. (d) Accrued expenses or prepaid expenses.

(b) Unearned revenues. (e) Prepaid expenses.
(c) Accrued expenses. (f) Accrued revenues or unearned revenues.

20. One-half of the adjusting entry is given below. Indicate the account title for the other half of the entry.
a. Salaries and Wages Expense is debited.
b. Depreciation Expense is debited.
c. Interest Payable is credited.
d. Supplies is credited.
e. Accounts Receivable is debited.
f. Unearned Service Revenue is debited.

(a) Salaries and Wages Payable. (d) Supplies Expense.

(b) Accumulated Depreciation. (e) Service Revenue.
(c) Interest Expense. (f) Service Revenue.

21. “An adjusting entry may affect more than one balance sheet or income statement account.” Explain why
this statement is true or false.
False. An adjusting entry affects only one balance sheet account and one income statement account.

22. Why is it possible to prepare financial statements directly from an adjusted trial balance?
Financial statements can be prepared from an adjusted trial balance because the balances of all
accounts have been adjusted to show the effects of all financial events that have occurred during the
accounting period.
*23. Dashan Company debits Supplies Expense for all purchases of supplies and credits Rent Revenue for
all advanced rentals. For each type of adjustment, give the adjusting entry.
For Supplies Expense (prepaid expense): expenses are overstated and assets are understated. The
adjusting entry is:
Assets (Supplies).............................................................................. XX
Expenses (Supplies Expense)..................................................... XX
For Rent Revenue (unearned revenues): revenues are overstated and liabilities are understated. The
adjusting entry is:
Revenues (Rent Revenue)................................................................ XX
Liabilities (Unearned Rent Revenue)........................................... XX

*24. What is the primary objective of financial reporting?

(a) The primary objective of financial reporting is to provide financial information that is useful to
investors and creditors for making decisions about providing capital.

Identify the characteristics of useful accounting information.

(b) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing
qualities are comparabiIity, consistency, verifiability, timeliness, and understandability.

*25. Dan Fineman, the president of King Company, is pleased. King substantially increased its net income
in 2027 while keeping its unit inventory relatively the same. Howard Gross, chief accountant, cautions
Dan, however. Gross says that since King changed its method of inventory valuation, there is a
consistency problem and it is difficult to determine whether King is better off. Is Gross correct? Why or
why not?

Gross is correct. Consistency means using the same accounting principles and accounting methods
from period to period within a company. Without consistency in the application of accounting principles,
it is difficult to determine whether a company is better off, worse off, or the same from period to period.

*26. What is the distinction between comparability and consistency?

Comparability results when different companies use the same accounting principles. Consistency
means using the same accounting principles and methods from year to year within the same company.

*27. Describe the constraint inherent in the presentation of accounting information.

The constraint is the cost constraint. The cost constraint allows accounting standard setters to weigh
the cost that companies will incur to provide information against the benefit that financial statement
users will gain from having the information available.

*28. Laurie Belk is president of Better Books. She has no accounting background. Belk cannot understand
why fair value is not used as the basis for all accounting measurement and reporting. Discuss.
Accounting relies primarily on two measurement principles. Fair value is sometimes used when market
price information is readily available. However, in many situations, reliable market price information is
not available. In these instances, accounting relies on cost as its basis.

*29. What is the economic entity assumption? Give an example of its violation.
The economic entity assumption states that every economic entity can be separately identified and
accounted for. This assumption requires that the activities of the entity be kept separate and distinct
from (1) the activities of its owners (the shareholders) and (2) all other economic entities. A shareholder
of a company charging personal living costs as expenses of the company is an example of a violation
of the economic entity assumption.
 SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3.1 (Five steps in the revenue recognition process.)

Number the following steps of the revenue recognition process (from 1–5) to place in the correct order.
________ Allocate the transaction price to the separate performance obligations.
________ Identify the contract with customers.
________ Identify the separate performance obligations in the contract.
________ Recognize revenue when each performance obligation is satisfied.
________ Determine the transaction price.
4 Allocate the transaction price to the separate performance obligations.
1 Identify the contract with customers.
2 Identify the separate performance obligations in the contract.
5 Recognize revenue when each performance obligation is satisfied.
3 Determine the transaction price.

BRIEF EXERCISE 3.2 (Identify impact of transactions on cash and net income.)

Transactions that affect net income do not necessarily affect cash. Identify the effect, if any, that each of the
following transactions would have upon cash and net income. The first transaction has been completed as an
example.
a. Purchased $100 of supplies for cash.
Cash Net Income
-$100 $0
b. Recorded an adjusting entry to record use of $20 of the above supplies.
c. Made sales of $1,300, all on account.
d. Received $800 from customers in payment of their accounts.
e. Purchased equipment for cash, $2,500.
f. Recorded depreciation of building for period used, $600.

Cash Net Income

(a) $–100 $0
(b) 0 –20
(c) 0 +1,300
(d) +800 0
(e) –2,500 0
(f) 0 –600
BRIEF EXERCISE 3.3 (Indicate why adjusting entries are needed.)

The ledger of Melmann Company includes the following accounts. Explain why each account may require
adjustment.
a. Prepaid Insurance—to recognize insurance expired during the period.
b. Depreciation Expense—to allocate the cost of an asset to expense during the current period.
c. Unearned Service Revenue—to account for revenue earned because services were provided during
the period.
d. Interest Payable to recognize interest accrued but unpaid on notes payable during the current period.
LO 1 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting IMA: Reporting

BRIEF EXERCISE 3.4 (Identify the major types of adjusting entries.)

Cortina Company accumulates the following adjustment data at December 31. Indicate (1) the type of
adjustment (prepaid expense, accrued revenue, and so on) and (2) the status of the accounts before
adjustment (for example, “assets understated and revenues understated”).
a. Supplies of $400 are on hand. Supplies account shows $1,600 balance.
b. Services performed but unbilled total $700.
c. Interest of $300 has accumulated (and not been paid) on a note payable.
d. Rent collected in advance totaling $1,100 has been earned.
(1) (2)
Item Type of Adjustment Accounts Before Adjustment

(a) Prepaid Expenses Assets Overstated

Expenses Understated

(b) Accrued Revenues Assets Understated

Revenues Understated

(c) Accrued Expenses Expenses Understated

Liabilities Understated

(d) Unearned Revenues Liabilities Overstated

Revenues Understated

BRIEF EXERCISE 3.5 (Prepare adjusting entry for supplies.)

Lahey Advertising Company’s trial balance at December 31 shows Supplies $8,800 and Supplies Expense
$0. On December 31, there are $1,100 of supplies on hand. Prepare the adjusting entry at December 31 and,
using T-accounts, enter the balances in the accounts, post the adjusting entry, and indicate the adjusted
balance in each account.

Dec. 31 Supplies Expense............................................................ 7,700

Supplies.................................................................. 7,700

Supplies
8,800 12/31 7,700
12/31 Bal. 1,100
 Supplies Expense
12/31 7,700

BRIEF EXERCISE 3.6 (Prepare adjusting entry for depreciation.)

At the end of its first year, the trial balance of Rayburn Company shows Equipment $22,000 and zero
balances in Accumulated Depreciation—Equipment and Depreciation Expense. Depreciation for the year is
estimated to be $2,750. Prepare the annual adjusting entry for depreciation at December 31, post the
adjustments to T-accounts, and indicate the balance sheet presentation of the equipment at December 31.

Dec. 31 Depreciation Expense...................................................... 2,750

Accumulated Depreciation—
Equipment........................................................... 2,750

Depreciation Expense Accumulated Depreciation—Equipment

12/31 2,750 12/31 2,750

Balance Sheet:
Equipment.................................................................................. $22,000
Less: Accumulated depreciation—equipment............................. 2,750 $19,250

BRIEF EXERCISE 3.7 (Prepare adjusting entry for prepaid expense.)

On July 1, 2027, Ling Co. pays $12,400 to Marsh Insurance Co. for a 2-year insurance contract. Both
companies have fiscal years ending December 31. For Ling Co., journalize and post the entry on July 1 and
the annual adjusting entry on December 31.

July 1 Prepaid Insurance............................................................ 12,400

Cash....................................................................... 12,400

Dec. 31 Insurance Expense ($12,400 × 6/24)............................... 3,100

Prepaid Insurance................................................... 3,100

Prepaid Insurance
7/1 12,400 12/31 3,100
12/31 Bal. 9,300

Insurance Expense
12/31 3,100
BRIEF EXERCISE 3.8 (Prepare adjusting entry for unearned revenue.)

On July 1, 2027, Ling Co. pays $12,400 to Marsh Insurance Co. for a 2-year insurance contract. Both
companies have fiscal years ending December 31. Journalize and post the entry on July 1 and the annual
adjusting entry on December 31 for Marsh Insurance Co. Marsh uses the accounts Unearned Service
Revenue and Service Revenue.

July 1 Cash ....................................................................12,400

Unearned Service Revenue.................................... 12,400

Dec. 31 Unearned Service Revenue............................................. 3,100

Service Revenue ($12,400 × 6/24)......................... 3,100

Unearned Service Revenue

12/31 3,100 7/1 12,400 Service Revenue
12/31 Bal. 9,300 12/31 3,100

BRIEF EXERCISE 3.9 (Prepare adjusting entries for deferrals.)

The unadjusted trial balance of Northern Exposure Inc. had these balances for the following selected
accounts: Supplies $3,100, Unearned Service Revenue $8,200, and Prepaid Rent $1,200. At the end of the
period, a count showed $500 of supplies on hand. Services of $2,900 had been performed related to the
unearned revenue account, and one month’s rent, worth $400, had been consumed by Northern Exposure.
Record the required adjusting entries related to these events.

1. Supplies Expense...................................................................... 2,600

Supplies ($3,100 – $500)................................................. 2,600

2. Unearned Service Revenue....................................................... 2,900

Service Revenue............................................................. 2,900

3. Rent Expense............................................................................ 400

Prepaid Rent.................................................................... 400
BRIEF EXERCISE 3.10 (Prepare adjusting entries for accruals.)

The bookkeeper for Tran Company asks you to prepare the following accrual adjusting entries at December
31. Use these account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable,
Salaries and Wages Expense, and Salaries and Wages Payable.
a. Interest on notes payable of $300 should be accrued.
b. Services performed but unbilled totals $1,700.
c. Salaries of $780 earned by employees have not been recorded or paid.

(a) Dec. 31 Interest Expense..................................................... 300

Interest Payable............................................. 300
(b) 31 Accounts Receivable.............................................. 1,700
Service Revenue........................................... 1,700
(c) 31 Salaries and Wages Expense................................. 780
Salaries and Wages Payable......................... 780

BRIEF EXERCISE 3.11 (Prepare adjusting entries for accruals.)

At December 31 of the current year, Cullen Corporation had a number of items that were not reflected in its
accounting records. Maintenance and repair costs of $770 were incurred but not paid. Utilities costing $240
were used but not paid, and use of a warehouse space worth $1,900 was provided to a tenant who had not
been billed as of the end of the month. Record the required adjusting entries related to these events.

Dec. 31 Maintenance and Repairs Expense................................... 770

Accounts Payable................................................... 770
31 Utilities Expense............................................................... 240
Accounts Payable................................................... 240
31 Accounts Receivable......................................................... 1,900
Rent Revenue......................................................... 1,900
BRIEF EXERCISE 3.12 (Analyze accounts in a trial balance.)

The trial balance of Woods Company includes the following balance sheet accounts. Identify the accounts
that might require adjustment. For each account that requires adjustment, indicate (1) the type of adjusting
entry (prepaid expense, unearned revenue, accrued revenue, and accrued expense) and (2) the related
account in the adjusting entry.

a. Accounts Receivable.
b. Prepaid Insurance.
c. Cash.
d. Accumulated Depreciation—Equipment.
e. Dividends.
f. Interest Payable.
g. Unearned Service Revenue.
(1) (2)
Account Type of Adjustment Related Account

(a) Accounts Receivable Accrued Revenues Service Revenue

(b) Prepaid Insurance Prepaid Expenses Insurance Expense

(c) Cash Not required

(d) Accumulated Depreciation—

Equipment Prepaid Expenses Depreciation Expense

(e) Dividends Not required

(f) Interest Payable Accrued Expenses Interest Expense

(g) Unearned Service Unearned Revenues Service Revenue

Revenue
BRIEF EXERCISE 3.13 (Prepare an income statement from an adjusted trial balance.)

The adjusted trial balance of Levin Corporation at December 31, 2027, includes the following selected
accounts: Retained Earnings $17,200, Dividends $6,000, Service Revenue $32,600, Salaries and Wages
Expense $14,000, Insurance Expense $1,800, Rent Expense $3,900, Supplies Expense $1,500, and
Depreciation Expense $1,000. Prepare an income statement for the year.

LEVIN CORPORATION
Income Statement
For the Year Ended December 31, 2027

Revenues
Service revenue..................................................................... $32,600
Expenses
Salaries and wages expense................................................. $14,000
Rent expense......................................................................... 3,900
Insurance expense................................................................. 1,800
Supplies expense................................................................... 1,500
Depreciation expense............................................................ 1,000
Total expenses.............................................................. 22,200
Net income..................................................................................... $ 10,400
[Rev. – Exp. = Net inc. or (loss)]
($32,600 – $22,200 = $10,400)

BRIEF EXERCISE 3.14 (Prepare a retained earnings statement from an adjusted trial balance.)

The adjusted trial balance of Sharp Corporation at December 31, 2027, includes the following accounts:
Retained Earnings $18,000 and Dividends $7,000. The balance in Retained Earnings is the balance as of
January 1. Prepare a retained earnings statement for the year, assuming net income is $9,000.

SHARP CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2027

Retained earnings, January 1................................................................................ $18,000

Add: Net income.................................................................................................. 9,000
27,000
Less: Dividends.................................................................................................... 7,000
Retained earnings, December 31.......................................................................... $20,000

(Beg. ret. earn. + Net inc. – Div. = End. ret. earn.)

($18,000 + $9,000 – $7,000 = $20,000)

*BRIEF EXERCISE 3.15 (Prepare adjusting entries under alternative treatment of deferrals.)
Mayes Company records all prepayments in income statement accounts. At April 30, the trial balance shows
Supplies Expense $2,800, Service Revenue $9,200, and zero balances in related balance sheet accounts.
Prepare the adjusting entries at April 30 assuming (a) $700 of supplies on hand and (b) $3,000 of service
revenue should be reported as unearned.

(a) Apr. 30 Supplies....................................................................... 700

Supplies Expense................................................ 700

(b) 30 Service Revenue.......................................................... 3,000

Unearned Service Revenue................................. 3,000

*BRIEF EXERCISE 3.16 (Identify characteristics of useful information.)

The accompanying chart shows the qualitative characteristics of useful accounting information. Fill in the
blanks.

(f). Comparability
(a) Predictive value (g) Verifiability
(b) Confirmatory value (h) Timeliness
(c) Materiality

(d) Complete

(e) Free from material error

*BRIEF EXERCISE 3.17 (Identify characteristics of useful information.)

Given the characteristics of useful accounting information, complete each of the following statements.

a. For information to be ____, it should have predictive value, confirmatory value, and be material.
b. _____ means that information accurately depicts what really happened.
c. _____ means using the same accounting principles and methods from year to year within a company.
(a) Relevant
(b) Faithful representation
(c) Consistency

*BRIEF EXERCISE 3.18 (Identify characteristics of useful information.)

Here are some qualitative characteristics of useful accounting information:
1. Predictive value
2. Neutral
3. Verifiable
4. Timely

Match each qualitative characteristic to one of the following statements.

Predictive Value a. Accounting information should help provide accurate expectations about future events.
Neutral b. Accounting information cannot be selected, prepared, or presented to favor one set of interested
users over another.
Verifiable c. Independent observers, using the same methods, are able to obtain similar results.
Timely d. Accounting information must be available to decision-makers before it loses its capacity to
influence their decisions.

*BRIEF EXERCISE 3.19 (Define full disclosure principle)

Select the response that completes the following statement correctly. The full disclosure principle dictates
that:
a. financial statements should disclose all assets at their cost.
b. financial statements should disclose only those events that can be measured in currency.
c. financial statements should disclose all events and circumstances that would matter to users of
financial statements.
d. financial statements should not be relied on unless an auditor has expressed an unqualified opinion on
them.
(c) Financial statements should disclose all events and circumstances that would matter to users of
financial statements.
 SOLUTIONS FOR DO IT! EXERCISES

DO IT! 3.1

DO IT! 3.2 (Prepare adjusting entries for deferrals.)

The ledger of Herrera, Inc. on March 31, 2027, includes the following selected accounts before adjusting
entries.
Debit Credit
Prepaid Insurance $ 2,400
Supplies 2,500
Equipment 30,000
Unearned Service Revenue $9,000

An analysis of the accounts shows the following.

1. Insurance expires at the rate of $300 per month.

2. Supplies on hand total $1,100.
3. The equipment depreciates at $500 per month.
4. During March, services were performed for two-fifths of the unearned service revenue.

Prepare the adjusting entries for the month of March.

1. Insurance Expense......................................................................... 300

Prepaid Insurance.................................................................. 300
(To record insurance expired)

2. Supplies Expense ($2,500 – $1,100).............................................. 1,400

Supplies................................................................................. 1,400
(To record supplies used)

3. Depreciation Expense.................................................................... 500

Accumulated Depreciation—Equipment................................. 500
(To record monthly depreciation)

4. Unearned Service Revenue ($9,000 × 2/5)..................................... 3,600

Service Revenue.................................................................... 3,600
(To record revenue for services provided)

DO IT! 3.3 (Prepare adjusting entries for accruals.)

Javier Computer Services began operations in July 2027. At the end of the month, the company prepares
monthly financial statements. It has the following information for the month.

1. At July 31, the company owed employees $1,300 in salaries that the company will pay in August.
2. On July 1, the company borrowed $20,000 from a local bank on a 10-year note. The annual interest
rate is 12%. Interest is paid annually.
3. Service revenue unrecorded in July totaled $2,400.

Prepare the adjusting entries needed at July 31, 2027.

1. Salaries and Wages Expense......................................................... 1,300

Salaries and Wages Payable.................................................. 1,300
(To record accrued salaries)

2. Interest Expense ($20,000 × .12 × 1/12)......................................... 200

Interest Payable..................................................................... 200
(To record accrued interest)

3. Accounts Receivable...................................................................... 2,400

Service Revenue.................................................................... 2,400
(To record revenue for service provided)

DO IT! 3.4 (Calculate amounts from trial balance)

Lumina Company was organized on April 1, 2027. The company prepares quarterly financial statements. The
adjusted trial balance at June 30 is shown here.

Debit Credit
Cash $ 5,360 Accumulated Depreciation—Equipment $ 700
Accounts Receivable 480 Notes Payable 4,000
Prepaid Rent 720 Accounts Payable 790
Supplies 920 Salaries and Wages Payable 300
Equipment 12,000 Interest Payable 40
Dividends 500 Unearned Rent Revenue 400
Salaries & Wage Expense 7,400 Common Stock 11,200
Rent Expense 1,200 Service Revenue 11,360
Depreciation Expense 700 Rent Revenue 1,100
Supplies Expense 160 $29,890
Utilities Expense 410
Interest Expense 40
$29,890

a. Determine the net income for the quarter April 1 to June 30.
b. Determine the total assets and total liabilities at June 30, 2027, for Lumina Company.
c. Determine the amount that appears for Retained Earnings at June 30, 2027.

(a) The net income is determined by adding revenues and subtracting expenses. The net income is
computed as follows:
Revenues
Service revenue................................................................ $11,360
Rent revenue.................................................................... 1,100
Total revenues......................................................... $12,460
Expenses
Salaries and wages expense............................................ 7,400
Rent expense................................................................... 1,200
Depreciation expense....................................................... 700
Utilities expense............................................................... 410
Supplies expense............................................................. 160
Interest expense............................................................... 40
Total expenses........................................................ 9,910
Net income................................................................................ $ 2,550

......................................................................................... (Net Income = Tot. rev. – Tot. exp.)

......................................................................................... ($12,460 – $9,910 = $2,550)

(b) Total assets and liabilities are computed as follows:

Assets
Cash ................................................................................ $ 5,360
 Accounts receivable.......................................................... 480
Prepaid rent...................................................................... 720
Supplies............................................................................ 920
Equipment........................................................................ $12,000
Less: Accumulated depreciation—
equipment............................................................. 700 11,300
Total assets............................................................. $18,780

Liabilities
Notes payable................................................................... $ 4,000
Accounts payable............................................................. 790
Unearned rent revenue..................................................... 400
Salaries and wages payable............................................. 300
Interest payable................................................................ 40
Total liabilities.......................................................... $ 5,530

(Assets = Cash + Accts. rec. + Prepd. rent + Supp. + Equip. – Accum. depr.-equip.);
[$5,360 + $480 + $720 + $920 + ($12,000 – $700)]
(Liabl. = Notes pay. + Accts. pay. + Unearned rent rev. + Sal. & wages pay. + Int. pay.); ($4,000 + $790 + $400 + $300 + $40)

(c) Retained earnings, April 1.......................................................... $ –0–

Add: Net income........................................................................ 2,550
2,550
Less: Dividends......................................................................... 500
Retained earnings, June 30....................................................... $2,050

........................................................................................ (Beg. ret. earn. + Net inc. – Div.)

...................................................................................... ($0 + $2,550 – $500)
 SOLUTIONS TO EXERCISES
EXERCISE 3.1 (Explain Time Period Assumption)
Ian Muse has prepared the following list of statements about the time period assumption.

Identify each statement as true or false. If false, indicate how to correct the statement.
1. Adjusting entries would not be necessary if a company’s life were not divided into artificial time periods.
TRUE
2. The IRS requires companies to file annual tax returns. TRUE
3. Accountants divide the economic life of a business into artificial time periods, but all transactions affect
only one of these periods. FALSE. Many business transactions affect more than one of these artificial
time periods. For example, the purchase of a building affects expenses for many years.
4. Accounting time periods are generally a month, a quarter, or a year. TRUE
5. A time period lasting one year is called an interim period. FALSE. A time period that lasts less than
one year, such as monthly or quarterly periods, is called an interim period.
6. All fiscal years are calendar years, but not all calendar years are fiscal years. FALSE. All calendar
years are fiscal years, but not all fiscal years are calendar years. An accounting time period that is one
year in length is referred to as a fiscal year. The fiscal year that starts on January 1 and ends on
December 31 is a calendar year.

EXERCISE 3.2 (Distinguish between cash and accrual basis of accounting.)

On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of
accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities
would have to be booked, and the federal deficit would increase substantially.
Instructions
a. What is the difference between accrual-basis accounting and cash-basis accounting?
b. Why would politicians prefer the cash basis over the accrual basis?
c. Write an email to your senator explaining why the federal government should adopt the accrual basis
of accounting.
(a) Accrual-basis accounting records the transactions that change a company’s financial statements in the
periods in which the events occur rather than in the periods in which the company receives or pays cash.
Information presented on an accrual basis is useful because it reveals relationships that are likely to be
important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded
only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash
basis of accounting often leads to misleading financial statements.

(b) Politicians might desire a cash-basis accounting system over an accrual-basis system because if an
accrual-accounting system is used, it could mean that billions in government liabilities presently
unrecorded would have to be reported in the federal budget immediately. The recognition of these
additional liabilities would make the deficit even worse. This is not what politicians would like to see and
be held responsible for.
EXERCISE 3.2 (Continued)

(c) From: Student’s email address

To: Senator’s email address

Subject: Cash vs. Accrual Basis Accounting

Senator’s name:

It is my understanding, after having taken a beginning course in accounting principles, that the Federal
government uses a cash-basis accounting system rather than an accrual-basis accounting system.

I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts
that have not been recorded for the mere reason that they haven’t been paid yet. I realize that the
deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we
citizens should be given a more accurate picture of what our government is up to.

Student’s name

EXERCISE 3.3 (Compute cash and accrual accounting income.)

Primo Industries collected $105,000 from customers in 2027. Of the amount collected, $25,000 was for
services performed in 2026. In addition, Primo performed services worth $40,000 in 2027, which will not be
collected until 2028.

Primo Industries also paid $72,000 for expenses in 2027. Of the amount paid, $30,000 was for expenses
incurred on account in 2026. In addition, Primo incurred $42,000 of expenses in 2027, which will not be paid
until 2028.

Instructions:
a. Compute 2027 cash-basis net income.
b. Compute 2027 accrual-basis net income.

(a) Cash received from revenue............................................................... $105,000

Cash paid for expenses...................................................................... (72,000)
Cash-basis net income............................................................ $ 33,000

(b) Revenues [($105,000 – $25,000) + $40,000]...................................... $120,000

Expenses [($72,000 – $30,000) + $42,000]........................................ (84,000)
Accrual-basis net income......................................................... $ 36,000
(Accrual-basis rev. = Cash rec’d – Serv. performed in 2026 + Unpaid. serv. performed)
(Accrual-basis exp. = Cash pd. – Exp. incurred in 2026 + Incurred exp. unpaid.)
EXERCISE 3.4 (Identify point of revenue recognition.)
The following independent situations require professional judgment for determining when to recognize
revenue from the transactions.

a. Southwest Airlines sells you an advance-purchase airline ticket in September for your flight home in
December.
b. Ultimate Electronics sells you a home theater on a “no money down and full payment in three months”
promotional deal.
c. The Toronto Blue Jays sell season tickets online to games in the Skydome. Fans can purchase the
tickets at any time, although the season doesn’t officially begin until April. The major league baseball
season runs from April through October.
d. RBC Financial Group loans money on August 1. The loan and the interest are repayable in full in
November.
e. In August, a customer orders a sweater from the Target website. The sweater arrives in September.
Target sends a bill in October and receives payment in November.

Instructions:
Determine when revenue should be recognized in each of the above situations.

The revenue recognition principle requires that companies recognize revenue in the accounting period in
which the performance obligation is satisfied.

(a) Since the performance obligation is not satisfied until the flight actually occurs, revenue should not be
recognized until December. Southwest Airlines should recognize the revenue in December when the
customer has been provided with the flight.
(b) Sales revenue should be recognized at the time of delivery.
(c) Revenue should be recognized on a per game basis over the season from April through October.
(d) Interest revenue should be accrued and recognized by RBC evenly over the term of the loan.
(e) Revenue should be recognized when the sweater is shipped to the customer in September.

EXERCISE 3.5 (Determine the type of adjusting entry needed.)

The following independent situations require professional judgment for determining when to recognize
revenue from transactions. Assume the companies make monthly adjusting entries.

a. Google sells advance payment advertising services on June 1 for services to be provided during June.
b. [Link] sells a box of specialty cat food on July 10. The cat food is delivered on July 12.
c. Netflix receives payment on September 1 for movie services to be provided during September.
d. Apple receives an order for a set of ear buds on March 10. The ear buds are delivered on March 14.
e. Zoom Video Communications sells a 1-year subscription to video conferencing services. Payment for
the 12-month subscription is received on October 1.

Instructions:
Determine when revenue should be recognized in each of the above situations.
The revenue recognition principle requires that companies recognize revenue in the accounting period in
which the performance obligation is satisfied.

a. Receipt of cash on June 1 creates a performance obligation to provide advertising services. The
performance obligation is satisfied as advertising services are provided during the month. Revenue will
be recognized in an adjusting entry on June 30.
b. The revenue will be recognized when the goods are delivered on July 12.
c. Receipt of cash on September 1 creates a performance obligation to provide online movie viewing
services. The performance obligation is satisfied as viewing services are provided during the month.
Revenue will be recognized in an adjusting entry on September 30.
d. The revenue will be recognized when the goods are delivered on March 14.
e. Receipt of cash on October 1 creates a performance obligation to provide online video conferencing
services for a 12-month period. The performance obligation is satisfied as video conferencing services
are provided during each month. Revenue will be recognized evenly with 12 monthly adjustments.

EXERCISE 3.6 (Determine point of revenue recognition.)

Hart Corporation encounters the following situations:

Identify what type of adjusting entry (prepaid expense, unearned revenue, accrued expense, or accrued
revenue) is needed in each situation at December 31, 2027.

1. Hart collects $1,300 from a customer in 2027 for services to be performed in 2028.
Unearned Revenue
2. Hart incurs utility expense which is not yet paid in cash or recorded.
Accrued Expense
3. Hart’s employees worked 3 days in 2027 but will not be paid until 2028.
Accrued Expense
4. Hart performs services for customers but has not yet received cash or recorded the transaction.
Accrued Revenue
5. Hart paid $2,400 rent on December 1 for the 4 months starting December 1.
Prepaid Expenses
6. Hart received cash for future services and recorded a liability until the service was performed.
Unearned Revenue
7. Hart performed consulting services for a client in December 2027. On December 31, it had not billed the
client for services performed of $1,200.
Accrued Revenue
8. Hart paid cash for an expense and recorded an asset until the item was used up.
Prepaid Expense
9. Hart purchased $900 of supplies in 2027; at year-end, $400 of supplies remain unused.
Prepaid Expense
10. Hart purchased equipment on January 1, 2027; the equipment will be used for 5 years.
Prepaid Expense
11. Hart borrowed $10,000 on October 1, 2027, signing an 8% 1-year note payable. Both the interest and
the note will be paid in 1 year.
Accrued Expense

EXERCISE 3.7 (Prepare adjusting entries from selected data.)

Verne Cova Company has the following balances in selected accounts on December 31, 2027.
 Accounts Receivable $ -0-
Accumulated Depreciation—Equipment -0-
Equipment 7,000
Interest Payable -0-
Notes Payable 10,000
Prepaid Insurance 2,100
Salaries & Wage Expense -0-
Supplies 2,450
Unearned Service Revenue 30,000

All the accounts have normal balances. The following information has been gathered at December 31, 2027.
1. Verne Cova Company borrowed $10,000 by signing a 12%, 1-year note on September 1, 2027.
Interest will be paid when the note is repaid.
2. A count of supplies on December 31, 2027, indicates that supplies of $900 are on hand.
3. Depreciation on the equipment for 2027 is $1,000.
4. Verne Cova paid $2,100 for 12 months of insurance coverage on June 1, 2027.
5. On December 1, 2027, Verne Cova collected $30,000 for consulting services to be performed evenly
from December 1, 2027, through March 31, 2028.
6. Verne Cova performed consulting services for a client in December 2027. The client will be billed
$4,200.
7. Verne Cova pays its employees total salaries of $9,000 every Monday for the preceding 5-day week
(Monday through Friday). On Monday, December 29, employees were paid for the week ending
December 26. All employees worked the last 3 days of 2027.

Instructions
Prepare adjusting entries for the seven items described above. Verne Cova prepares adjustments annually.

1. Interest Expense...................................................................... 400

Interest Payable ($10,000 × 12% × 4/12)......................... 400

2. Supplies Expense.................................................................... 1,550

Supplies ($2,450 – $900)................................................. 1,550

3. Depreciation Expense.............................................................. 1,000

Accumulated Depreciation—Equipment........................... 1,000

4. Insurance Expense.................................................................. 1,225

Prepaid Insurance ($2,100 × 7/12)................................... 1,225

5. Unearned Service Revenue..................................................... 7,500

Service Revenue
($30,000 × 1/4)............................................................ 7,500
6. Accounts Receivable............................................................... 4,200
Service Revenue............................................................. 4,200

7. Salaries and Wages Expense.................................................. 5,400

Salaries and Wages Payable
($9,000 × 3/5).............................................................. 5,400

EXERCISE 3.8 (Identify types of adjustments and accounts before adjustment.)

Wang Company accumulates the following adjustment data at December 31.

a. Services performed but unbilled total $600.
b. Store supplies of $160 are on hand. The supplies account shows a $1,900 balance.
c. Utility expenses of $275 are unpaid and unrecorded.
d. Services performed of $490 have been collected in advance.
e. Salaries of $620 are unpaid and unrecorded.
f. Prepaid insurance totaling $400 has expired.

Instructions:
For each item, indicate (1) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or
accrued expense) and (2) the status of the accounts before adjustment (overstated or understated).

(1) (2)
Item Type of Adjustment Accounts Before Adjustment

(a) Accrued Revenues Assets Understated

Revenues Understated

(b) Prepaid Expenses Assets Overstated

Expenses Understated

(c) Accrued Expenses Expenses Understated

Liabilities Understated

(d) Unearned Revenues Liabilities Overstated

Revenues Understated

(e) Accrued Expenses Expenses Understated

Liabilities Understated

(f) Prepaid ExpensesAssets Overstated

Expenses Understated
EXERCISE 3.9 (Prepare adjusting entries from selected account data.)

The ledger of Howard Rental Agency on March 31 of the current year includes the following selected
accounts before adjusting entries have been prepared.
Credit Debit
Supplies $ 3,000
 Prepaid Insurance 3,600
Equipment 25,000
Accumulated Depreciation – Equip $ 8,400
Notes Payable 20,000
Unearned Rent Revenue 12,400
Rent Revenue 60,000
Interest Expense 0
Salaries & Wage Expense 14,000

An analysis of the accounts shows the following.

1. The equipment depreciates $280 per month.
2. Half of the unearned rent revenue was earned during the quarter.
3. Interest of $400 should be accrued on the notes payable.
4. Supplies on hand total $850.
5. Insurance expires at the rate of $400 per month.

Instructions:
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.

1. Mar. 31 Depreciation Expense ($280 × 3)................................. 840

Accumulated Depreciation—
Equipment........................................................ 840

2. 31 Unearned Rent Revenue.............................................. 6,200

Rent Revenue ($12,400 × 1/2)............................ 6,200

3. 31 Interest Expense.......................................................... 400

Interest Payable.................................................. 400

4. 31 Supplies Expense......................................................... 2,150

Supplies ($3,000 – $850)..................................... 2,150

5. 31 Insurance Expense ($400 × 3)...................................... 1,200

Prepaid Insurance............................................... 1,200
EXERCISE 3.10 (Prepare adjusting entries.)

Al Medina, D.D.S., opened an incorporated dental practice on January 1, 2027. During the first month of
operations, the following transactions occurred.
1. Performed services for patients who had dental plan insurance. At January 31, $760 of such services
was completed but not yet billed to the insurance companies.
2. Utility expenses incurred but not paid or recorded prior to January 31 totaled $450.
3. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000,
3-year note payable (interest is paid each December 31). The equipment depreciates $400 per month.
Interest is $500 per month.
4. Purchased a 1-year malpractice insurance policy on January 1 for $24,000.
5. Purchased $1,750 of dental supplies (recorded as increase to Supplies). On January 31, determined
that $550 of supplies were on hand.

Instructions:
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 Accounts Payable.

1. Jan. 31 Accounts Receivable.................................................... 760

Service Revenue................................................. 760

2. 31 Utilities Expense........................................................... 450

Accounts Payable................................................ 450

3. 31 Depreciation Expense.................................................. 400

Accumulated Depreciation—
Equipment........................................................ 400

31 Interest Expense.......................................................... 500

Interest Payable.................................................. 500

4. 31 Insurance Expense ($24,000 ÷ 12)............................... 2,000

Prepaid Insurance............................................... 2,000

5. 31 Supplies Expense ($1,750 – $550)............................... 1,200

Supplies.............................................................. 1,200

EXERCISE 3.11 (Prepare adjusting entries)

The CCBC Corporation had the following unadjusted trial balance at the end of its fiscal year, July 31, 2027.

Credit Debit
Cash $ 8,175
Accounts Receivable 4,775
Supplies 1,400
Prepaid Rent 1,500
Equipment 15,000
Accumulated Depreciation – Equip $ 6,000
Accounts Payable 200
Unearned Service Revenue 3,500
Notes Payable 1,000
Common Stock 5,000
Retained Earnings 15,150
$30,850 $30,850

Additional information for adjusting entries:

1. On July 31, the company had performed $800 of services for a client that it had not billed or recorded.
2. Record rent expense this month. The current balance in Prepaid Rent represents 2 months of rent.
3. Supplies on hand on July 31 were $500.
4. Unrecorded monthly depreciation is $250.
5. Interest is due on the note payable on the first day of each following month, beginning August 1.
Interest for July is $2.
6. As of July 31, the company owed $2,500 of salaries and wages to its employees for the month just
ended.
7. During July, the company satisfied $2,000 worth of services related to amounts that had previously
been recorded as Unearned Service Revenue. This revenue has not yet been recorded.

Instructions:
Prepare the adjusting entries for July 31.

July 31 Accounts Receivable............................................. 800

Service Revenue......................................... 800

31 Rent Expense....................................................... 750

Prepaid Rent............................................... 750
($1,500 ÷ 2 = $750)

31 Supplies Expense................................................. 900

Supplies ($1,400 − $500 = $900)................ 900

31 Depreciation Expense........................................... 250

Accumulated Depreciation—
Equipment............................................... 250
31 Interest Expense................................................... 2
Interest Payable........................................... 2

31 Salaries and Wages Expense............................... 2,500

 Salaries and Wages Payable........................ 2,500

31 Unearned Service Revenue................................. 2,000

Service Revenue.......................................... 2,000

EXERCISE 3.12 (Prepare adjusting entries.)

The trial balance for Pioneer Advertising Inc. is shown in Illustration 3.6. Instead of the adjusting entries
shown in the text at October 31, assume the following adjustment data.
1. Supplies on hand at October 31 total $500.
2. Expired insurance for the month is $100.
3. Depreciation for the month is $50.
4. Services related to unearned service revenue in October worth $600 were performed.
5. Services performed but not recorded at October 31 are $300.
6. Interest to be accrued at October 31 is $95.
7. Salaries to be accrued at October 31 are $1,625.
Instructions:
Prepare the adjusting entries for the items above.

1. Oct. 31 Supplies Expense......................................................... 2,000

Supplies ($2,500 – $500)..................................... 2,000

2. 31 Insurance Expense....................................................... 100

Prepaid Insurance............................................... 100

3. 31 Depreciation Expense.................................................. 50
Accumulated Depreciation—
Equipment........................................................ 50

4. 31 Unearned Service Revenue.......................................... 600

Service Revenue................................................. 600

5. 31 Accounts Receivable.................................................... 300

Service Revenue................................................. 300

6. 31 Interest Expense ............................................... 95

Interest Payable................................................... 95

7. 31
Salaries and Wages Expense..................................... 1,625
Salaries and Wages Payable............................. 1,625
EXERCISE 3.13 (Prepare adjusting entries from selected account data)

The ledger of Armour Lake Lumber Supply on July 31, 2027, includes the following selected accounts before
adjusting entries have been prepared.
Credit Debit
Supplies $ 24,000
 Prepaid Rent 3,600
Buildings 250,000
Accumulated Depreciation – Bldg $ 140,000
Unearned Service Revenue 11,500

An analysis of the company’s accounts shows the following.

1. Supplies on hand at the end of the month totaled $18,600.
2. The balance in Prepaid Rent represents 4 months of rent costs.
3. Employees were owed $3,100 related to unpaid and unrecorded salaries and wages.
4. Depreciation on buildings is $6,000 per year.
5. During the month, the company satisfied obligations worth $4,700 related to the Unearned Service
Revenue account.
6. Unpaid and unrecorded maintenance and repairs costs were $2,300.

Instructions:
Prepare the adjusting entries at July 31 assuming that adjusting entries are made monthly. Use additional
accounts as needed.

Date Account Titles Debit Credit

July 31 Supplies Expense ($24,000 – $18,600)............................. 5,400
Supplies................................................................... 5,400

31 Rent Expense ($3,600  4)............................................... 900

Prepaid Rent............................................................ 900

31 Salaries and Wages Expense........................................... 3,100

Salaries and Wages Payable................................... 3,100

31 Depreciation Expense ($6,000  12)................................ 500

Accumulated Depreciation—Buildings...................... 500

31 Unearned Service Revenue.............................................. 4,700

Service Revenue...................................................... 4,700

31 Maintenance and Repairs Expense................................... 2,300

Accounts Payable.................................................... 2,300

EXERCISE 3.15 (Journalize basic transactions and adjusting entries.)

Selected accounts of Villa Company are shown here.

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.)

(a) July 10 Supplies....................................................................... 200

Cash.................................................................... 200

14 Cash ...................................................................3,800
Service Revenue................................................. 3,800

15 Salaries and Wages Expense....................................... 1,000

Cash.................................................................... 1,000

20 Cash ................................................................... 600

Unearned Service Revenue................................. 600

(b) July 31 Supplies Expense......................................................... 750

Supplies.............................................................. 750

31 Accounts Receivable.................................................... 500

Service Revenue................................................. 500

31 Salaries and Wages Expense....................................... 1,000

Salaries and Wages Payable............................... 1,000

31 Unearned Service Revenue.......................................... 900

Service Revenue................................................. 900

EXERCISE 3.16 (Analyze adjusted data.)

This is a partial adjusted trial balance of Ramon Company.
Answer these questions, assuming the year begins January 1.
a. If the amount in Supplies Expense is the January 31 adjusting entry and $300 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 1 year, what was the total premium and when was the policy purchased?
c. If $2,500 of salaries owed were paid in January, what was the balance in Salaries and Wages Payable
at December 31, 2026?
d. If $1,800 was received in January for services performed in January (no services are performed on
credit), what was the balance in Unearned Service Revenue at December 31, 2026?

Answer Computation

(a) Supplies balance = $1,350 Supplies expense $ 950

Add: Supplies (Jan 31) 700
Less: Supplies purchased 300
Supplies (Jan 1) $ 1,350

(b) Total premium = $6,240 Total premium = Monthly premium × 12; $520 × 12 = $6,240
Purchase date = May 1, 2026 Purchase date: On Jan. 31, there are 3 months coverage
remaining ($520 × 3). Thus, the purchase date was 9 months
earlier on May 1, 2026.
(c) Salaries and wages
payable = $1,760 Cash paid $2,500
Salaries and wages
payable (1/31/27) 1,060
3,560
Less: Salaries and wages
expense 1,800
Salaries and wages
payable (12/31/26) $1,760

(d) Unearned service

revenue = $2,950 Service revenue $4,000
Unearned revenue (1/31/27) 750
4,750
Less: Cash received in Jan. 1,800
Unearned revenue (12/31/26) $2,950

EXERCISE 3.17 (Determine effect of adjusting entries)

In December 31, 2027, Waters Company prepared an income statement and balance sheet, but failed to take
into account three adjusting entries. The balance sheet showed total assets $150,000, total liabilities $70,000,
and stockholders’ equity $80,000. The incorrect income statement showed net income of $70,000.
The data for the three adjusting entries were:
1. Salaries and wages amounting to $10,000 for the last 2 days in December were not paid and not
recorded. The next payroll will be in January.
2. Rent payments of $8,000 were received for two months in advance on December 1. The entire amount
was credited to Unearned Rent Revenue when received.
3. Depreciation expense for 2027 is $9,000.

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

Total Total Stockholders’

Item Net Income Assets Liabilities Equity
Incorrect balances $70,000 $150,000 $70,000 $80,000
Effects of:
Salaries and Wages (10,000) 10,000 (10,000)
Rent Revenue 4,000 (4,000) 4,000
Depreciation (9,000) (9,000) (9,000)
Correct balances $55,000 $141,000 $76,000 $65,000
(Incorrect net inc. – Unrecorded exp. incurred + Unrecorded rev. earned = Correct net inc.)
($70,000 – $10,000 + $4,000 – $9,000 = $55,000)
EXERCISE 3.18 (Prepare and post transaction and adjusting entries for prepayments)
Action Quest Games Inc. adjusts its accounts annually. The following information is available for the year
ended December 31, 2027.
1. Purchased a 1-year insurance policy on June 1 for $1,800 cash.
2. Paid $6,500 on August 31 for 5 months’ rent in advance.
3. On September 4, received $3,600 cash in advance from a corporation to sponsor a game each month
for a total of 9 months for the most improved students at a local school.
4. Signed a contract for cleaning services starting December 1 for $1,000 per month. Paid for the first 2
months on November 30. (Hint: Use the account Prepaid Cleaning to record prepayments.)
5. On December 5, received $1,500 in advance from a gaming club. Determined that on December 31,
$475 of these games had not yet been played.
Instructions:
a. For each of the above transactions, prepare the journal entry to record the initial transaction.
b. For each of the above transactions, prepare the adjusting journal entry that is required on December
31. (Hint: Use the account Service Revenue for item 3 and the account Maintenance and Repairs
Expense for item 4.)
c. Post the journal entries in parts (a) and (b) to T-accounts and determine the final balance in each
account. (Note: Posting to the Cash account is not required.)

(a) 2027
June 1 Prepaid Insurance..................................................... 1,800
Cash.................................................................. 1,800

Aug. 31 Prepaid Rent............................................................. 6,500

Cash.................................................................. 6,500

Sept. 4 Cash.......................................................................... 3,600

Unearned Service Revenue............................... 3,600

Nov. 30 Prepaid Cleaning....................................................... 2,000

Cash.................................................................. 2,000

Dec. 5 Cash.......................................................................... 1,500

Unearned Service Revenue............................... 1,500

(b) 2027
Dec. 31 Insurance Expense.................................................... 1,050
Prepaid Insurance........................................... 1,050
($1,800 × 7/12 months = $1,050)

31 Rent Expense............................................................ 5,200

 Prepaid Rent................................................... 5,200
($6,500 × 4/5 months = $5,200)

31 Unearned Service Revenue....................................... 1,600

Service Revenue............................................ 1,600
($3,600 × 4/9 months = $1,600)

31 Maintenance and Repairs Expense........................... 1,000

Prepaid Cleaning............................................ 1,000

31 Unearned Service Revenue....................................... 1,025

Service Revenue............................................ 1,025
($1,500 – $475 not played = $1,025 played)

(c)
Dec. 31 Adj. 1,025
Prepaid Insurance Dec. 31 Bal. 2,625
June 1 1,800 Dec. 31 Adj. 1,050
Dec. 31 Bal. 750 Maintenance and Repairs Expense
Dec. 31 Adj. 1,000
Prepaid Rent
Aug. 31 6,500 Dec. 31 Adj. 5,200
Dec. 31 Bal. 1,300

Unearned Service Revenue and

Service Revenue
Dec. 31 Adj. 1,600 Sept. 4 3,600
Dec. 31 Adj. 1,025 Dec. 5 1,500
Dec. 31 Bal. 2,475

Prepaid Cleaning
Nov. 30 2,000 Dec. 31 Adj. 1,000
Dec. 31 Bal. 1,000

Insurance Expense
Dec. 31 Adj. 1,050

Rent Expense
Dec. 31 Adj. 5,200

Service Revenue
Dec. 31 Adj. 1,600
Note: The Cash account has not been included in this solution, as per the instructions.
EXERCISE 3.19 (Prepare adjusting and subsequent entries for accruals)
Greenock Limited has the following information available for accruals for the year ended December 31, 2027.
The company adjusts its accounts annually.
1. The December utility bill for $425 was unrecorded on December 31. Greenock paid the bill on 11-Jan.
2. Greenock is open 7 days a week and employees are paid a total of $3,500 every Monday for a 7-day
(Monday–Sunday) workweek. December 31 is a Thursday, so employees will have worked 4 days
(Monday, December 28–Thursday, December 31) that they have not been paid for by year-end.
Employees will be paid next on January 4.
3. Greenock signed a $45,000, 5% bank loan on November 1, 2026, due in 2 years. Interest is payable on
the first day of each following month. (For example, interest incurred during November would be paid on
December 1.)
4. Greenock receives a fee from Pizza Shop next door for all pizzas sold to customers using Greenock’s
facility. The amount owed for December is $300, which Pizza Shop will pay on January 4. (Hint: Use the
Service Revenue account.)
5. Greenock rented some of its unused warehouse space to a client for $6,000 a month, payable the first
day of the following month. It received the rent payment for the month of December on January 1.

Instructions:
a. For each situation, prepare the adjusting entry required at December 31. (Round all calculations to the
nearest dollar.)
b. For each situation, prepare the journal entry to record the subsequent cash transaction in 2028.

(a) 2027
Dec. 31 Utilities Expense........................................................ 425
Utilities Payable.............................................. 425

31 Salaries and Wages Expense.................................... 2,000

Salaries and Wages Payable.......................... 2,000
($3,500 × 4/7 days = $2,000)

31 Interest Expense....................................................... 188

Interest Payable.............................................. 188
($45,000 × 5% × 1/12 months = $188 (rounded))

31 Accounts Receivable................................................. 300

Service Revenue............................................ 300

31 Accounts Receivable................................................. 6,000

Rent Revenue................................................. 6,000

(b) 2028
Jan. 11 Utilities Payable......................................................... 425
Cash.................................................................. 425
 4 Salaries and Wages Payable..................................... 2,000
Salaries and Wages Expense.................................... 1,500
Cash.................................................................. 3,500

1 Interest Payable........................................................ 188

Cash.................................................................. 188

4 Cash.......................................................................... 300
Accounts Receivable......................................... 300

1 Cash.......................................................................... 6,000
Accounts Receivable......................................... 6,000

EXERCISE 3.20 (Prepare adjusting entries)

The trial balances before and after adjustment for Ryan Company at the end of the fiscal year are as follows.

Instructions
Prepare the adjusting entries that were made.
Aug. 31 Accounts Receivable............................................................ 600
Service Revenue......................................................... 600

31 Supplies Expense................................................................. 2,000

Supplies....................................................................... 2,000

31 Insurance Expense............................................................... 1,500

Prepaid Insurance........................................................ 1,500

31 Depreciation Expense........................................................... 1,200

Accumulated Depreciation—Equipment....................... 1,200

31 Salaries and Wages Expense............................................... 1,100

Salaries and Wages Payable....................................... 1,100

31 Unearned Rent Revenue...................................................... 1,000

Rent Revenue.............................................................. 1,000

EXERCISE 3.22 (Record transactions on accrual basis; convert revenue to cash receipts)

The following data are taken from the comparative balance sheets of Cascade Billiards Club, which prepares
its financial statements using the accrual basis of accounting.

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 2027 income
statement for the club showed that service revenue of $161,000 was recorded during the year.
Instructions
(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 2027.
1. Accounts receivable from 2026 were all collected.
2. Gift certificates outstanding at the end of 2026 were all redeemed.
3. An additional $38,000 worth of gift certificates were sold during 2027. A portion of these was used by
the recipients during the year; the remainder was still outstanding at the end of 2027.
4. Services performed for members for 2027 were billed to members.
5. Accounts receivable for 2027 (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 2027.

(a) 1. Cash ............................................................................... 9,000

Accounts Receivable................................................ 9,000

2. Unearned Service Revenue............................................... 25,000

Service Revenue...................................................... 25,000

3. Cash ............................................................................... 38,000

Unearned Service Revenue...................................... 38,000

Unearned Service Revenue

($38,000 – $17,000)...................................................... 21,000
Service Revenue...................................................... 21,000
(Gift cert. sold – Bal. unearned serv. rev.)

4. Accounts Receivable......................................................... 115,000

Service Revenue
($161,000 – $25,000 – $21,000)........................... 115,000
(Inc. stmt. serv. rev. – 2026 Unearned serv. rev. earned– 2027 Unearned serv. rev. earned)
($161,000 – $25,000 – $21,000 = $115,000)

5. Cash ................................................................................. 101,000

Accounts Receivable
($115,000 – $14,000)............................................ 101,000
(Accts. rec. beg. bal. – 2026 Accts. collected + 2027 Billings – Accts. receivable ending bal.)
($9,000 – $9,000 + $115,000 – $14,000)

(b) Cash received by the club = $9,000 + $38,000 + $101,000

= $148,000
(Cash rec’d in (1) + (3) + (5) above)
($9,000 + $38,000 + $101,000 = $148,000)
*EXERCISE 3.23 (Journalize adjusting entries)

Prior to adjustments, Aaron Lynch Company has the following balances in selected accounts on December
31, 2027.
Service Revenue $40,000
Insurance Expense 2,700
Supplies Expense 2,450

All the accounts have normal balances. Aaron Lynch Company debits prepayments to expense accounts
when paid, and credits unearned revenues to revenue accounts when received. The following information has
been gathered at December 31, 2027.
1. Aaron Lynch Company paid $2,700 for 12 months of insurance coverage on June 1, 2027.
2. On December 1, 2027, Aaron Lynch Company collected $40,000 for consulting services to be
performed from December 1, 2027, through March 31, 2028.
3. A count of supplies on December 31, 2027, indicates that supplies of $900 are on hand.

Instructions:
Prepare the adjusting entries needed at December 31, 2027. Adjustments are prepared annually.

1. Prepaid Insurance.................................................................... 1,125

Insurance Expense
($2,700 × 5/12)............................................................. 1,125

2. Service Revenue..................................................................... 30,000

Unearned Service Revenue
($40,000 × 3/4)............................................................. 30,000

3. Supplies............................................................................900
Supplies Expense............................................................ 900
*EXERCISE 3.24 (Journalize transactions and adjusting entries)

At Cambridge Company, prepayments are debited to expense when paid, and unearned revenues are
credited to revenue when cash is received. During January of the current year, the following transactions
occurred.

Jan. 2 Paid $1,920 for fire insurance protection for the year.
10 Paid $1,700 for supplies.
15 Received $6,100 for services to be performed in the future.

On January 31, it is determined that $2,500 of the services were performed and that there are $650 of
supplies on hand.
Instructions:
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.

(a) Jan. 2 Insurance Expense..................................................... 1,920

Cash.................................................................. 1,920

10 Supplies Expense....................................................... 1,700

Cash.................................................................. 1,700

15 Cash .................................................................6,100
Service Revenue............................................... 6,100

Cash Service Revenue

1/15 6,1001/2 1,920 1/15 6,100
1/10 1,700

Supplies Expense
Insurance Expense
1/10 1,700
1/2 1,920

(b) Jan. 31 Prepaid Insurance ($160 × 11 months)....................... 1,760

Insurance Expense............................................ 1,760

31 Supplies...................................................................... 650
Supplies Expense.............................................. 650

31 Service Revenue ($6,100 - $2,500)............................ 3,600

Unearned Service Revenue............................... 3,600
 Cash Prepaid Insurance Supplies
1/15 6,100
1/2 1/31 1/31
1/10
Bal. 2,480

Unearned Service
Revenue
1/31

Insurance Expense Supplies Expense Service Revenue

1/2 1,920
1/31 1/10 1/31 1/31 1/15
Bal. Bal. Bal.

(c) Cash............................................................................................................... $2,480

Prepaid insurance........................................................................................... 1,760
Supplies.......................................................................................................... 650
Unearned service revenue.............................................................................. 3,600
Service revenue.............................................................................................. 2,500
Insurance expense.......................................................................................... 160
Supplies expense............................................................................................ 1,050

*EXERCISE 3.25 (Identify accounting assumptions and principles)

Identify the accounting assumption or principle that is described below.

Going Concern Assumption: Indicates that a business is expected to operate indefinitely into the future.
Economic Entity Assumption: Indicates that personal and business record keeping should be separately
maintained.
Monetary Unit Assumption: Assumes that the monetary unit is the “measuring stick” used to report on
financial performance.
Time period Assumption: Separates financial information into time periods for reporting purposes.
Historical Cost Principle: Measurement basis used when a reliable estimate of fair value is not available.
Full Disclosure Principle: Dictates that companies should disclose all circumstances and events that make a
difference to financial statement users.

*EXERCISE 3.26 (Identify accounting assumptions, principles, and constraint)

Identify the accounting concept that describes each situation below.

Going Concern Assumption: Is the rationale for why plant assets are not reported at liquidation value.
(Do not use the historical cost principle.)
Economic Entity Assumption: Indicates that personal and business recordkeeping should be separately
maintained.
Full Disclosure Principle: Ensures that all relevant financial information is reported.
Monetary Unit Assumption: Assumes that the dollar is the “measuring stick” used to report on financial
performance.
Materiality: Requires that accounting standards be followed for all items of significant size.
Time period Assumption: Separates financial information into time periods for reporting purposes.
Expense Recognition principle: Requires recognition of expenses in the same period as related revenues.
Historical Cost Principle: Indicates that fair value changes subsequent to purchase are not recorded in the
accounts.

*EXERCISE 3.27

(a) Revenue recognition principle.

(b) Time period assumption.
(c) No violation.
(d) Going concern assumption.
(e) Historical cost principle.
(f) Economic entity assumption.
LO 6 BT: C Difficulty: Medium TOT: 10 min. AACSB: None AICPA FC: Reporting IMA: Reporting

*EXERCISE 3.28
(a) This is a violation of the historical cost principle. The land was written up to its fair
value when it should have remained at cost.
(b) This is a violation of the economic entity assumption. The treatment of the
transaction treats Jay Rosman and Rosman Co. as one entity when they are two
separate entities. The purchase of the truck should not be included in the
company’s records, as it was a personal purchase.
(c) This is a violation of the time period assumption. This assumption states that the
economic life of a business can be divided into artificial time periods (months,
quarters, or a year). By adding two more weeks to the year, Rosman Co. would be
misleading financial statement readers. In addition, 2027 results would not be
comparable to previous years’ results. The company should use a 52-week year.

LO 6 BT: C Difficulty: Moderate TOT: 5 min. AACSB: None AICPA FC: Measurement IMA: Reporting
*EXERCISE 3.29

1. Comparability
2. Going concern assumption
3. Materiality
4. Full disclosure principle
5. Time period assumption
6. Relevance
7. Historical cost principle
8. Consistency
9. Economic entity assumption
10. Faithful representation
11. Monetary unit assumption
12. Expense recognition principle

LO 6 BT: K Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement IMA: Reporting

*EXERCISE 3.30

(a) The primary objective of financial reporting is to provide financial information that
is useful to investors and creditors for making decisions about providing capital.
Since Net Nanny’s shares appear to be actively traded, investors must be capable
of using the information made available by Net Nanny to make decisions about the
company.
(b) The investors must feel as if the company will show earnings in the future. They
must recognize that information relevant to their investment choice is indicated by
more than Net Nanny’s net income.
(c) The change from Canadian dollars to U.S. dollars for reporting purposes should
make Net Nanny more comparable with companies traded on U.S. stock
exchanges.

LO 6 BT: E Difficulty: Hard TOT: 12 min. AACSB: Communication AICPA FC: Measurement IMA: Reporting

*EXERCISE 3.31
(a) Accounting information is the compilation and presentation of financial
information for a company. It provides information in the form of financial
statements and additional disclosures that are useful for decision making.
The accounting rules and practices that have substantial authoritative support
and are recognized as a general guide for financial reporting purposes are
referred to as generally accepted accounting principles (GAAP). The
biotechnology company that employs Ana will follow GAAP to report its assets,
liabilities, equity, revenues, and expenses as it prepares financial statements.
(b) Ana is correct in her understanding that the low success rate for new biotech
products will be a cause of concern for investors. Her suggestion that detailed
scientific findings be reported to prospective investors might offset some of their
concerns, but it probably won’t conform to the qualitative characteristics of
accounting information.
These characteristics consist of relevance, faithful representation, comparability,
and consistency, verifiability, timeliness, and under-standability. They apply to
accounting information rather than the scientific findings that Ana wants to
include.

LO 6 BT: E Difficulty: Hard TOT: 15 min. AACSB: Communication AICPA FC: Measurement IMA: Reporting
 SOLUTIONS TO PROBLEMS

PROBLEM 3.1

(a)
J4
Date Account Titles Ref. Debit Credit
2027
May 31 Supplies Expense................................. 631 900
Supplies....................................... 126 900

31 Utilities Expense................................... 732 250

Accounts Payable....................... 201 250

31 Insurance Expense............................... 722 150

Prepaid Insurance
($3,600 ÷ 24 months)................ 130 150

31 Unearned Service Revenue................. 209 1,600

Service Revenue
($2,000 – $400)......................... 400 1,600

31 Salaries and Wages Expense.............. 726 1,080

Salaries and Wages Payable
[(3/5 × $900) × 1,080
2 employees]............................ 212

31 Depreciation Expense.......................... 717 190

Accumulated Depreciation—
Equipment................................ 150 190

31 Accounts Receivable........................... 112 1,700

Service Revenue.......................... 400 1,700
PROBLEM 3.1 (Continued)

Cash No. 101

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  4,500

Accounts Receivable No. 112

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  6,000
31 Adjusting J4 1,700 7,700

Supplies No. 126

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  1,900
31 Adjusting J4 900 1,000

Prepaid Insurance No. 130

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  3,600
31 Adjusting J4 150 3,450

Equipment No. 149

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  11,400
PROBLEM 3.1 (Continued)

Accumulated Depreciation—Equipment No. 150

Date Explanation Ref. Debit Credit Balance
2027
May 31 Adjusting J4 190 190

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  2,200
31 Adjusting J4 250 2,450

Unearned Service Revenue No. 209

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  2,000
31 Adjusting J4 1,600 400

Salaries and Wages Payable No. 212

Date Explanation Ref. Debit Credit Balance
2027
May 31 Adjusting J4 1,080 1,080

Common Stock No. 311

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  20,000

Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  7,500
31 Adjusting J4 1,600 9,100
31 Adjusting J4 1,700 10,800

PROBLEM 3.1 (Continued)

Supplies Expense No. 631

Date Explanation Ref. Debit Credit Balance
2027
May 31 Adjusting J4 900 900

Depreciation Expense No. 717

Date Explanation Ref. Debit Credit Balance
2027
May 31 Adjusting J4 190 190

Insurance Expense No. 722

Date Explanation Ref. Debit Credit Balance
2027
May 31 Adjusting J4 150 150

Salaries and Wages Expense 726

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  3,400
31 Adjusting J4 1,080 4,480

Rent Expense No. 729

Date Explanation Ref. Debit Credit Balance
2027
May 31 Balance  900

Utilities Expense No. 732

Date Explanation Ref. Debit Credit Balance
2027
May 31 Adjusting J4 250 250
PROBLEM 3.1 (Continued)

(c) NARDELLI CONSULTING

Adjusted Trial Balance
May 31, 2027

Debit Credit
Cash...................................................................... $ 4,500
Accounts Receivable........................................... 7,700
Supplies................................................................ 1,000
Prepaid Insurance................................................ 3,450
Equipment............................................................ 11,400
Accumulated Depreciation—
Equipment......................................................... $ 190
Accounts Payable................................................ 2,450
Unearned Service Revenue................................. 400
Salaries and Wages Payable............................... 1,080
Common Stock.................................................... 20,000
Service Revenue.................................................. 10,800
Supplies Expense................................................ 900
Depreciation Expense......................................... 190
Insurance Expense.............................................. 150
Salaries and Wages Expense.............................. 4,480
Rent Expense....................................................... 900
Utilities Expense.................................................. 250
$34,920 $34,920
(Tot. credits = Accum. depr.-equip. + Accts. pay. + Unearned serv. rev. + Sal. & wages pay. + Com. stk. + Serv. rev.)
($190 + $2,450 + $400 + $1,080 + $20,000 + $10,800)
LO 2, 3, 4 BT: AP Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 PROBLEM 3.2

(a)
J1
Date Account Titles Ref. Debit Credit
May 31 Insurance Expense............................... 722 200
Prepaid Insurance
($2,400 × 1/12)........................... 130 200

31 Supplies Expense................................. 631 1,330

Supplies ($2,080 – $750).............. 126 1,330

31 Depreciation Expense
($3,000 × 1/12) + ($1,500 × 1/12)........ 619 375
Accumulated Depreciation—
Buildings................................... 142 250
Accumulated Depreciation—
Equipment................................ 150 125

31 Interest Expense................................... 718 400

Interest Payable
[($40,000 × 12%) × 1/12]............. 230 400

31 Unearned Rent Revenue...................... 208 2,200

Rent Revenue
(2/3 × $3,300)............................. 429 2,200

31 Salaries and Wages Expense............... 726 750

Salaries and Wages Payable....... 212 750
PROBLEM 3.2 (Continued)

(b)

Cash No. 101

Date Explanation Ref. Debit Credit Balance
May 31 Balance  3,500

Supplies No. 126

Date Explanation Ref. Debit Credit Balance
May 31 Balance  2,080
31 Adjusting J1 1,330 750

Prepaid Insurance No. 130

Date Explanation Ref. Debit Credit Balance
May 31 Balance  2,400
31 Adjusting J1 200 2,200

Land No. 140

Date Explanation Ref. Debit Credit Balance
May 31 Balance  12,000

Buildings No. 141

Date Explanation Ref. Debit Credit Balance
May 31 Balance  60,000

Accumulated Depreciation—Buildings No. 142

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 250 250

PROBLEM 3.2 (Continued)

Equipment No. 149

Date Explanation Ref. Debit Credit Balance
May 31 Balance  15,000

Accumulated Depreciation—Equipment No. 150

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 125 125

Notes Payable No. 200

Date Explanation Ref. Debit Credit Balance
May 31 Balance  40,000

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
May 31 Balance  11,180

Unearned Rent Revenue No. 208

Date Explanation Ref. Debit Credit Balance
May 31 Balance  3,300
31 Adjusting J1 2,200 1,100

Salaries and Wages Payable No. 212

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 750 750

Interest Payable No. 230

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 400 400

Common Stock No. 311

Date Explanation Ref. Debit Credit Balance
May 31 Balance  35,000
PROBLEM 3.2 (Continued)

Rent Revenue No. 429

Date Explanation Ref. Debit Credit Balance
May 31 Balance  10,300
Date Explanation Ref. Debit Credit Balance
31 Adjusting J1 2,200 12,500

Advertising Expense No. 610

Date Explanation Ref. Debit Credit Balance
May 31 Balance  600

Depreciation Expense No. 619

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 375 375

Supplies Expense No. 631

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 1,330 1,330

Interest Expense No. 718

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 400 400

Insurance Expense No. 722

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 200 200

Salaries and Wages Expense No. 726

Date Explanation Ref. Debit Credit Balance
May 31 Balance  3,300
31 Adjusting J1 750 4,050

Utilities Expense No. 732

Date Explanation Ref. Debit Credit Balance
May 31 Balance  900
PROBLEM 3.2 (Continued)

(c) SKYLINE MOTEL

Adjusted Trial Balance
May 31, 2027

Debit Credit
Cash...................................................................... $ 3,500
Supplies................................................................ 750
Prepaid Insurance................................................ 2,200
Land...................................................................... 12,000
Buildings.............................................................. 60,000
Accumulated Depreciation—Buildings.............. $ 250
Equipment............................................................ 15,000
Accumulated Depreciation—Equipment............ 125
Notes Payable...................................................... 40,000
Accounts Payable................................................
Unearned Rent Revenue...................................... 11,180
Salaries and Wages Payable............................... 1,100
Interest Payable................................................... 750
Common Stock.................................................... 400
Rent Revenue....................................................... 35,000
Advertising Expense........................................... 600
Depreciation Expense......................................... 375 12,500
Supplies Expense................................................ 1,330
Interest Expense.................................................. 400
Insurance Expense.............................................. 200
Salaries and Wages Expense.............................. 4,050
Utilities Expense.................................................. 900
$101,305

$101,305

(Tot. credits = Accum. depr.-bldgs. + Accum. depr.-equip. + Notes pay. + Accts. pay. + Unearned rent rev. + Sal. & wages pay. +
Int. pay. + Com. stk. + Rent rev.)
($250 + $125 + $40,000 + $11,180 + $1,100 + $750 + $400 + $35,000 + $12,500)
PROBLEM 3.2 (Continued)

(d) SKYLINE MOTEL

Income Statement
For the Month Ended May 31, 2027

Revenues
Rent revenue.................................................... $12,500
Expenses
Salaries and wages expense........................... $4,050
Supplies expense............................................. 1,330
Utilities expense............................................... 900
Advertising expense........................................ 600
Interest expense............................................... 400
Depreciation expense...................................... 375
Insurance expense........................................... 200
Total expenses.......................................... 7,855
Net income............................................................... $ 4,645
(Rent rev. – Tot. exp.)
($12,500 – $7,855)

SKYLINE MOTEL
Retained Earnings Statement
For the Month Ended May 31, 2027

Retained earnings, May 1.......................................................... $ 0

Add: Net income...................................................................... 4,645
Retained earnings, May 31........................................................ $4,645
(Beg. ret. earn. + Net inc.)
($0 + $4,645)
PROBLEM 3.2 (Continued)

SKYLINE MOTEL
Balance Sheet
May 31, 2027

Assets
Cash..................................................................... $ 3,500
Supplies............................................................... 750
Prepaid insurance............................................... 2,200
Land..................................................................... 12,000
Buildings.............................................................. $60,000
Less: Accumulated depreciation—
buildings................................................... 250 59,750
Equipment............................................................ 15,000
Less: Accumulated depreciation—
equipment................................................. 125 14,875
Total assets.......................................... $93,075

Liabilities and Stockholders’ Equity

Liabilities
Notes payable.............................................. $ 40,000
Accounts payable........................................ 11,180
Unearned rent revenue................................ 1,100
Salaries and wages payable....................... 750
Interest payable........................................... 400
Total liabilities...................................... 53,430
Stockholders’ equity
Common stock............................................. $35,000
Retained earnings........................................ 4,645
Total stockholders’ equity................... 39,645
Total liabilities and stockholders’
equity................................................. $93,075
[(Cash + Supp. + Prepd. ins. + Land + (Bldgs. – Accum. depr.-bldgs.) + (Equip. – Accum. depr.-equip)) = (Notes pay. + Accts. pay.
+ Unearned rent rev. + Sal. & wages pay. + Int. pay.) + (Com. stk. + Ret. earn.)]
[($3,500 + $750 + $2,200 + $12,000 + ($60,000 – $250) + ($15,000 – $125)) = ($40,000 + $11,180 + $1,100 + $750 + $400) +
($35,000 + 4,645)]

LO 2, 3, 4 BT: AP Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 PROBLEM 3.3

(a) Sept. 30 Accounts Receivable................................ 1,100

Service Revenue................................. 1,100

30 Supplies Expense..................................... 850

Supplies............................................... 850

30 Rent Expense............................................ 1,000

Prepaid Rent........................................ 1,000

30 Depreciation Expense.............................. 700

Accum. Depreciation—Equipment...... 700

30 Salaries and Wages Expense................... 725

Salaries and Wages Payable.............. 725

30 Interest Expense....................................... 100

Interest Payable................................... 100

30 Unearned Rent Revenue.......................... 850

Rent Revenue...................................... 850

(b) EVERETT CO.

Income Statement
For the Quarter Ended September 30, 2027

Revenues
Service revenue.................................................... $17,100
Rent revenue........................................................ 2,260
Total revenues.............................................. $19,360
Expenses
Salaries and wages expense............................... 8,725
Rent expense........................................................ 2,900
Utilities expense................................................... 1,510
Supplies expense................................................. 850
Depreciation expense.......................................... 700
Interest expense................................................... 100
Total expenses............................................. 14,785
Net income................................................................... $ 4,575
(Tot. rev. – Tot. exp.) ($19,360 – $14,785)
PROBLEM 3.3 (Continued)
EVERETT CO.
Retained Earnings Statement
For the Quarter Ended September 30, 2027

Retained earnings, July 1, 2027............................. $ 0

Add: Net income................................................... 4,575
4,575
Less: Dividends..................................................... 1,600
Retained earnings, September 30, 2027............... $2,975
(Beg. ret. earn. + Net inc. – Div.)
($0 + $4,575 – $1,600)
EVERETT CO.
Balance Sheet
September 30, 2027

Assets
Cash........................................................................ $ 8,700
Accounts receivable............................................... 11,500
Supplies.................................................................. 650
Prepaid rent............................................................ 1,200
Equipment............................................................... $18,000
Less: Accum. depreciation—equipment.............. 700 17,300
Total assets............................................. $39,350
Liabilities and Stockholders’ Equity
Liabilities
Notes payable................................................. $10,000
Accounts payable........................................... 2,500
Unearned rent revenue................................... 1,050
Salaries and wages payable........................... 725
Interest payable.............................................. 100
Total liabilities......................................... 14,375
Stockholders’ equity
Common stock................................................ $22,000
Retained earnings........................................... 2,975
Total stockholders’ equity...................... 24,975
Total liabilities and stockholders’
equity.................................................... $39,350
[(Cash + Accts. rec. + Supp. + Prepd. rent + (Equip. – Accum. depr.-equip.)) = (Notes pay. + Accts. pay. + Unearned rent rev. + Sal.
& wages pay. + Int. pay.) + (Com. stk. + Ret. earn.)]
[($8,700 + $11,500 + $650 + $1,200 + ($18,000 – $700)] = [($10,000 + $2,500 + $725 + $1,050 + $100) + ($22,000 + $2,975)]
PROBLEM 3.3 (Continued)
(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest is $100
($10,000 × 1%). Since total interest payable is $100, the note has been outstanding
one month.
LO 2, 3, 4 BT: AN Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

PROBLEM 3.4

1. Dec. 31 Insurance Expense......................................... 6,800

 Prepaid Insurance.................................. 6,800
[($9,600 ÷ 3) = $3,200
($7,200 ÷ 2) = 3,600
$6,800]

2. Dec. 31 Unearned Rent Revenue................................ 84,000

Rent Revenue......................................... 84,000
Nov. 5 × $5,000 × 2 = $50,000
Dec. 4 × $8,500 × 1 = 34,000
$84,000

3. Dec. 31 Interest Expense............................................ 467

Interest Payable
($40,000 × 7% × 2/12).......................... 467

4. Dec. 31 Salaries and Wages Expense........................ 2,040

Salaries and Wages Payable.................. 2,040
[5 × $600 × 2/5 = $1,200
3 × $700 × 2/5 = 840
$2,040]
LO 2, 3 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 PROBLEM 3.5

(a), (c) & (e)

Cash No. 101

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  2,400
8 J1 1,700 700
10 J1 3,420 4,120
12 J1 3,100 7,220
20 J1 2,700 4,520
22 J1 400 4,120
25 J1 1,700 2,420
29 J1 600 3,020

Accounts Receivable No. 112

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  4,250
10 J1 3,420 830
27 J1 1,900 2,730

Supplies No. 126

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  1,800
17 J1 700 2,500
30 Adjusting J1 1,100 1,400

Equipment No. 153

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  12,000
15 J1 2,000 14,000
PROBLEM 3.5 (Continued)

Accumulated Depreciation—Equipment No. 154

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  2,000
30 Adjusting J1 200 2,200

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  2,600
15 J1 2,000 4,600
17 J1 700 5,300
20 J1 2,700 2,600

Unearned Service Revenue No. 209

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  1,200
29 J1 600 1,800
30 Adjusting J1 1,250 550

Salaries and Wages Payable No. 212

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  700
8 J1 700 0
30 Adjusting J1 350 350

Common Stock No. 311

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  10,000

Retained Earnings No. 320

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance  3,950
PROBLEM 3.5 (Continued)

Service Revenue No. 407

Date Explanation Ref. Debit Credit Balance
Nov. 12 J1 3,100 3,100
27 J1 1,900 5,000
30 Adjusting J1 1,250 6,250

Depreciation Expense No. 615

Date Explanation Ref. Debit Credit Balance
Nov. 30 Adjusting J1 200 200

Supplies Expense No. 631

Date Explanation Ref. Debit Credit Balance
Nov. 30 Adjusting J1 1,100 1,100

Salaries and Wages Expense No. 726

Date Explanation Ref. Debit Credit Balance
Nov. 8 J1 1,000 1,000
25 J1 1,700 2,700
30 Adjusting J1 350 3,050

Rent Expense No. 729

Date Explanation Ref. Debit Credit Balance
Nov. 22 J1 400 400
PROBLEM 3.5 (Continued)

(b) General Journal

J1
Date Account Titles Ref. Debit Credit
Nov. 8 Salaries and Wages Payable............... 212 700
Salaries and Wages Expense.............. 726 1,000
Cash.............................................. 101 1,700

10 Cash...................................................... 101 3,420

Accounts Receivable................... 112 3,420

12 Cash...................................................... 101 3,100

Service Revenue.......................... 407 3,100

15 Equipment............................................ 153 2,000

Accounts Payable........................ 201 2,000

17 Supplies................................................ 126 700

Accounts Payable........................ 201 700

20 Accounts Payable................................ 201 2,700

Cash.............................................. 101 2,700

22 Rent Expense....................................... 729 400

Cash.............................................. 101 400

25 Salaries and Wages Expense.............. 726 1,700

Cash.............................................. 101 1,700

27 Accounts Receivable........................... 112 1,900

Service Revenue.......................... 407 1,900

29 Cash...................................................... 101 600

Unearned Service Revenue......... 209 600
PROBLEM 3.5 (Continued)

(d) & (f) SCHILLING EQUIPMENT REPAIR

Trial Balances
November 30, 2027

Before After
Adjustment Adjustment
Dr. Cr. Dr. Cr.
Cash............................................. $ 3,020 $ 3,020
Accounts Receivable.................. 2,730 2,730
Supplies....................................... 2,500 1,400
Equipment................................... 14,000 14,000
Accumulated Depreciation—
Equipment................................ $ 2,000 $ 2,200
Accounts Payable....................... 2,600 2,600
Unearned Service Revenue........ 1,800 550
Salaries and Wages Payable...... –0– 350
Common Stock........................... 10,000 10,000
Retained Earnings...................... 3,950 3,950
Service Revenue......................... 5,000 6,250
Depreciation Expense................ –0– 200
Supplies Expense....................... –0– 1,100
Salaries and Wages Expense..... 2,700 3,050
Rent Expense.............................. 400 400
$25,350 $25,350 $25,900 $25,900
(Tot. debits before adj. = Cash + Accts. rec. + Supp. + Equip. + Sal. & wages exp.. + Rent exp.);
($3,020 + $2,730 + $2,500 + $14,000 + $2,700 + $400)
(Tot. debits after adj. = Cash + Accts. rec. + Supplies + Equip. + Depr. exp. + Supp. exp. + Sal. & wages exp. + Rent exp.); ($3,020
+ $2,730 + $1,400 + $14,000 + $200 + $1,100 + $3,050 + $400)

(e) 1. Nov. 30 Supplies Expense......................... 631 1,100

Supplies ($2,500 – $1,400)...... 126 1,100

2. 30 Salaries and Wages Expense....... 726 350

Salaries and Wages
Payable................................. 212 350

3. 30 Depreciation Expense................... 615 200

Accumulated Depreciation—
Equipment............................ 154 200

PROBLEM 3.5 (Continued)

4. 30 Unearned Service Revenue.......... 209 1,250

 Service Revenue..................... 407 1,250

(g) SCHILLING EQUIPMENT REPAIR

Income Statement
For the Month Ended November 30, 2027

Revenues
Service revenue................................................ $6,250
Expenses
Salaries and wages expense........................... $3,050
Supplies expense............................................. 1,100
Rent expense.................................................... 400
Depreciation expense...................................... 200
Total expenses.......................................... 4,750
Net Income............................................................... $1,500
(Serv. rev. – Tot. exp.)
($6,250 – $4,750)

SCHILLING EQUIPMENT REPAIR

Retained Earnings Statement
For the Month Ended November 30, 2027

Retained earnings, November 1............................................... $3,950

Plus: Net income...................................................................... 1,500
Retained earnings, November 30............................................. $5,450
(Beg. ret. earn. + Net inc.)
($3,950 + $1,500)
PROBLEM 3.5 (Continued)

SCHILLING EQUIPMENT REPAIR

Balance Sheet
November 30, 2027

Assets
Cash........................................................................ $ 3,020
Accounts receivable............................................... 2,730
Supplies.................................................................. 1,400
Equipment............................................................... $14,000
Less: Accumulated depreciation—
equipment.................................................... 2,200 11,800
Total assets..................................................... $18,950

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable........................................... $ 2,600
Unearned service revenue............................. 550
Salaries and wages payable........................... 350
Total liabilities......................................... 3,500
Stockholders’ equity
Common stock................................................ $10,000
Retained earnings........................................... 5,450
Total stockholders’ equity.............................. 15,450
Total liabilities and stockholders’ equity...... $18,950
[(Cash + Accts. rec. + Supp. + (Equip. – Accum. depr.-equip)) = (Accts. pay. + Unearned serv. rev. + Sal. & wages pay.) + (Com.
stk. + Ret. earn.)]
[($3,020 + $2,730 + $1,400 + ($14,000 – $2,200)) = ($2,600 + $550 + $350) + ($10,000 + $5,450)]
LO 2, 3, 4 BT: AP Difficulty: Hard TOT: 70 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 *PROBLEM 3.6

(a) 1. June 30 Supplies.................................................. 1,500

Supplies Expense........................... 1,500

2. 30 Interest Expense
($20,000 × 9% × 5/12).......................... 750
Interest Payable.............................. 750

3. 30 Prepaid Insurance
($2,700 × 8/12).................................... 1,800
Insurance Expense......................... 1,800

4. 30 Service Revenue.................................... 1,300

Unearned Service Revenue............ 1,300

5. 30 Accounts Receivable............................. 2,000

Service Revenue............................. 2,000

6. 30 Depreciation Expense
($2,250 × 6/12)..................................... 1,125
Accumulated Depreciation—
Equipment................................... 1,125
*PROBLEM 3.6 (Continued)

(b) SOMMER GRAPHICS COMPANY

Adjusted Trial Balance
June 30, 2027

Debit Credit
Cash...................................................................... $ 8,600
Accounts Receivable ($14,000 + $2,000)............ 16,000
Supplies................................................................ 1,500
Prepaid Insurance................................................ 1,800
Equipment............................................................ 45,000
Accumulated Depreciation—Equipment............ $ 1,125
Notes Payable...................................................... 20,000
Accounts Payable................................................ 9,000
Interest Payable................................................... 750
Unearned Service Revenue................................. 1,300
Common Stock.................................................... 22,000
Rent Revenue....................................................... 52,100
Service Revenue ($6,000 – $1,300 + $2,000)...... 6,700
Salaries and Wages Expense.............................. 30,000
Supplies Expense ($3,700 – $1,500)................... 2,200
Advertising Expense........................................... 1,900
Rent Expense....................................................... 1,500
Utilities Expense.................................................. 1,700
Depreciation Expense......................................... 1,125
Insurance Expense ($2,700 – $1,800)................. 900
Interest Expense.................................................. 750
$112,975 $112,975
(Tot. credits = Accum. depr.-equip. + Notes pay. + Accts. pay. + Int. pay. + Unearned serv. rev. + Com. stk. + Rent rev. + Serv. rev.)
($1,125 + $20,000 + $9,000 + $750 + $1,300 + $22,000 + $52,100 + $6,700)
*PROBLEM 3.6 (Continued)

(c) SOMMER GRAPHICS COMPANY

Income Statement
For the Six Months Ended June 30, 2027

Revenues
Rent revenue................................................... $52,100
Service revenue.............................................. 6,700
Total revenues......................................... $58,800
Expenses
Salaries and wages expense.......................... 30,000
Supplies expense........................................... 2,200
Advertising expense....................................... 1,900
Utilities expense............................................. 1,700
Rent expense.................................................. 1,500
Depreciation expense..................................... 1,125
Insurance expense......................................... 900
Interest expense............................................. 750
Total expenses........................................ 40,075
Net income.............................................................. $18,725
(Tot. rev. – Tot. exp.)
($58,800 – $40,075)

SOMMER GRAPHICS COMPANY

Retained Earnings Statement
For the Six Months Ended June 30, 2027

Retained Earnings, January 1................................................... $ 0

Add: Net income....................................................................... 18,725
Retained Earnings, June 30...................................................... $18,725
(Beg. ret. earn. + Net inc.)
($0 + $18,725)
*PROBLEM 3.6 (Continued)

SOMMER GRAPHICS COMPANY

Balance Sheet
June 30, 2027

Assets
Cash........................................................................ $ 8,600
Accounts receivable............................................... 16,000
Supplies.................................................................. 1,500
Prepaid insurance.................................................. 1,800
Equipment............................................................... $45,000
Less: Accumulated depreciation—
equipment.................................................... 1,125 43,875
Total assets............................................. $71,775

Liabilities and Stockholders’ Equity

Liabilities
Notes payable................................................. $20,000
Accounts payable........................................... 9,000
Unearned service revenue............................. 1,300
Interest payable.............................................. 750
Total liabilities......................................... 31,050
Stockholders’ equity
Common stock................................................ $22,000
Retained earnings........................................... 18,725
Total stockholders’ equity...................... 40,725
Total liabilities and stockholders’
equity.................................................... $71,775
[(Cash + Accts. rec. + Supp. + Prepd. ins. + (Equip. – Accum. depr.-equip.)) = (Notes pay. + Accts. pay. + Unearned serv. rev. + Int.
pay.) + (Com. stk. + Ret. earn.)]
($8,600 + $16,000 + $1,500 + $1,800 + ($45,000 – $1,125)) = (($20,000 + $9,000 + $1,300 + $750) + ($22,000 + $18,725))]
LO 2, 3, 4, 5 BT: AP Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 CT3.1 FINANCIAL REPORTING PROBLEM

(a) Items that may result in adjusting entries for prepayments are:

1. Other current assets (per balance sheet).

2. Property, plant and equipment, net (per balance sheet).

3. Other non-current assets, net (per balance sheet)—amortization is similar to

depreciation (explained later in Chapter 9).

4. Deferred revenue, also referred to as unearned revenue (per balance sheet).

(b) Accrual adjusting entries were probably made for accounts payable, and other
current liabilities (per balance sheet).

(c) Apple’s net income increased $2,155 million from 2019 to 2020, and increased
$37,269 million from 2020 to 2021 This amounted in a net increase of $39,424
million from 2019 to 2021.
LO 2, 3, 4 BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 CT3.2 COMPARATIVE ANALYSIS PROBLEM

(All amounts in millions)

PepsiCo Coca-Cola
(a) Net increase (decrease) in $1,038 ($857)
property, plant, and equipment
(net) from 2020 to 2021.

(b) Increase (decrease) in selling, 2,742 2,413

general, and administrative
expenses from 2020 to 2021.

(c) Increase (decrease) in long-term (4,344) (2,009)

debt (obligations) from 2020 to
2021.

(d) Increase (decrease) in net 504 2,036

income from 2020 to 2021.

(e) Increase (decrease) in cash (2,589) 2,889

and cash equivalents from 2020
to 2021.
LO N/A BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 CT3.3 COMPARATIVE ANALYSIS PROBLEM

a. (All amounts in millions)

Amazon Walmart Inc.
(1) Increase (decrease) in interest
expense, from 2020 to 2021 and
from 2021 to 2022. $162 ($321)

(2) Increase (decrease) in net income

from 2020 to 2021 and from 2021 to
2022. 12,033 163

(3) Increase (decrease) in cash flow

from operating activities from 2020
to 2021 and from 2021 to 2022. (19,737) (11,893)

b. Cash flow from operating activities is the difference between cash receipts from
revenues and cash payments for expenses (see chapter 1). Depreciation expense
is a major reason why cash flow from operations and net income are different for
these two companies. Depreciation expense reduces a company’s net income, but
does not affect cash flow from operations since it’s a noncash expense. Other
reasons would include changes in accounts receivable, inventory, and accounts
payable.

c. Accounts that provide evidence that Amazon uses accrual accounting are:
Accounts receivable (Sales revenue would be affected by the adjustment process)
and Unearned revenue (Sales revenue would be affected by the adjustment
process).

d. Accounts that provide evidence that Walmart uses accrual accounting are:
Prepaid expenses (Supplies expense and/or Insurance expense would be affected
by the adjustment process) and Accrued income taxes (Income tax expense would
be affected by the adjustment process).
LO N/A BT: AN Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 CT3.4 REAL–WORLD FOCUS

Answers will vary depending on the company and article chosen by the student.
LO N/A BT: S Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA PC: Communication IMA: Reporting
 CT3.5 REAL-WORLD FOCUS

(a) Many large companies, big accounting firms, and accounting standard setters
tend to favor a switch to IFRS because they believe that global accounting
standards would save companies money by consolidating their bookkeeping.
They also believe it would make it easier to raise capital around the world. In
addition, investors would have less trouble comparing companies from different
countries. They also feel that having international accounting standards would
lead to an improvement in the enforcement of securities laws.

(b) Many small companies are opposed to switching to IFRS because (1) they say
that the switch would be very costly, and (2) because they don't have
operations outside of the U.S., so they don’t see any benefit to their company of
using international standards.

(c) It has been suggested that IFRS lacks standards that are specific to utility
companies that U.S. GAAP contains.

(d) Condorsement (a word invented by the SEC) represents a combination of

convergence and endorsement. Under condorsement, U.S. standard setters
would continue to work with international standard setters to try to reduce
differences in standards. In addition, as new international standards are issued,
U.S. standard setters would review those standards and consider whether to
endorse them by absorbing them into U.S. GAAP.
LO N/A BT: S Difficulty: Moderate TOT: 45 min. AACSB: Diversity AICPA FC: Reporting AICPA PC: Communication IMA:
Reporting
 CT3.6 DECISION MAKING ACROSS THE ORGANIZATION

(a) ABBY PARK

Income Statement
For the Quarter Ended March 31, 2027

Revenues
Rent revenue ($83,000 – $21,000).................. $62,000
Expenses
Salaries and wages expense
[$27,600 + ($290 × 2)]................................... $28,180
Advertising expense ($4,200 + $110)............. 4,310
Supplies expense ($4,500 – $600)................. 3,900
Maintenance and repairs expense
($2,800 + $1,040).......................................... 3,840
Insurance expense ($7,200 × 3/12)................ 1,800
Utilities expense ($1,500 + $240)................... 1,740
Depreciation expense..................................... 800
Interest expense ($20,000 × 17% × 3/12)......... 850
Total expenses........................................ 45,420
Net income.............................................................. $16,580

(b) The generally accepted accounting principles pertaining to the income statement
that were not recognized by Trudy were the revenue recognition principle and the
expense recognition principle. The revenue recognition principle states that
revenue is recognized when the performance obligation is satisfied. The $21,000
for summer rentals has not been performed and, therefore, should not be reported
in income for the quarter ended March 31. The expense recognition principle
dictates that efforts (expenses) be matched with accomplishments (revenues)
whenever it is reasonable and practicable to do so. This means that the expenses
should include amounts incurred in March but not paid until April. The difference
in expenses was $8,520 ($45,420 – $36,900). The overstatement of revenues
($21,000) plus the understatement of expenses ($8,520) equals the difference in
reported income of $29,520 ($46,100 – $16,580).
LO 1, 2, 3, 4 BT: AN Difficulty: Hard TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
 CT3.7 COMMUNICATION ACTIVITY

From: Student’s email address

To: Gloria Jean Hall’s email address

Subject: Why Adjusting Entries?

Dear Ms. Hall:

Upon reviewing the accounts of your company at the end of the year,
I discovered that adjusting entries were not made.

Adjusting entries are made at the end of the accounting period to ensure that the
revenue recognition and expense recognition principles required under generally
accepted accounting principles are followed. The use of adjusting entries makes it
possible to report on the balance sheet the appropriate assets, liabilities, and
stockholders’ equity at the statement date and to report on the income statement the
proper net income (or loss) for the period.

Adjusting entries are needed because the unadjusted trial balance may not contain an
up-to-date and complete record of all transactions and economic events for the
following reasons:

1. Some events are not journalized daily because it is not efficient to do so.
Examples include the use of supplies and the earning of wages by employees.

2. The expiration of some costs is not journalized during the accounting period
because these costs expire with the passage of time rather than as a result of
recurring daily transactions. Examples
of such costs are building and equipment depreciation, rent, and insurance.

3. Some expenses, such as the cost of utility service and property taxes, may be
unrecorded because the bills for the costs have not been received.

CT3.7 (Continued)

There are four types of adjusting entries:

1. Prepaid expenses—costs paid in cash and recorded as assets before they are
used or consumed.
 2. Unearned revenues—customer cash receipts recorded as liabilities before
they are earned.

3. Accrued revenues—revenues earned but not yet received in cash

or recorded.

4. Accrued expenses—expenses incurred but not yet paid in cash or recorded.

I will be happy to answer any questions you may have on adjusting entries.

Student’s name
LO 1,2,3,4 BT: C Difficulty: Moderate TOT: 30 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication
IMA: Reporting
 CT3.8 ETHICS CASE

(a) The stakeholders in this situation are:

 Melissa Ray, controller.

 The president of Kellner Company.
 Kellner Company stockholders.

(b) 1. It is unethical for the president to place pressure on Melissa to misstate net
income by requesting her to prepare incorrect adjusting entries.

2. It is customary for adjusting entries to be dated as of the balance sheet date

although the entries are prepared at a later date. Melissa did nothing unethical
by dating the adjusting entries December 31.

(c) Melissa can accrue revenues and defer expenses through the preparation of
adjusting entries and be ethical so long as the entries reflect economic reality.
Intentionally misrepresenting the company’s financial condition and its results of
operations is unethical (it is also illegal).
LO 2, 3 BT: E Difficulty: Moderate TOT: 20 min. AACSB: Ethics, Communication AICPA FC: Reporting AICPA PC: Professional
Demeanor IMA: Business Applications
 CT3.9 ALL ABOUT YOU

We address the issue of contingent liabilities in greater detail in Chapter 10. Our
primary interest in this exercise is to engage students in a discussion regarding the
general nature of the financial statement elements (assets, liabilities, equity, revenues
and expenses).

(a) By taking out the bank loan, your friend has incurred a liability. You do not have a
liability unless your friend defaults, or unless it becomes clear that he will default.
Your loan application may, however, require you to disclose any guarantees that
you have signed, since they represent potential liabilities.

(b) Accounting standards have specific requirements regarding accounting for

situations where there is uncertainty regarding whether a liability has been
incurred. Those standards require an evaluation of the
probability of an amount being owed. Without going into detail regarding those
standards, the basic idea is that if it is probable that you will owe money, then you
should accrue a liability. If it is not probable, but it is possible that you will owe
money, then you should disclose facts regarding the situation. The most
important point is that this event has the potential to materially impact your
finances, and therefore you have a responsibility to disclose it to the bank in
some form.

(c) Losing your job would not create a financial liability, although it would most
certainly reduce your revenues. You are obviously concerned that you might lose
your job, but you don’t have specific information that would suggest that it will
happen. Therefore, you probably don’t have an obligation to disclose this
information to the bank. However, unless you are relatively certain that you would
be able to find suitable employment relatively quickly, you might want to wait until
your job situation has stabilized before pursuing a loan of this size.
LO N/A BT: E Difficulty: Moderate TOT: 25 min. AACSB: Ethics, Communication AICPA FC: Reporting AICPA PC: Professional
Demeanor IMA: Business Applications
 CT3.10 CONSIDERING ENVIRONMENTAL, SOCIAL,
AND GOVERNANCE REPORTING

The balance sheet should provide a fair representation of what a company owns and
what it owes. If significant obligations of the company are not reported on the balance
sheet, the company’s net worth (its equity) will be overstated. While it is true that it is
not possible to estimate the exact amount of future environmental cleanup costs, it
has become clear that companies will be held accountable.

Therefore, it doesn’t seem reasonable not to accrue for environmental costs.

Recognition of these liabilities provides a more accurate picture of the company’s
financial position. It also has the potential to improve the environment. As companies
are forced to report these amounts on their financial statements they will start to look
for more effective and efficient means to reduce toxic waste, and therefore reduce their
costs.
LO N/A BT: E Difficulty: Moderate TOT: 20 min. AACSB: Communication AICPA BB: Legal/Regulatory Perspective AICPA PC:
Communication IMA: Internal Controls
 CT3.11 FASB CODIFICATION ACTIVITY

(a) Revenue is earned by an entity from its direct distribution, exploitation, or

licensing of a film, before deduction for any of the entity’s direct costs of
distribution. For markets and territories in which an entity’s fully or jointly-owned
films are distributed by third parties, revenue is the net amounts payable to the
entity by third party distributors. Revenue is reduced by appropriate allowances,
estimated returns, price concessions, or similar adjustments, as applicable.

(b) Compensation is reciprocal transfers of cash or other assets in exchange for

services performed.
LO N/A BT: K Difficulty: Easy TOT: 15 min. AACSB: Technology, Communication AICPA FC: Reporting, Measurement IMA:
Reporting