1、McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 119Chapter 3Adjusting Accounts and Preparing Financial StatementsQUESTIONS1. The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when
2、cash is paid while the accrual basis reports expenses when they are incurred and matched with revenues they generated.2. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases t
3、he comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.3. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.4. A prepaid expense is an item pa
4、id for in advance of receiving its benefits. As such, it is reported as an asset on the balance sheet.5. Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation. Generally, land is the only long-term tangible plant asset that does not require
5、depreciation.6. The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in
6、need of replacement.7. Unearned revenue refers to cash received in advance of providing products and services. Another name for unearned revenue is deferred revenue. It is reported as a liability on the balance sheet.8. Accrued revenue is revenue that is earned but is not yet received in cash (and/o
7、r other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed
8、.9.A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition12010. For Best Buy, all of the accounts under the category of Prop
9、erty and Equipment (except for Land), require adjusting entries. The expense related to the depreciation expense account would be understated on the income statement if Best Buy fails to adjust these asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Student
10、s might also correctly identify accounts receivable, goodwill, and tradenames as needing adjustment.11. Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and possibly oth
11、er assets and liabilities such as Receivables for bad debts. (It is also possible that Circuit City would need to adjust Goodwill and Other intangible assets.)12. RadioShack would need to debit interest receivable and credit interest revenue.13. The Accrued Wages Expense would be reported as part of
12、 “Accrued Expenses” on Apples balance sheet.QUICK STUDIESQuick Study 3-1 (15 minutes)Cash AccountingRevenues (cash receipts). $52,000 Expenses (cash payments: $37,500 - $6,000 + $3,250) . 34,750Net income . $17,250Accrual AccountingRevenues (earned) . $60,000Expenses (incurred) . 37,500Net income. $
13、22,500Quick Study 3-2 (10 minutes)a. AE Accrued expensesb. PE Prepaid expensesc. UR Unearned revenuesd. PE Prepaid expenses (Depreciation)e. AR Accrued revenuesMcGraw-Hill Companies, 2009Solutions Manual, Chapter 3 121Quick Study 3-3 (20 minutes)Accounts Debited and Credited Financial Statementa. De
14、bit Unearned Revenue Balance SheetCredit Revenue Earned Income Statementb. Debit Wages Expense Income StatementCredit Wages Payable Balance Sheetc. Debit Accounts Receivable Balance SheetCredit Revenue Earned Income Statementd. Debit Insurance Expense Income StatementCredit Prepaid Insurance Balance
15、 Sheete. Debit Depreciation Expense Income StatementCredit Accumulated Depreciation Balance SheetQuick Study 3-4 (15 minutes)a. Insurance Expense . 3,000Prepaid Insurance . 3,000To record 6-month insurance coverage expired.b. Supplies Expense . 4,150Supplies . 4,150To record supplies used during the
16、 year.($900 + $4,000 ? = $750)Quick Study 3-5 (15 minutes)a. Depreciation ExpenseEquipment . 8,400Accumulated DepreciationEquipment. 8,400To record depreciation expense for the year.($45,000 - $3,000) / 5 years = $8,400b. No depreciation adjustments are made for land asit is expected to last indefin
17、itely.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition122Quick Study 3-6 (10 minutes)Salaries Expense . 400Salaries Payable . 400To record salaries incurred but not yet paid.One student earns $100 x 4 days, Monday through ThursdayQuick Study 3-7 (15 minutes)a. Unearned Reve
18、nue . 22,500Legal Revenue . 22,500To recognize legal revenue earned (30,000 x 3/4).b. Unearned Subscription Revenue . 1,200Subscription Revenue . 1,200To recognize subscription revenue earned.100 x ($24 / 12 months) x 6 monthsQuick Study 3-8 (15 minutes)Adjusting entry Debit Credit1. Accrue salaries
19、 expense e g2. Adjust the Unearned Services Revenue account to recognize earned revenuea f3. Record the earning of services revenue for which cash will be received the following periodb fQuick Study 3-9 (10 minutes)The answer is a. ExplanationThe debit balance in Prepaid Insurance was reduced by $40
20、0, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense.McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 123Quick Study 3-10 (15 minutes)The answer is 2. ExplanationInsurance premium errorUnderstates ex
21、penses (and overstates assets) by . $1,600Accrued salaries errorUnderstates expenses (and understates liabilities) by . 1,000The collective effects from this companys errors follow:Understates expenses by . $2,600Overstates assets by. $1,600Understates liabilities by . $1,000Quick Study 3-11 (10 min
22、utes)Profit margin = $78,750 / $630,000 = 12.5%Interpretation: For each dollar that Miller Company records as revenue, it earns 12.5 cents in net income. Millers 12.5% is markedly lower than competitors average profit margin of 15%it must improve performance.Quick Study 3-12A (5 minutes)The answer i
23、s c.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition124EXERCISESExercise 3-1 (10 minutes)1. B 4. A2. F 5. D3. C 6. EExercise 3-2 (25 minutes)a. Depreciation ExpenseEquipment . 16,000Accumulated DepreciationEquipment . 16,000To record depreciation expense for the year.b. Ins
24、urance Expense. 5,360Prepaid Insurance* . 5,360To record insurance coverage that expired ($6,000 - $640).c. Office Supplies Expense. 3,422Office Supplies*. 3,422To record office supplies used ($325 + $3,480 - $383).d. Unearned Fee Revenue. 3,000Fee Revenue . 3,000To record earned portion of fee rece
25、ived in advance($15,000 x 1/5).e. Insurance Expense. 6,160Prepaid Insurance . 6,160To record insurance coverage that expired.f. Wages Expense . 2,700Wages Payable . 2,700To record wages accrued but not yet paid.Notes:Prepaid Insurance* Office Supplies*Bal. Bal. 6,000 Beg. Bal. 325Purch. 3,480? Used
26、? UsedEnd. Bal. 640 End. Bal. 383McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 125Exercise 3-3 (30 minutes)a. Unearned Fee Revenue. 5,000Fee Revenue . 5,000To record earned portion of fee received in advance ($15,000 x 1/3).b. Wages Expense . 7,500Wages Payable . 7,500To record wages accrue
27、d but not yet paid.c. Depreciation ExpenseEquipment . 17,251Accumulated DepreciationEquipment . 17,251To record depreciation expense for the year.d. Office Supplies Expense. 5,682Office Supplies*. 5,682To record office supplies used ($240 + $6,102 - $660).e. Insurance Expense. 2,700Prepaid Insurance
28、 . 2,700To record insurance coverage expired ($4,000 - $1,300).f. Interest Receivable. 1,400Interest Revenue. 1,400To record interest earned but not yet received.g. Interest Expense. 2,000Interest Payable. 2,000To record interest incurred but not yet paid.Notes:Prepaid Insurance Office Supplies*Beg.
29、 Bal. 4,000 Beg. Bal. 240Purch. 6,102? Used ? UsedEnd. Bal. 1,300 End. Bal. 660McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition126Exercise 3-4 (15 minutes)a. Adjusting entry2009Dec. 31 Wages Expense.825Wages Payable . 825To record accrued wages for one day.(5 workers x $165
30、)b. Payday entry2010Jan. 4 Wages Expense.2,475Wages Payable .825Cash . 3,300To record accrued and current wages.Wages expense = 5 workers x 3 days x $165Cash = 5 workers x 4 days x $165Exercise 3-5 (15 minutes)a. $ 2,000b. $ 6,607c. $11,987d. $ 1,375Proof: (a) (b) (c) (d)Supplies available prior yea
31、r-end . $ 350 $1,855 $ 1,576 $1,375Supplies purchased in current year . 2,450 6,307 11,987 6,907Total supplies available . 2,800 8,162 13,563 8,282Supplies available current year-end . (800) (6,607) (2,056) (800)Supplies expense for current year. $2,000 $1,555 $11,507 $7,482McGraw-Hill Companies, 20
32、09Solutions Manual, Chapter 3 127Exercise 3-6 (25 minutes)a.Apr. 30 Legal Fees Expense. 4,500Legal Fees Payable . 4,500To record accrued legal fees.May 12 Legal Fees Payable. 4,500Cash. 4,500To pay accrued legal fees.b.Apr. 30 Interest Expense . 1,900Interest Payable. 1,900To record accrued interest
33、 expense($5,700 x 10/30).May 20 Interest Payable . 1,900Interest Expense . 3,800Cash. 5,700To record payment of accrued and current interest expense ($5,700 x 20/30).c.Apr. 30 Salaries Expense . 4,800Salaries Payable . 4,800To record accrued salaries($12,000 x 2/5 week).May 3 Salaries Payable. 4,800
34、Salaries Expense . 7,200Cash. 12,000To record payment of accrued and current salaries ($12,000 x 3/5 week).McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition128Exercise 3-7 (20 minutes)Balance Sheet Prepaid Insurance Asset using Insurance Expense usingAccrual Basis*Cash Basis
35、Accrual Basis*Cash BasisDec. 31, 2007.$14,450 $0 2007 .$ 850 $15,300 Dec. 31, 2008.9,350 0 2008 .5,100 0 Dec. 31, 2009.4,250 0 2009 . 5,100 0 Dec. 31, 2010.0 0 2010 . 4,250 0 Total.$15,300 $15,300 Explanations:*Accrual asset balance equals months left in the policy x $425 per month (monthly cost is computed as $15,300 / 36 months).Months Left Balance12/31/2007 . 34 $14,45012/31/2008 . 22 9,350 12/31/2009 . 10 4,250 12/31/2010 . 0 0*Accrual insurance expense equals months covered in the year x $425 per month.Months Covered Expense2007.2 $ 8502008.12 5,1002009.12 5,1002010.10 4,250$15,300
