Financial and Managerial Accounting Study Set 1

Business

Quiz 3 :

The Adjusting Process

Quiz 3 :

The Adjusting Process

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Adjustments and financial statements Several years ago, your brother opened Magna Appliance Repairs. He made a small initial investment and added money from his personal bank account as needed. He withdrew money for living expenses at irregular intervals. As the business grew, he hired an assistant. He is now considering adding more employees, purchasing additional service trucks, and purchasing the building he now rents. To secure funds for the expansion, your brother submitted a loan application to the bank and included the most recent financial statements (which follow) prepared from accounts maintained by a part-time bookkeeper. img After reviewing the financial statements, the loan officer at the bank asked your brother if he used the accrual basis of accounting for revenues and expenses. Your brother responded that he did and that is why he included an account for "Amounts Due from Customers." The loan officer then asked whether or not the accounts were adjusted prior to the preparation of the statements. Your brother answered that they had not been adjusted. a. Why do you think the loan officer suspected that the accounts had not been adjusted prior to the preparation of the statements? b. Indicate possible accounts that might need to be adjusted before an accurate set of financial statements could be prepared.
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a. In a mercantile system of accounting, revenues and expenses are recorded in the period, to which they relate. The payment or receipt against expenses and revenue does not affect the income statement. Thus income statement presents the actual income (loss) earned in the period. To arrive at the net income of the period, we do some adjustment entries in the year end to record all those revenues and expenses which are accrued but not paid or received. Similarly there may be some revenues and expenses which were paid in a prior period but they relate to the current period. So adjustment entries are required to adjust all these accruals and deferrals.
Here, the book-keeper has shown the expense on payment basis only. Expenses are not adjusted for accruals. Practically this is not possible to make payment of all the expenses in the same period so adjustments are required to arrive at actual results or correct net income. There is no provision for expenses which are accrued but remain unpaid. There is a fixed asset Truck but there is no depreciation for truck. Therefore, loan officer detected in the first instance that accounts had not been adjusted. b. Possibly, Rent, Wages or Utilities may have some amount accrued but not paid. This amount should be added to respective accounts and a liability against these accruals should be recorded.
Generally supplies are purchased in lots and then used as and when required. So supplies may have some part which is still in stock. So to arrive at correct supply expense, stock on hand should be deducted from the amount of supply purchased. Normally, Insurance is a prepaid expense which is adjusted at the end of periods and the balance remains as Prepaid Insurance. So insurance should also be adjusted. There could be some revenue which is earned but not billed. Service Revenue should be adjusted for such revenue.
There is a truck which is a depreciable fixed asset so depreciation should be adjusted against the accumulated depreciation for the period.

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Accounts requiring adjustment Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry: a. Accumulated Depreciation b. Dividends c. Land d. Salaries Payable e. Supplies f. Unearned Rent Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry: a. Building b. Cash c. Interest Expense d. Miscellaneous Expense e. Common Stock f. Prepaid Insurance
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Accounts requiring adjustment
We need to indicate whether the following accounts normally require an adjusting entry:
A. a. Accumulated Depreciation Yes
b. Dividends No
c. Land No
d. Salaries Payable Yes
e. Supplies Yes
f. Unearned Rent Yes
B. a. Building Yes
b. Cash No
c. Interest Expense Yes
d. Miscellaneous Expense No
e. Capital Stock No
f. Prepaid Insurance Yes

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The unadjusted trial balance that you prepared for PS Music at the end of Chapter 2 should appear as follows: img The data needed to determine adjustments are as follows: a. During July, PS Music provided guest disc jockeys for KXMD for a total of 115 hours. For information on the amount of the accrued revenue to be billed to KXMD, see the contract described in the July 3, 2016, transaction at the end of Chapter 2. b. Supplies on hand at July 31, $275. c. The balance of the prepaid insurance account relates to the July 1, 2016, transaction at the end of Chapter 2. d. Depreciation of the office equipment is $50. e. The balance of the unearned revenue account relates to the contract between PS Music and KXMD, described in the July 3, 2016, transaction at the end of Chapter 2. f. Accrued wages as of July 31, 2016, were $140. Instructions 1. Prepare adjusting journal entries. You will need the following additional accounts: img 2. Post the adjusting entries, inserting balances in the accounts affected. 3. Prepare an adjusted trial balance.
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1. Make the journal entries for adjustments in the books of PS M on July 31, 2016:
img Explanation(s):
(A) At the end of the accounting period any unearned fees that have been earned require an adjusting entry. In this case, under the contract anything over 80 hours is paid at $40.00 per hour and that is debited as cash, also debited is the amount of 3600 for the month is moved from unearned revenue; the total amount of the fees is credited to fees earned as revenue.
(B) At the end of the accounting period the supplies account must be adjusted to bring the account up to date to the supplies left on hand. Supplies Expense is debited as the expense occurs and supplies is credited to deduct the amount of supplies used bringing the account up to date with the amount of supplies left on hand. Supplies expense = Supplies account - supplies left on hand
Supplies expense = 1,020 - 275
Supplies expense = $745
(C) At the end of the accounting period any prepaid expenses that have been used (expired) during the period requires an adjusting entry. In this case prepaid insurance would be credited to deduct the used (expired) insurance and insurance expense would be debited as the expense occurs.
(D) At the end of the accounting period any depreciable assets require an adjusting entry to depreciate the asset(s). In this case depreciation expense- equipment is debited as the expense occurs and accumulated depreciation- equipment is credited to add the depreciation of the equipment.
(F) At the end of the accounting period any wages that have been accrued but not paid require and adjusting entry. In this case wages expense is debited as the expense occurs and wages payable is credited to add these accrued wages to until they are paid. 2. Post the adjusting entries in affected accounts:
Cash Account:
img Supplies Account:
img Prepaid insurance Account:
img Accumulated depreciation - office equipment Account:
img Wages payable Account:
img Unearned revenue Account:
img Fees earned Account:
img Wages Account:
img Supplies Account:
img Insurance Account:
img Depreciation Account:
img 3. Make an adjusted trail balance:
Preparation of a trial balance means prepare a book, which Contains balances of transactions, occurred during a particular Period. It includes organization's assets, liabilities, owners' equity, revenue, and expenses. A trial balance is calculated to verify that the sum of the debit is equal to the sum of the credits. After making the adjustment entries, prepare an adjusted trial balance.
After all the adjustments are made the adjusted trial balance would appear as:
img Hence, the total balance of trail balance is $42,340.

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How are revenues and expenses reported on the income statement under (a) the cash basis of accounting and (b) the accrual basis of accounting?
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Adjusting entries Selected account balances before adjustment for Intuit Realty at November 30, the end of the current year, follow: img Data needed for year-end adjustments are as follows: • Supplies on hand at November 30, $550. • Depreciation of equipment during year, $1,675. • Rent expired during year, $8,500. • Wages accrued but not paid at November 30, $2,000. • Unearned fees at November 30, $4,000. • Unbilled fees at November 30, $5,380. Instructions 1. Journalize the six adjusting entries required at November 30, based on the data presented. 2. What would be the effect on the income statement if the adjustments for equipment depreciation and unearned fees were omitted at the end of the year? 3. What would be the effect on the balance sheet if the adjustments for equipment depreciation and unearned fees were omitted at the end of the year? 4. What would be the effect on the "Net increase or decrease in cash" on the statement of cash flows if the adjustments for equipment depreciation and unearned fees were omitted at the end of the year?
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Accrued revenue The following is an excerpt from a conversation between Sonia Lopez and Pete Lemke just before they boarded a flight to Paris on Delta Air Lines. They are going to Paris to attend their company's annual sales conference. Sonia: Pete, aren't you taking an introductory accounting course at college? Pete: Yes, I decided it's about time I learned something about accounting. You know, our annual bonuses are based on the sales figures that come from the accounting department. Sonia: I guess I never really thought about it. Pete: You should think about it! Last year, I placed a $5,000,000 order on December 30. But when I got my bonus, the $5,000,000 sale wasn't included. They said it hadn't been shipped until January 9, so it would have to count in next year's bonus. Sonia: A real bummer! Pete: Right! I was counting on that bonus including the $5,000,000 sale. Sonia: Did you complain? Pete: Yes, but it didn't do any good. Julie, the head accountant, said something about matching revenues and expenses. Also, something about not recording revenues until the sale is final. I figure I'd take the accounting course and find out whether she's just messing with me. Sonia: I never really thought about it. When do you think Delta Air Lines will record its revenues from this flight? Pete: Hmmm … I guess it could record the revenue when it sells the ticket … or … when the boarding passes are scanned at the door … or … when we get off the plane … or when our company pays for the tickets … or … I don't know. I'll ask my accounting instructor. Discuss when Delta Air Lines should recognize the revenue from ticket sales to properly match revenues and expenses.
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Classifying adjusting entries The following accounts were taken from the unadjusted trial balance of Orion Co., a congressional lobbying firm. Indicate whether or not each account would normally require an adjusting entry. If the account normally requires an adjusting entry, use the following notation to indicate the type of adjustment: img To illustrate, the answer for the first account follows: img
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Classifying types of adjustments Classify the following items as (a) prepaid expense, (b) unearned revenue, (c) accrued revenue, or (d) accrued expense: 1. A two-year premium paid on a fire insurance policy. 2. Fees earned but not yet received. 3. Fees received but not yet earned. 4. Salary owed but not yet paid. 5. Subscriptions received in advance by a magazine publisher. 6. Supplies on hand. 7. Taxes owed but payable in the following period. 8. Utilities owed but not yet paid.
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Codes of ethics Group Project Obtain a copy of your college or university's student code of conduct. In groups of three or four, answer the following questions: 1. Compare this code of conduct with the Institute of Management Accountants' Statement of Ethical Professional Practice, which can be obtained from the IMA Web site at www.imanet.org, and the American Institute of Certified Public Accountants' Code of Professional Conduct, which can be obtained from the AICPA Web site at www.aicpa.org. 2. One of your classmates asks you for permission to copy your homework, which your instructor will be collecting and grading for part of your overall term grade. Although your instructor has not stated whether one student may or may not copy another student's homework, is it ethical for you to allow your classmate to copy your homework? Is it ethical for your classmate to copy your homework?
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Adjusting entry for supplies The balance in the supplies account, before adjustment at the end of the year, is $5,330. Journalize the adjusting entry required if the amount of supplies on hand at the end of the year is $1,875.
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Ethics and professional conduct in business Daryl Kirby opened Squid Realty Co. on January 1, 2015. At the end of the first year, the business needed additional capital. On behalf of Squid Realty Co., Daryl applied to Ocean National Bank for a loan of $375,000. Based on Squid Realty Co.'s financial statements, which had been prepared on a cash basis, the Ocean National Bank loan officer rejected the loan as too risky. After receiving the rejection notice, Daryl instructed his accountant to prepare the financial statements on an accrual basis. These statements included $65,000 in accounts receivable and $25,000 in accounts payable. Daryl then instructed his accountant to record an additional $30,000 of accounts receivable for commissions on property for which a contract had been signed on December 28, 2015. The title to the property is to transfer on January 5, 2016, when an attorney formally records the transfer of the property to the buyer. Daryl then applied for a $375,000 loan from Free Spirit Bank, using the revised financial statements. On this application, Daryl indicated that he had not previously been rejected for credit. Discuss the ethical and professional conduct of Daryl Kirby in applying for the loan from Free Spirit Bank.
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Adjusting entries On May 31, 2016, the following data were accumulated to assist the accountant in preparing the adjusting entries for Oceanside Realty: a. Fees accrued but unbilled at May 31 are $19,750. b. The supplies account balance on May 31 is $12,300. The supplies on hand at May 31 are $4,150. c. Wages accrued but not paid at May 31 are $2,700. d. The unearned rent account balance at May 31 is $9,000, representing the receipt of an advance payment on May 1 of three months' rent from tenants. e. Depreciation of office equipment is $3,200. Instructions 1. Journalize the adjusting entries required at May 31, 2016. 2. Briefly explain the difference between adjusting entries and entries that would be made to correct errors.
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Adjusting entries Reliable Repairs Service, an electronics repair store, prepared the following unadjusted trial balance at the end of its first year of operations: img For preparing the adjusting entries, the following data were assembled: a. Fees earned but unbilled on April 30 were $9,850. b. Supplies on hand on April 30 were $4,660. c. Depreciation of equipment was estimated to be $6,470 for the year. d. The balance in unearned fees represented the April 1 receipt in advance for services to be provided. During April, $15,000 of the services were provided. e. Unpaid wages accrued on April 30 were $5,200. Instructions 1. Journalize the adjusting entries necessary on April 30, 2016. 2. Determine the revenues, expenses, and net income of Reliable Service Repairs before the adjusting entries. 3. Determine the revenues, expense, and net income of Reliable Service Repairs after the adjusting entries. 4. Determine the effect of the adjusting entries on Retained Earnings.
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A ? Type of adjustment Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense: a. Cash received for services not yet rendered b. Insurance paid for the next year c. Rent revenue earned but not received d. Salaries owed but not yet paid B ? Type of adjustment Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense: a. Cash received for use of land next month b. Fees earned but not received c. Rent expense owed but not yet paid d. Supplies on hand
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Adjusting entries On March 31, 2016, the following data were accumulated to assist the accountant in preparing the adjusting entries for Potomac Realty: a. The supplies account balance on March 31 is $5,620 The supplies on hand on March 31 are $1,290. b. The unearned rent account balance on March 31 is $5,000 representing the receipt of an advance payment on March 1 of four months' rent from tenants. c. Wages accrued but not paid at March 31 are $2,290. d. Fees accrued but unbilled at March 31 are $16,825. e. Depreciation of office equipment is $4,600. Instructions 1. Journalize the adjusting entries required at March 31, 2016. 2. Briefly explain the difference between adjusting entries and entries that would be made to correct errors.
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Why are adjusting entries needed at the end of an accounting period?
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Adjusting entries Selected account balances before adjustment for Alantic Coast Realty at July 31, 2016, the end of the current year, are as follows: img Data needed for year-end adjustments are as follows: a. Unbilled fees at July 31, $11,150. b. Supplies on hand at July 31, $900. c. Rent expired, $6,000. d. Depreciation of equipment during year, $8,950. e. Unearned fees at July 31, $2,000. f. Wages accrued but not paid at July 31, $4,840. Instructions 1. Journalize the six adjusting entries required at July 31, based on the data presented. 2. What would be the effect on the income statement if adjustments (a) and (f) were omitted at the end of the year? 3. What would be the effect on the balance sheet if adjustments (a) and (f) were omitted at the end of the year? 4. What would be the effect on the "Net increase or decrease in cash" on the statement of cash flows if adjustments (a) and (f) were omitted at the end of the year?
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Is the matching concept related to (a) the cash basis of accounting or (b) the accrual basis of accounting?
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A ? Adjustment for prepaid expense The supplies account had a beginning balance of $3,375 and was debited for $6,450 for supplies purchased during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of supplies on hand is $2,980. B ? Adjustment for prepaid expense The prepaid insurance account had a beginning balance of $9,600 and was debited for $12,900 of premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $7,360.
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Adjusting entries Crazy Mountain Outfitters Co., an outfitter store for fishing treks, prepared the following unadjusted trial balance at the end of its first year of operations: img For preparing the adjusting entries, the following data were assembled: a. Supplies on hand on April 30 were $1,380. b. Fees earned but unbilled on April 30 were $3,900. c. Depreciation of equipment was estimated to be $3,000 for the year. d. Unpaid wages accrued on April 30 were $2,475. e. The balance in unearned fees represented the April 1 receipt in advance for services to be provided. Only $14,140 of the services was provided between April 1 and April 30. Instructions 1. Journalize the adjusting entries necessary on April 30, 2016. 2. Determine the revenues, expenses, and net income of Crazy Mountain Outfitters Co.before the adjusting entries. 3. Determine the revenues, expense, and net income of Crazy Mountain Outfitters Co.after the adjusting entries. 4. Determine the effect of the adjusting entries on Retained Earnings.
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