Ch. 3: Periodic Reporting & Adjustments (QS 3-1 to 3-6)

QS 3-1: Periodic Reporting Fill in the blanks using the provided terms: 1. Time period assumption presumes that an organization’s activities can be divided into specific time periods. 2. Financial reports covering a one-year period are known as annual financial statements. 3. A fiscal year consists of any 12 consecutive months. 4. Accrual basis accounting records revenues when services are provided and records expenses when incurred. 5. The value of information is often linked to its timeliness. QS 3-2: Computing Accrual and Cash Income Given: • • • Revenues earned: $45,000 (cash received $37,000) Expenses incurred: $25,500 (cash paid $20,250) Prepaid expenses: $6,750 (for next year) 1. Cash Basis Net Income: • • • • Cash Received from Revenues: $37,000 Cash Paid for Expenses: $20,250 Cash Basis Net Income = Cash Received - Cash Paid Cash Basis Net Income = $37,000 - $20,250 = $16,750 2. Accrual Basis Net Income: • • • • • Revenues Earned: $45,000 Expenses Incurred: $25,500 Prepaid expenses are not expensed until next year, so they don’t affect this year’s accrual income. Accrual Basis Net Income = Revenues Earned - Expenses Incurred Accrual Basis Net Income = $45,000 - $25,500 = $19,500 QS 3-3: Identifying Accounting Adjustments Classify each adjustment: 1. To record revenue earned that was previously received as cash in advance: Unearned Revenues 2. To record wages expense incurred but not yet paid or recorded: Accrued Expenses 3. To record revenue earned but not yet billed or recorded: Accrued Revenues 4. To record expiration of prepaid insurance: Prepaid Expenses 5. To record annual depreciation expense: Prepaid Expenses (as it involves adjusting an asset over time) QS 3-4: Concepts of Adjusting Entries For each adjusting entry, indicate the accounts: 1. Accrue salaries expense: o Debit: Salaries Expense (Income Statement) o Credit: Salaries Payable (Balance Sheet) 2. Adjust the Unearned Revenue account to recognize earned services revenue: o Debit: Unearned Revenue (Balance Sheet) o Credit: Service Revenue (Income Statement) 3. Record services revenue earned for which cash will be received the following period: o Debit: Accounts Receivable (Balance Sheet) o Credit: Service Revenue (Income Statement) QS 3-5: Prepaid (Deferred) Expenses Adjustments Follow the three-step process: a. Prepaid Insurance with $4,700 starting balance, $900 unexpired: • • • Step 1: Current balance = $4,700 (Debit) Step 2: Adjusted balance should be = $900 (remaining unexpired) Step 3: Adjusting entry: bash Debit: Insurance Expense $3,800 Credit: Prepaid Insurance $3,800 b. Prepaid Insurance with $5,890 starting balance, $1,040 expired: • Step 1: Current balance = $5,890 (Debit) • • Step 2: Adjusted balance should be = $4,850 (unexpired) Step 3: Adjusting entry: bash Debit: Insurance Expense $1,040 Credit: Prepaid Insurance $1,040 c. Prepaid Rent of $24,000 for two years (24 months), starting on September 1: • • • Step 1: Current balance = $24,000 (Debit) Step 2: Adjusted balance should be for 20 months remaining = $20,000 (12 months per year) Step 3: Adjusting entry: bash Debit: Rent Expense $4,000 Credit: Prepaid Rent $4,000 (4 months of rent have expired: $24,000 / 24 months = $1,000 per month × 4 months = $4,000) QS 3-6: Prepaid (Deferred) Expenses Adjustments for Supplies a. Supplies balance of $300, $110 remaining: • • • Step 1: Current balance = $300 Step 2: Adjusted balance = $110 Step 3: Adjusting entry: bash Debit: Supplies Expense $190 Credit: Supplies $190 b. Supplies balance of $800, purchases of $2,100, $650 remaining: • • • Step 1: Current balance = $2,900 ($800 + $2,100) Step 2: Adjusted balance = $650 Step 3: Adjusting entry: bash Debit: Supplies Expense $2,250 Credit: Supplies $2,250 c. Supplies balance of $4,000, purchases of $9,400, $2,660 remaining: • • • Step 1: Current balance = $13,400 ($4,000 + $9,400) Step 2: Adjusted balance = $2,660 Step 3: Adjusting entry: bash Debit: Supplies Expense $10,740 Credit: Supplies $10,740 (13,400 - 2,660 = 10,740)