Adjusting the Accounts Part II

SOLUTIONS TO EXERCISES EXERCISE 3.1 1. True. 2. True. 3. 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. True. 5. False. A time period that lasts less than one year, such as monthly or quarterly periods, is called an interim period. 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. A fiscal year that starts on January 1 and ends on December 31 is a calendar year. 6. EXERCISE 3.2 (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 accrualbasis 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) Dear Government Official, It is my understanding, after having taken a beginning course in accounting principles, that governments uses a cash-basis 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 yet 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. Sincerely, CONCERNED STUDENT EXERCISE 3.3 (a) Cash received from revenue........................................... Cash paid for expenses .................................................. Cash-basis net income .......................................... (b) Revenues [(₤108,000 – ₤25,000) + ₤36,000] ................... Expenses [(₤72,000 – ₤30,000) + ₤42,000] ..................... Accrual-basis net income ...................................... EXERCISE 3.4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Unearned revenue. Accrued expense. Accrued expense. Accrued revenue. Prepaid expense. Unearned revenue. Accrued revenue. Prepaid expense. Prepaid expense. Prepaid expense. Accrued expense. ₤108,000 (72,000) ₤ 36,000 ₤119,000 (84,000) ₤ 35,000 EXERCISE 3.5 1. 2. 3. 4. 5. 6. 7. Interest Expense .................................................... Interest Payable (NT$10,000 X 9% X 4/12) .............................. 300 300 Supplies Expense .................................................. Supplies (NT$2,450 – NT$900)........................ 1,550 Depreciation Expense ............................................ Accumulated Depreciation—Equipment ....... 1,000 Insurance Expense ................................................ Prepaid Insurance (NT$2,100 X 7/12) ......................................... 1,225 Unearned Service Revenue ................................... Service Revenue (NT$32,000 X 1/4) ......................................... 8,000 Accounts Receivable ............................................. Service Revenue.............................................. 4,200 Salaries and Wages Expense ................................ Salaries and Wages Payable (NT$9,000 X 3/5) ........................................... 1,550 1,000 1,225 8,000 4,200 5,400 5,400 EXERCISE 3.6 Item (a) Type of Adjustment (b) Accounts before Adjustment 1. Accrued Revenues Assets Understated Revenues Understated 2. Prepaid Expenses Assets Overstated Expenses Understated 3. Accrued Expenses Expenses Understated Liabilities Understated 4. Unearned Revenues Liabilities Overstated Revenues Understated 5. Accrued Expenses Expenses Understated Liabilities Understated 6. Prepaid Expenses Assets Overstated Expenses Understated EXERCISE 3.7 1. 2. 3. 4. 5. Mar. 31 31 31 31 31 Depreciation Expense (€400 X 3) ................. 1,200 Accumulated Depreciation— Equipment ......................................... 1,200 Unearned Rent Revenue .............................. 3,400 Rent Revenue (€10,200 X 1/3)............... 3,400 Interest Expense ........................................... Interest Payable..................................... 500 500 Supplies Expense ......................................... 2, 050 Supplies (€2,800 – €750) ....................... Insurance Expense (€300 X 3) ..................... Prepaid Insurance ................................. 2, 050 900 900 EXERCISE 3.8 1. 2. 3. Jan. 31 31 31 31 4. 5. 31 31 Accounts Receivable ................................... Service Revenue ................................... 785 785 Utilities Expense........................................... Utilities Payable .................................... 650 Depreciation Expense .................................. Accumulated Depreciation— Equipment ......................................... 400 Interest Expense........................................... Interest Payable .................................... 500 Insurance Expense (€24,000 ÷ 12) ............... Prepaid Insurance ................................. 2,000 Supplies Expense (€1,600 – €400) ............... Supplies................................................. 1,200 650 400 500 2,000 1,200 EXERCISE 3.9 1. Oct. 31 Supplies Expense ......................................... 2,000 Supplies ( 2,500 – 500) ...................... 2,000 120 2. 31 Insurance Expense ....................................... Prepaid Insurance ................................. 3. 31 Depreciation Expense .................................. Accumulated Depreciation— Equipment ......................................... 50 Unearned Service Revenue ......................... Service Revenue ................................... 600 Accounts Receivable ................................... Service Revenue ................................... 360 4. 5. 31 31 120 50 600 360 EXERCISE 3.9 (Continued) 6. 7. Oct. 31 31 Interest Expense ..................................... Interest Payable............................... 95 95 Salaries and Wages Expense ................ Salaries and Wages Payable .......... 1,625 1,625 EXERCISE 3.10 BJORN ASA Income Statement For the Month Ended July 31, 2020 Revenues Service revenue (€5,500 + €650) ............................. Expenses Salaries and wages expense (€2,300 + €400)......... Supplies expense (€1,200 – €250)........................... Utilities expense ...................................................... Insurance expense................................................... Depreciation expense .............................................. Total expenses ................................................. Net income ....................................................................... €6,150 €2,700 950 600 500 150 4,900 €1,250 EXERCISE 3.11 Answer (a) Supplies balance = ₤800 (b) Total premium = ₤4,800 Purchase date = Aug. 1, 2019 Computation Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1) ₤ 950 850 (1,000) ₤ 800 Total premium = Monthly premium x 12; ₤400 x 12 = ₤4,800 Purchase date: On Jan. 31, there are 6 months’ coverage remaining (₤400 x 6). Thus, the purchase date was 6 months earlier on Aug. 1, 2019. EXERCISE 3.11 (Continued) (c) Salaries and wages payable = ₤1,820 Cash paid Salaries and wages payable (1/31/20) ₤3,800 920 4,720 Less: Salaries and wages expense Salaries and wages payable (12/31/19) 2,900 ₤1,820 EXERCISE 3.12 (a) July 10 14 15 20 (b) July 31 Supplies ........................................................ Cash ....................................................... 650 Cash .............................................................. Service Revenue ................................... 2,200 650 2,200 Salaries and Wages Expense ...................... 1,200 Cash ....................................................... Cash .............................................................. Unearned Service Revenue .................. Supplies Expense ......................................... Supplies................................................. 1,000 900 31 Accounts Receivable ................................... Service Revenue ................................... 500 31 Salaries and Wages Expense ...................... Salaries and Wages Payable ................ 1,200 31 Unearned Service Revenue ......................... Service Revenue ................................... 1,150 1,200 1,000 900 500 1,200 1,150 EXERCISE 3.13 Date July 31 31 31 31 Account Titles Interest Expense (￦20,000 .06 1/12) ......... Interest Payable ........................................ Debit 100 Supplies Expense (￦24,000 – ￦18,600) ......... Supplies..................................................... 5,400 Rent Expense (￦3,600  4) .............................. Prepaid Rent.............................................. 900 Salaries and Wages Expense .......................... Salaries and Wages Payable .................... Credit 100 5,400 900 3,100 3,100 31 Depreciation Expense (￦6,000  12)............... Accumulated Depreciation—Buildings ... 500 31 Unearned Service Revenue ............................. Service Revenue ....................................... 4,700 31 Maintenance and Repairs Expense ................. Accounts Payable ..................................... 2,300 500 4,700 2,300 EXERCISE 3.14 Item Incorrect balances Effects of: Salaries and Wages Rent Revenue Depreciation Correct balances Net Income €70,000 Total Assets €150,000 (10,000) 4,000 (9,000) €55,000 Total Liabilities €70,000 10,000 (4,000) (9,000) €141,000 €76,000 Equity €80,000 (10,000) 4,000 (9,000) €65,000 EXERCISE 3.15 (a) 2020 June 1 Aug. 31 Sept. 4 Nov. 30 Dec. 5 Prepaid Insurance ...................................... 1,800 Cash ..................................................... 1,800 Prepaid Rent............................................... Cash ..................................................... 6,500 6,500 Cash ............................................................ Unearned Service Revenue ................ 3,600 3,600 Prepaid Cleaning........................................ 2,000 Cash ..................................................... Cash ............................................................ Unearned Service Revenue ................ 2,000 1,500 1,500 (b) 2020 Dec. 31 Insurance Expense .................................... Prepaid Insurance ............................. ($1,800 × 7/12 months = $1,050) 31 Rent Expense ............................................. Prepaid Rent...................................... ($6,500 × 4/5 months = $5,200) 31 Unearned Service Revenue ....................... Service Revenue ............................... ($3,600 × 4/9 months = $1,600) 31 31 1,050 1,050 5,200 5,200 1,600 Maintenance and Repairs Expense .......... 1,000 Prepaid Cleaning............................... Unearned Service Revenue ....................... 1,025 Service Revenue ............................... ($1,500 – $475 not played = $1,025 played) 1,600 1,000 1,025 EXERCISE 3.15 (Continued) (c) Insurance Expense Prepaid Insurance 1,800 12/31 Adj. 6/1 Dec. 31 Adj. 1,050 1,050 Rent Expense Bal. 750 Dec. 31 Adj. 5,200 Prepaid Rent 8/31 6,500 Bal. 1,300 Service Revenue 12/31 Adj. 5,200 Unearned Service Revenue 12/31 Adj. 12/31 Adj. 1,600 1,025 9/4 12/5 3,600 1,500 Bal. 2,475 11/30 2,000 12/31 Adj. Bal. 1,000 1,000 1,600 1,025 Bal. 2,625 Maintenance and Repairs Expense 12/31 Adj. Prepaid Cleaning 12/31 Adj. 12/31 Adj. 1,000 EXERCISE 3.15 (Continued) Note: The Cash account has not been included in this solution, as per the instructions. EXERCISE 3.16 (a) 2020 Dec. 31 31 31 Utilities Expense ........................................ Accounts Payable ............................. Salaries and Wages Expense .................... Salaries and Wages Payable ............ ($3,500 × 4/7 days = $2,000) 425 425 2,000 2,000 Interest Expense ........................................ Interest Payable ................................ ($48,000 × 5% × 2/12 months = $400) 400 31 Accounts Receivable ................................. Service Revenue ............................... 300 31 Accounts Receivable ................................. Rent Revenue .................................... 6,000 Accounts Payable ...................................... Cash ..................................................... 425 (b) 2021 Jan. 11 4 1 4 400 300 6,000 Salaries and Wages Payable ..................... 2,000 Salaries and Wages Expense .................... 1,500 Cash ..................................................... Interest Payable ......................................... Cash ..................................................... 400 Cash ............................................................ Accounts Receivable .......................... 300 425 3,500 400 300 EXERCISE 3.16 (Continued) 2 Cash ............................................................ Accounts Receivable .......................... 6,000 6,000 EXERCISE 3.17 Aug. 31 31 31 31 31 31 Accounts Receivable..................................... Service Revenue .................................... 2,400 2,400 Supplies Expense .......................................... Supplies .................................................. 1,600 Insurance Expense ........................................ Prepaid Insurance .................................. 1,500 Depreciation Expense ................................... Accumulated Depreciation— Equipment........................................... Salaries and Wages Expense........................ Salaries and Wages Payable ................. Unearned Rent Revenue ............................... Rent Revenue ......................................... 1,600 1,500 900 900 1,100 1,100 1,100 1,100 EXERCISE 3.18 MATUSIAK OAO Income Statement For the Year Ended August 31, 2020 Revenues Service revenue ................................................... Rent revenue ........................................................ Total revenues.............................................. Expenses Salaries and wages expense .............................. Rent expense ....................................................... Insurance expense .............................................. Supplies expense ................................................ Depreciation expense.......................................... Total expenses ............................................. Net income................................................................... €36,400 12,100 €48,500 18,100 15,000 1,500 1,600 900 37,100 €11,400 MATUSIAK OAO Retained Earnings Statement For the Year Ended August 31, 2020 Retained earnings, September 1, 2019 .......................................... Add: Net income ............................................................................ Retained earnings, August 31, 2020 ............................................. €3,000 11,400 €14,400 MATUSIAK OAO Statement of Financial Position August 31, 2020 Assets Equipment............................................................... Less: Accum. depreciation—equipment ............. Prepaid insurance .................................................. Supplies .................................................................. Accounts receivable .............................................. Cash ........................................................................ Total assets ............................................. €14,000 4,500 €9,500 2,500 700 11,200 10,400 €34,300 EXERCISE 3.18 (Continued) Equity and Liabilities Equity Share capital—Ordinary ................................. Retained earnings ........................................... Liabilities Accounts payable ........................................... Salaries and wages payable........................... Unearned rent revenue ................................... Total liabilities ......................................... Total equity and liabilities....................... €12,600 14,400 €27,000 5,800 1,100 400 7,300 €34,300 EXERCISE 3.19 (a) 1. 2. 3. Cash ................................................................... Accounts Receivable ................................ Unearned Service Revenue .............................. Service Revenue........................................ 8,000 8,000 25,000 Cash ................................................................... Unearned Service Revenue ...................... Unearned Service Revenue (₤38,000 – ₤17,000)............................................ Service Revenue ........................................... 4. 5. 25,000 38,000 38,000 21,000 21,000 Accounts Receivable ........................................ 115,000 Service Revenue (₤161,000 – ₤25,000 – ₤21,000).............. Cash ................................................................... Accounts Receivable (₤115,000 – ₤16,000) .............................. (b) Cash received by the club = ₤8,000 + ₤99,000 + ₤38,000 = ₤145,000 115,000 99,000 99,000 *EXERCISE 3.20 1. 2. 3. Prepaid Insurance................................................... Insurance Expense (€2,400 X 5/12) .............................................. 1,000 Service Revenue ..................................................... Unearned Service Revenue (€40,000 X 3/4) .............................................. 30,000 1,000 Supplies .................................................................. Supplies Expense ............................................ 30,000 600 600 *EXERCISE 3.21 (a) Jan. 2 10 Supplies Expense ........................................ Cash ...................................................... 15 Cash ............................................................. Service Revenue .................................. Cash 6,100 1/2 1/10 1/15 1/2 Insurance Expense ...................................... 1,920 Cash ...................................................... Insurance Expense 1,920 (b) Jan. 31 31 31 1,700 1,920 1,700 6,100 6,100 Service Revenue 1/15 1,920 1,700 1/10 6,100 Supplies Expense 1,700 Prepaid Insurance (€160 X 11 months) ...... Insurance Expense .............................. 1,760 1,760 Supplies ....................................................... Supplies Expense ................................ 650 Service Revenue.......................................... Unearned Service Revenue ................. 4,000 650 4,000 *EXERCISE 3.21 (Continued) Prepaid Insurance 1/31 1,760 Supplies 650 1/31 Insurance Expense 1/2 1,920 1/31 1,760 Bal. 160 Supplies Expense 1/10 1,700 1/31 650 Bal. 1,050 Unearned Service Revenue 1/31 4,000 Service Revenue 1/31 4,000 1/15 6,100 Bal. 2,100 (c) Prepaid insurance...................................................................... Supplies...................................................................................... Unearned service revenue ........................................................ Service revenue ......................................................................... Insurance expense..................................................................... Supplies expense....................................................................... €1,760 650 4,000 2,100 160 1,050 *EXERCISE 3.22 (a) (b) (c) (d) (e) (f) 2 6 3 4 5 1 Going concern assumption Economic entity assumption Monetary unit assumption Time period assumption Historical cost principle Full disclosure principle *EXERCISE 3.23 (a) This is a violation of the historical cost principle. The inventory 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 Austin Weber and Weber Co. as one entity when they are two separate entities. The Dividends account should have been debited for the purchase of the truck. (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, Weber Co. would be misleading financial statement readers. In addition, 2020 results would not be comparable to previous years’ results. The company should use a 52 week year. *EXERCISE 3.24 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Comparability Going concern assumption Materiality Full disclosure principle Time period assumption Relevance Historical cost principle Consistency Economic entity assumption Faithful representation Monetary unit assumption Expense recognition principle *EXERCISE 3.25 (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 Speyeware’s shares appear to be actively traded, investors must be capable of using the information made available by Speyeware 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 Speyeware’s net income. (c) The change from Canadian dollars to U.S. dollars for reporting purposes should make Speyeware more comparable with companies traded on U.S. stock exchanges. *EXERCISE 3.26 (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 is 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 international financial reporting standards (IFRS). The biotechnology company that employs Mindy will follow IFRS to report its assets, liabilities, equity, revenues, and expenses as it prepares financial statements. (b) Mindy 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 understandability. They apply to accounting information rather than the scientific findings that Mindy wants to include.