Financial Accounting using IFRS, 3e by Wong
Financial Accounting using IFRS, 3e by Wong
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Chapter 3
Adjusting
Accounts
for
Financial Statements
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Learning
Objectives – coverage by question |
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True
/ False |
Multiple
Choice |
Exercises |
Problems |
Essay Questions |
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LO1
Identify the major steps in the accounting cycle. (p. 94)
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1, 2 |
1, 2 |
17 |
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1, 2 |
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LO2
Review the process of journalising and posting transactions. (p. 95)
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3-5 |
3, 4 |
2,
5, 10-18 |
1, 6 |
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LO3
Describe the adjusting process and illustrate adjusting entries. (p. 101)
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6-11,
15 |
5-8,
10-12, 15-17, 20 |
1-3,
5, 14-19 |
2,
3, 6, 7, |
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LO4
Prepare financial statements from adjusted accounts. (p. 110)
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14 |
6-10,
13, 15,-17 |
4, 6-18 |
1,
4, 6 |
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LO5
Describe the process of closing temporary accounts. (p. 114)
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7,
13 |
14,
18 |
6-9 |
5 |
3 |
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LO6
Analyse changes in balance sheet accounts.
(p. 117)
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12 |
19 |
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Chapter
3: Adjusting Accounts for Financial Statements
True
False
Topic: Fiscal year
LO: 1
1. A company’s fiscal
year cannot coincide with the calendar year.
Answer: False
Rationale: A company’s
fiscal year often coincides with the calendar year, but it need not.
Topic: Fiscal year
LO: 1
2. All companies have a
fiscal year ending on December 31.
Answer: False
Rationale: Only about
60% of companies have fiscal year ends that correspond to their calendar year
end.
Topic: Chart of accounts
LO: 2
3. The chart of accounts is a tabular record in which business
activities are analysed in terms of debits and credits and recorded in
chronological order.
Answer: False
Rationale: The chart of
accounts lists the titles and numbers of all accounts found in the general
ledger.
Topic: Chart of accounts
LO: 2
4. The chart of accounts
is also known as the book of original entry.
Answer: False
Rationale: The general
journal is also known as the book of original entry.
Topic:
Posting
LO: 2
5. The process of transferring debit and credit entries from the
journal to their related general ledger accounts is called “posting.”
Answer: True
Rationale: Posting
results when debits and credits are entered into the general ledger from the
journal.
Topic: Accrued expense
LO: 3
6. An accrued expense
is one that has been incurred but not yet paid.
Answer: True
Rationale: An expense
is accrued when it becomes owed if it has not yet been paid.
Topic: Adjusted trial balance
LO: 3, 5
7. An adjusted trial balance is a listing of all the year-end balance
sheet accounts, since all the income statement accounts have been closed to
zero.
Answer: False
Rationale: The adjusted
trial balance lists all general ledger accounts after adjustments have been
posted. It contains much of the data
needed to construct the financial statements, including the income statement.
Topic: Deferred revenue
LO: 3
8. Deferred revenue and unearned revenue both
refer to cash that has been received but not yet earned.
Answer: True
Rationale: Both
unearned revenue and deferred revenue refer to fees received before services
are performed to earn those fees.
Topic: Prepaid asset
LO: 3
9. Prepaid rent is an example of a contra
account, and is used to record a reduction to its related account, rent expense.
Answer: False
Rationale: Prepaid rent
is an asset account reflecting the benefit owed the company from paying cash in
advance for rent. Rent expense is used
to accumulate costs associated with using property rented from others.
Topic: Unadjusted trial balance
LO: 3
10. The purpose of an unadjusted trial balance is to be sure the
general ledger is in balance.
Answer: True
Rationale: The primary
purpose of the unadjusted trial balance is to ensure the general ledger is in
balance before management posts adjusting entries.
Topic: Adjusting entries
LO: 3
11. Adjusting entries
always impact the income statement and the cash account.
Answer: False
Rationale: Adjusting
entries affect a balance sheet account and an income statement account, but
never the cash account.
Topic: Preparing financial statements
LO: 6
12. The income statement, statement of changes in equity, and statement
of cash flows report on time periods that depict flows.
Answer: True
Rationale: Specific
periods of time are reported on all financial statements, except the balance
sheet. They depict changes or flows in levels over a period of time.
Topic: Temporary accounts
LO: 5
13. All accounts in the general ledger are closed at a company’s fiscal
year end in order to facilitate preparation of the financial statements and to
ready the accounts for the activities of the next year.
Answer: False
Rationale: Only
temporary accounts (revenue, expense and dividends) are closed at the end of
the period. Balance sheet accounts, also known as permanent accounts, are not
closed as the balances are carried over to the next accounting period.
Topic: Asset book value
LO: 4
14. The book value of a
building is equivalent to its historical cost.
Answer: False
Rationale: A building’s
book value is its historical cost minus the accumulated depreciation associated
with the building.
Topic: Adjusting unearned revenues
LO: 3
15. Adjusting unearned
revenues causes a liability to decline.
Answer: True
Rationale: The
adjustment of unearned revenues reduces Unearned Revenue, a liability, and
increases Service Revenue or Sales.
Multiple
Choice
Topic: Accounting cycle
LO: 1
1. Which of the
following is the correct order of the steps in the accounting cycle?
A) Adjust, report, analyse, record, and close
B) Record, report, analyse, adjust, and close
C) Report, analyse, close, record, and adjust
D) Analyse, record, adjust, report, and close
Answer: D
Rationale: The steps in
the cycle are to first analyse the transaction, the record it, then make any
necessary adjustments, report the results, and finally to close the temporary
accounts to ready them for the next period’s activity.
Topic:
Fiscal year
LO: 1
2. A company’s fiscal
year may:
A) Be any portion of a year including a month or
quarter
B) Be for a period either greater or less than
12 months
C) Be the same as the calendar year
D) All of the above are true of a company’s
fiscal year
Answer: C
Rationale: A company’s
fiscal year must be a complete year, may not be for a period greater or less
than 12 months, and may be the same as the calendar year.
Topic: Recording transactions
LO: 2
3. Which of the following journal entries will record
the payment of a $675 accounts payable originally incurred for Office Supplies?
A) Debit Office Supplies; credit Cash
B) Debit Office Supplies; credit Accounts Payable
C) Debit Cash; credit Accounts Payable
D) Debit Accounts Payable; credit Cash
Answer: D
Rationale:
The original entry was:
Office supplies 675
Accounts payable 675
The entry to record the
payment of cash reduces the liability and reduces cash.
Accounts payable
675
Cash
675
Topic: Recording Transactions
LO: 2
4. A company bills customers for services rendered on account. Which of the following is one part of
recording this transaction?
A) Debit Service Revenue
B) Credit Cash
C) Debit Accounts Receivable
D) Credit Unearned Revenue
Answer: C
Rationale: The journal
entry includes a debit to Accounts Receivable and a credit to Service Revenue.
Topic: Adjusting entries
LO: 3
5. Which one of the
following is not a reason for which adjusting entries are made?
A) To close the income statement accounts and
ready them for the following year’s activity
B) To allocate used or expired assets to reflect
expenses incurred in the period
C) To allocate the earned portion of unearned
revenue to reflect revenues earned during the period
D) To accrue expenses to reflect expenses
incurred in the period that are not yet paid or recorded
Answer: A
Rationale: Adjusting
entries are made for all the reasons above except to close out the accounts. Answer A
describes closing entries.
Use the following information to answer questions 6, 7,
and 8:
On the last day of
December 2022, Tom’s Trucks entered into a transaction that resulted in a
receipt of $108,000 cash in advance related to services that will be provided
during January 2023. During December of 2022,
the company also performed $64,000 of services which were neither billed nor
paid. Prior to December adjustments and
before these two transactions were recorded, the company’s trial balance showed
service revenue of $582,735 at December 31, 2022. There are no other prepaid services yet to be
delivered, and during the month all outstanding accounts receivable from prior
months were collected.
Topic: Adjusting entries
LO: 3, 4
6 If Tom’s Trucks makes the appropriate adjusting entry, how much
will service revenue will be reflected on the December 31, 2022 income
statement?
A) $582,735
B) $857,500
C) $811,500
D) $646,735
Answer: D
Rationale: Service
revenue = $582,735 + $64,000 = $646,735
Topic: Adjusting entries
LO: 3, 4
7. If Tom’s Trucks makes the appropriate adjusting
entry, how much will be reported on the December 31, 2022 balance sheet as
unearned revenue?
A) $45,000
B) $108,000
C) $32,000
D) $49,000
Answer: B
Rationale: Unearned
revenue represents the amount collected in advance that the company has not yet
earned.
Topic: Adjusting entries
LO: 3, 4
8. If Tom’s Trucks makes the appropriate adjusting
entry, how much will be reported on the December 31, 2022 balance sheet as
accounts receivable?
A) $54,000
B) $128,000
C) $32,000
D) $64,000
Answer: D
Rationale: Outstanding receivables
are the amount earned but not yet received from customers.
Use the following information to answer questions 9 and 10:
On April 1, 2022, CMP
NV paid €60,000 for rent on warehouse space one year in advance. On October 1, 2022, CMP NV entered into a
lease agreement to rent out its old warehouse space it was no longer using. This agreement calls for CMP to receive €4,000
per month from the lessee, due and payable at the end of the 4-month lease
term. At December 31, 2022, none of the rental payments from the lessee had yet
been received.
Topic: Adjusting entries
LO: 4
9. If CMP makes the appropriate adjusting entry, how much will be
reported on the December 31, 2022 income statement for rent expense?
A) €42,500
B) €24,500
C) €7,500
D) €45,000
Answer: D
Rationale: Rent expense
= €60,000 × 9/12 = €45,000
Topic: Adjusting entries
LO: 3, 4
10. If CMP makes the appropriate adjusting entry,
how much will be reported on the December 31, 2022 balance sheet as prepaid
rent and rent receivable, respectively?
A) €15,000 and €12,000
B) €7,500 and €8,000
C) €15,000 and €7,500
D) €15,000 and €6,000
Answer: A
Rationale: Prepaid rent
remaining = €60,000 × 3/12 = €15,000
Rent receivable = €4,000
× 3 = €12,000
Topic: Deferral
LO: 3
11. Which of the
following is a distinguishing characteristic of a deferral?
A) It affects at least one liability account.
B) It always impacts the cash account.
C) It includes the adjustment of an amount
previously recorded in a balance sheet account.
D) It increases a balance sheet account and
decreases an income statement account.
Answer: C
Rationale: A deferral
adjusts an amount previously recorded in a balance sheet account.
Topic: Accruals
LO: 3
12. A company provides
services to clients during the period that are neither paid for, nor billed to
the clients. What must the company do?
A) Bill the client prior to year end in order to
recognise the revenue.
B) Record the revenues as a liability at the end
of the year.
C) Accrue revenue by making an adjusting entry
at the end of the period.
D) All of the above are true.
Answer: C
Rationale: Services
earned but not yet billed or collected require an accrual to recognise the
revenue and the account receivable at the end of the period. The bill does not have to be sent prior to
year end and there is no liability at year end since money is owed to the
company.
Topic: Statement of changes in equity
LO: 4
13. Which statement is true of the statement of changes in equity?
A) It reports a company’s assets, liabilities,
and equities.
B) It reports a company’s revenue and expenses
for a period.
C) It is prepared using the unadjusted trial balance
in order to facilitate the closing process.
D) It shows a company’s share issuances and
dividends paid to shareholders.
Answer: D
Rationale: The balance
sheet is described in “A,” the income
statement in “B,” and “C” applies primarily to the income
statement. Answer “D” is the best choice as it shows changes in all equity
accounts.
Topic: Closing entries
LO: 5
14. Maker Corporation has the following normal account balances in its
general ledger at the end of a period:
|
Sales
revenue |
$ 530,000 |
|
Advertising
expense |
90,000 |
Which of the following
gives the correct entry required to close only the accounts above?
A) Advertising
Expense 90,000
Retained Earnings
440,000
Sales Revenue
530,000
B) Retained
Earnings 440,000
Net Income
440,000
C) Sales Revenue
530,000
Advertising Expense 90,000
Retained Earnings
440,000
D) None of the above. These accounts are not closed.
Answer: C
Rationale: The closing
process requires that revenue accounts are debited and retained earnings are
credited for the amount equal to the revenue balance. The closing process also requires that expense
accounts are credited and retained earnings debited for an amount equal to the
expense balance. The net amount of
retained earnings credited in this problem is equal to $440,000 (or $530,000 – $90,000),
since revenues are greater than expenses.
Use the following information to answer questions 15, 16,
and 17:
Denise’s Donuts has 12
employees who are paid $15 per hour. The
company purchases its inventory, on account, daily. At December 31, 2022, each of Denise’s Donuts’
employees had worked 20 hours which had not been paid or recorded. Also on this date, the company had taken
receipt of $62,400 of inventory from its suppliers which had not been recorded
in the accounts. As of the beginning of 2022,
the company had equipment totaling $1,200,000 which was depreciated at $120,000
per year. Prior to adjustments, the
company’s trial balance showed $171,400 in the wages expense account and $83,600
of inventory.
Topic: Adjusting entries
LO: 3, 4
15. If Denise’s Donuts makes the appropriate adjusting entry, how much
will be reported on the December 31, 2022 income statement as wage expense?
A) $ 85,700
B) $175,000
C) $ 2,592
D) $173,992
Answer: B
Rationale: Wage expense
= 20 hours x 12 employees x $15 + $171,400
= $3,600+ $171,400 = $175,000
Topic: Adjusting entries
LO: 3, 4
16. If Denise’s Donuts makes the appropriate adjusting entry, how much
will be reported on the December 31, 2022, balance sheet as accounts payable?
A) $-0-
B) $59,808
C) $32,496
D) $62,400
Answer: D
Rationale: Accounts
payable = $62,400
Topic: Adjusting entries
LO: 3, 4
17. If Denise’s Donuts makes the appropriate adjusting entry, which of
the following is one part of the journal entry that will be made when the
payment of wages is made in January?
A) Debit Wages Payable for $3,600
B) Debit Wages Expense for $1,296
C) Credit Wages Payable for $3,600
D) Credit Cash for $32,496
Answer: A
Rationale: The entry
will debit Wages Payable for $3,600 and credit cash for the same amount.
Topic: Post-closing trial balance
LO: 5
18. Which one of the
following will never appear on a
post-closing trial balance?
A) Unearned revenue
B) Retained earnings
C) Rent expense
D) Share Capital
Answer: C
Rationale: All
temporary accounts (revenues and expenses) have zero balance after closing, so
only balance sheet accounts appear on the post-closing trial balance.
Topic: Financial statement flows
LO: 6
19. What is a ‘flow’ as
it relates to financial statements?
A) An amount that varies over time
B) A change in a level over a period of time
C) An amount depicted on the balance sheet
D) A balance at the end of the period that
appears on the income statement
Answer: B
Rationale: The income
statement portrays changes in balance sheet levels over time.
Topic: Adjusting for depreciation
LO: 3
20. When adjusting for depreciation, which of the
following is one effect of the adjustment?
A) Accumulated
depreciation is debited.
B) The
asset’s book value declines.
C) The
cost of the equipment declines.
D) The
market value of the equipment declines.
Answer: B
Rationale: The
adjusting entry creates a credit to accumulated depreciation and a debit to
depreciation expense. The credit causes
the book value to decline because it increases the contra account that is shown
as a deduction from the cost of the equipment on the balance sheet.
Exercises
Topic: Adjusting unearned revenue
LO: 3
1.
Aviation
Ltd. received an advance payment of £72,000 for a consulting contract during
the year. The balance in the Unearned
Consulting Fees account at the beginning of the year was £6,000. At the end of the year, £4,000 was still
unearned. Create T-accounts for the accounts involved in the adjusting entry
needed at year end, and post all amounts to them, including the adjusting entry
necessary, and calculate the account balances. How much will Aviation report as Consulting
Revenue on its income statement for the year?
Answer:
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Unearned Consulting
Revenue |
Consulting Revenue |
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6,000
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74,000 |
72,000 |
74,000 |
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4,000 |
74,000
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Aviation
Ltd. will
report £74,000 consulting revenue for the year.
Topic: Journal and adjusting entries
LO: 2, 3
2. Below
are several accounts from KooKoo Company’s accounting records. Columns
representing the accounting equation appear to the right of each transaction
listed below. Next to each transaction
in the column of the respective account classification, write the 1) name of
each account, 2) the dollar amount by which each account increases
or decreases, and 3) either debit or credit to indicate the effect on
the account, for each of the adjustments necessary at the end of May. The company records adjustments monthly.
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Assets |
Liabilities |
Equity |
Revenues |
Expenses |
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a. Provided lawn services to
customers in the amount of $8,000. Customers will pay next month |
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b. Recognised truck depreciation of
$1,000 for the current month |
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c. Delivered magazines totaling $4,000
to customers that had paid for subscriptions in advance. |
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d. Recognised May’s insurance cost.
On April 1, the company had paid $9,600 for 4 months coverage from April 1 to
July 31. |
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TABLE CONTINUED NEXT PAGE
TABLE CONTINUED…
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Assets |
Liabilities |
Equity |
Revenues |
Expenses |
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e. Recognised interest owed on a
note payable for $112. |
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f. Recognised supplies used during
the month. At the beginning of the month, the total of supplies on hand was$1,800,
while only $1,300 of supplies were left at the end of the month. During the
month, $8,000 of additional supplies were purchased. |
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g. Accrued wages earned by employees
for the last 3 days of the month. Employees work 5 days per week and the
weekly wages total $15,000. |
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h. Provided lawn services totaling $8,400
for customers that had paid in advance |
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Answer:
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Assets |
Liabilities |
Equity |
Revenues |
Expenses |
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a.
Provided lawn services to
customers in the amount of $8,000. Customers will pay next month |
Accounts Receivable Debit $8,000 |
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Service Revenue Credit $8,000 |
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b. Recognised truck depreciation of $1,000 for the current month |
Accumulated
Depreciation Credit $1,000 |
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Depreciation Expense Debit $1,000 |
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c. Delivered magazines totaling $4,000 to customers that had paid
for subscriptions in advance. |
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Unearned Subscription
Revenue Debit $4,000 |
|
Subscription Revenue Credit $4,000 |
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d. Recognised May’s insurance cost. On April 1, the company had
paid $9,600 for 4 months coverage from April 1 to July 31. |
Prepaid Insurance Credit $2,400 |
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|
Insurance Expense
Debit $2,400 |
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e. Recognised interest owed on a note payable for $112. |
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Interest Payable Credit $112 |
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Interest Expense Debit $112 |
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f. Recognised supplies used during the month. At the beginning of
the month, the total of supplies on hand was $1,800, while only $1,300 of
supplies were left at the end of the month. During the month, $8,000 of
additional supplies were purchased. |
Supplies Credit $8,500
$1,800 + $8,000 - $1,300
= $8,500 |
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Supplies Expense Debit $8,500 |
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g. Accrued wages earned by employees for the last 3 days of the
month. Employees work 5 days per week and the weekly wages total $15,000. |
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Wages Payable Credit $9,000
$15,000 × 3/5 = $9,000 |
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Wages Expense Debit $9,000 |
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h. Provided lawn services totaling $8,400 for customers that had
paid in advance |
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Unearned Revenue Debit $8,400 |
|
Lawn Service Revenue Credit $8,400 |
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Topic: Asset
prepayments
LO: 3
3. Kelly
Corporation took out a 3-year insurance policy and paid a $108,000 premium for
coverage beginning on July 1, 2022. Fill the missing parts of the statements
below:
|
Balance Sheet |
|
Insurance Expense |
||||||||||
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Accrual Basis |
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Cash Basis |
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Accrual Basis |
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Cash Basis |
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Dec. 31, 2022...... |
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2022................................. |
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Dec. 31, 2023...... |
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2023................................. |
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Dec. 31, 2024...... |
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2024................................. |
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Dec. 31, 2025...... |
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2025................................. |
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Total................................ |
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Answer:
Monthly cost = $108,000
/ 36 = $3,000
|
Balance Sheet |
|
Insurance Expense |
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Accrual Basis |
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Cash Basis |
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Accrual Basis |
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Cash Basis |
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Dec. 31, 2022...... |
$90,000 |
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$ 0 |
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2022................................. |
$18,000 |
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$108,000 |
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Dec. 31, 2023...... |
54,000 |
|
0 |
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2023................................. |
36,000 |
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0 |
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Dec. 31, 2024...... |
18,000 |
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0 |
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2024................................. |
36,000 |
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0 |
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Dec. 31, 2025...... |
0 |
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0 |
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2025................................. |
18,000 |
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0 |
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Total................................ |
$108,000
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$108,000 |
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Topic: Preparing
a statement of changes in equity after closing
LO: 4
4.
The Cathi’s Cleaning
provides janitorial services for commercial customers. On December 31, 2021, the credit balance of
the Share Capital and Retained Earnings accounts were $24,000 and $11,000,
respectively. During 2022, the company
issued $8,400 of common shares, and paid $7,600 in dividends. The income
statement resulted in a profit of $42,400.
Prepare a 2022 statement of changes in
equity for The Cathi’s Cleaning.
Answer:
|
Cathi’s
Cleaning Statement of Changes in
Equity For Year Ended December 31, 2022 |
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Share Capital |
Retained Earnings |
Total Shareholders’
Equity |
|
Balance at December
31, 2021........... |
$24,000 |
$11,000 |
$35,000 |
|
Share issuance................................ |
8,400 |
|
8,400 |
|
Dividends........................................ |
|
(7,600) |
(7,600) |
|
Net income...................................... |
___ __ |
42,400 |
42,400 |
|
Balance at December
31, 2022........... |
$32,400 |
$45,800 |
$78,200 |
Topic: Journalising
transactions and adjusting accounts
LO: 2, 3
5.
Water Clean SA offers pool and spa
cleaning services to hotels and residential customers. Commercial (hotels) customers pay on a monthly
contract basis, while residential customers pay an hourly rate based on
services provided.
In
July, Water Clean signed a 6-month contract with Hotel Buda to provide pool and
spa cleaning services for 3 hotel sites. The contract price of €84,000 was collected on
July 1. The services will be provided
evenly over the 6 months.
During
July, Water Clean also provided 80 hours of residential pool services at €32
per hour. These services have not yet
been billed to residential customers. The
company uses the account, Fees Receivable, to reflect amounts due but not yet
billed.
|
a. |
Prepare the entry on
July 1 to record the receipt of €84,000 cash related to the contract with Hotel
Buda (1) using the financial statements effect template and (2) in journal
entry form. |
|
b. |
Prepare the adjusting
entry to be made on July 31 for the contract work performed for Hotel Buda
during the month (1) using the financial statements effect template and (2)
in journal entry form. |
|
c. |
Prepare the adjusting
entry needed on July 31 to reflect the residential pool services performed
during the month (1) using the financial statements effect template and (2)
in journal entry form. |
Answer:
|
a. |
Balance Sheet |
Income Statement |
||||||||||||
|
Transaction |
Cash Asset |
+ |
Noncash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|
Received € 84,000 in advance for
contract work |
+ 84,000 Cash |
|
|
= |
+ 84,000 Unearned
Service Fees |
|
|
|
|
|
- |
|
= |
|
July
1 Cash
84,000
Unearned Service Fees
84,000
To record cash received in
advance
|
b. |
Balance Sheet |
Income Statement |
||||||||||||
|
Transaction |
Cash Asset |
+ |
Non- cash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|
Adjusting entry for services provided in July |
|
|
|
= |
- 14,000 Unearned Service Fees |
|
|
|
+ 14,000 Retained Earnings |
+ 14,000 Service Fees Revenue |
- |
|
= |
+ 14,000
|
July
31 Unearned Service Fees
14,000
Service Fees Revenue
14,000
To reflect July service fees earned
on contract (€84,000/6 = €14,000)
|
c. |
Balance Sheet |
Income Statement |
||||||||||||
|
Transaction |
Cash Asset |
+ |
Non- cash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|
Adjusting entry for fees earned but not billed |
|
|
+ 2,560 Fees Receivable |
= |
|
|
|
|
+2,560 Retained Earnings |
+2,560 Service Fees Revenue |
- |
|
= |
+ 2,560
|
July
31 Fees Receivable
2,560
Service Fees Revenue
2,560
To record unbilled service fees
earned at July 31: 80 hours x € 32/hr.
Use the following adjusted trial balance for ABC Corporation
to answer Exercises 6, 7, 8, and 9.
|
ABC Corporation Adjusted Trial Balance For the Year Ending December 31, 2022 |
||
|
|
Debit |
Credit |
|
Cash |
$ 22,000 |
|
|
Accounts receivable |
28,000 |
|
|
Equipment |
188,000 |
|
|
Accumulated depreciation |
|
$ 36,000 |
|
Notes payable |
|
30,000 |
|
Share Capital |
|
65,000 |
|
Retained earnings |
|
71,000 |
|
Service fees earned |
|
174,000 |
|
Rent expense |
44,000 |
|
|
Salaries expense |
58,000 |
|
|
Depreciation expense |
36,000 |
0 |
|
Totals |
$ 376,000 |
$ 376,000 |
Topic:
Preparing an income statement
LO:
4, 5
6. Use ABC’s adjusted trial balance to prepare the
company’s income statement.
Answer:
ABC Corporation
Income Statement
For Year Ended December 31, 2022
|
Sales |
$
174,000 |
|
Rent expense |
44,000 |
|
Salaries expense |
58,000 |
|
Depreciation expense |
36,000 |
|
Net income |
$ 36,000
|
Topic:
Preparing the statement of shareholders’ equity
LO:
4, 5
7. Use ABC’s adjusted trial balance to prepare ABC’s
statement of changes in equity for 2022. There were no share issuances or repurchases
during 2022.
Answer:
|
ABC
Corporation Statement of
Changes in Equity For Year Ended
December 31, 2022 |
|||
|
|
Share Capital |
Retained Earnings |
Total Shareholders Equity |
|
Balance
at December 31, 2021 |
$65,000 |
$
71,000 |
$136,000 |
|
Share
issuance |
|
|
|
|
Dividends |
|
|
|
|
Net
income |
_ _ ___ |
36,000 |
36,000 |
|
Balance
at December 31, 2022 |
$65,000 |
$107,000 |
$172,000 |
Topic: Preparing a balance sheet
LO:
4, 5
8. Use ABC’s adjusted
trial balance above to prepare ABC’s balance sheet for the current year-end.
Answer:
ABC Corporation
Balance Sheet
December 31, 2022
|
Cash |
$22,000 |
Notes
payable |
$ 30,000 |
|
Accounts receivable |
28,000 |
Total
liabilities |
30,000 |
|
Equipment |
188,000 |
|
|
|
Accumulated
depreciation |
(36,000) |
Share
Capital |
65,000 |
|
|
|
Retained
earnings |
107,000 |
|
Total assets |
$ 202,000 |
Total
liabilities and equity |
$ 202,000 |
Topic:
Preparing financial statements and closing procedures
LO:
4, 5
9.
Use ABC’s adjusted trial balance to
prepare entries to close ABC’s temporary accounts in journal entry form.
Answer:
|
1. |
Service fees earned ................................................... |
174,000 |
|
|
|
Retained earnings ................................................. |
|
174,000 |
|
|
|
|
|
|
2. |
Retained earning......................................................... |
138,000 |
|
|
|
Rent expense......................................................... |
|
44,000 |
|
|
Salaries expense.................................................... |
|
58,000 |
|
|
Depreciation expense............................................. |
|
36,000 |
Topic:
Analysing transactions with T-accounts
LO:
2, 4
10. Use the T-account below, to answer the
following questions.
|
|
Accounts
Receivable (A) |
|
|
1/1 |
160,000 |
|
|
|
4/1 |
1,800,200 |
1,406,000 |
9/1 |
|
12/31 |
? |
|
|
A. What journal entry is most likely represented
by $1,800,200 in the T-account? What
business event caused this?
B. What journal entry is most likely represented
by the $1,406,000 in the T-account? What
business event caused this?
C. What
is the balance of Accounts Receivable on December 31?
Answer:
A. 4/1 Accounts
receivable
1,800,200
Sales revenue
1,800,200
The company sold merchandise (or services) on account.
B. 9/1 Cash 1,406,000
Accounts receivable 1,406,000
The company collected cash from customers.
C. $160,000 + $ 1,800,200 – $1,406,000 = $
554,200
Topic:
Inferring transactions
LO:
2, 4
11. Kelly’s Kitchen sells pre-packaged meals to
consumers. During 2022, the company
purchased inventory on account at a cost of $8,460,000. The following T-accounts reflect the information
contained in the company’s 2022 and 2021 balance sheets.
|
Merchandise
Inventories |
|
Accounts Payable |
||
|
2021 Bal. 560,200 |
|
|
|
220,800
2021
Bal. |
|
… |
|
|
|
… |
|
2022
Bal. 444,500 |
|
|
|
205,100
2022
Bal. |
A. Prepare the journal entry, using the
financial statement effects template and in journal entry form, to record Kelly’s
Kitchen’s purchases during 2022.
B. How much will Kelly’s Kitchen report at
December 31, 2022 on its balance sheet for inventory? For Accounts Payable?
C. How much will Kelly’s Kitchen report for the
year ending December 31, 2022 on its income statement as Cost of Goods Sold?
Answer:
A.
|
|
Balance Sheet |
Income Statement |
||||||||||||
|
Transaction |
Cash Asset |
+ |
Noncash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|
Purchase
of inventory on account |
|
|
+ 8,460,000 Merch.
inventory |
= |
+ 8,460,000 Accounts
Payable |
|
|
|
|
|
- |
|
= |
|
|
Merchandise
inventory (+A).............................................................. |
8,460,000 |
|
|
Accounts
payable (+L).......................................................... |
|
8,460,000 |
|
To
recognise the purchase of merchandise inventory on account. |
|
|
B. Amount reported as Inventory = $444,500
Amount reported as Accounts Payable = $205,100
C. Amount reported as Cost of Goods Sold =
$560,200 + $8,460,000 ‒ $444,500 = $8,575,700
Topic:
Inferring transactions from financial statements
LO:
2, 4
12. Kelly’s Kitchen sells pre-packaged meals to
consumers. During 2022, the company
purchased inventory on account at a cost of $8,460,000. The following T-accounts reflect information
contained in the company’s 2021 and 2022 balance sheets.
|
Merchandise
Inventories (A) |
|
Accounts Payable (L) |
||
|
2021 Bal. 560,200 |
|
|
|
220,800 2021 Bal. |
|
… |
|
|
|
… |
|
2022 Bal. 444,500 |
|
|
|
205,100 2022 Bal. |
A.
What amount did Kelly’s
Kitchen pay in cash to its suppliers during 2022?
B.
What amount will Kelly’s
Kitchen report as Accounts Payable on its balance sheet at December 31, 2022?
Answer:
A. $220,800 + $8,460,000 ‒ $205,100 = $8,475,700
B. $205,100
Topic:
Preparing entries across two periods
LO:
2, 4
13. RRR SpA closes its accounts on December 31
each year. On December 31, 2022, RRR SpA
accrued interest income total €320 that was earned on a €20,000 investment but
not yet received or recorded (the investment will pay interest of €550 cash on
January 31, 2023). On January 31, 2023,
the company received the €550 cash as interest on the investment.
Prepare
journal entries to:
A. Accrue the
interest earned on December 31, 2022.
B. Close
the Interest Income account on December 31, 2022 (the account has a year-end
balance of €1,300 after adjustments).
C. Record the cash receipt of interest on January
31, 2023.
Answer:
A. Dec. 31 Interest
receivable 320
Interest income 320
To record accrued interest income
B. Dec.
31 Interest income 1,300
Retained earnings 1,300
To
close the Interest Income account
C. Jan.
31 Cash 550
Interest income 230
Interest
receivable 320
To record cash receipt of interest
Topic:
Recording transactions and adjusting accounts
LO:
2, 3, 4
14. On January 18, 2022, Raintree paid $24,480 for
a two-year insurance premium that covers February 1, 2022 through January 31,
2025. Raintree’s year end is March 31, 2022.
A. What entry is made on January 18, 2022?
B.
What adjusting entry should be made on
January 31, 2022 before the financial statements are prepared for the year
ending March 31, 2022?
Answer:
A.
Prepaid insurance 24,480
Cash
24,480
B.
Insurance expense 2,040
Prepaid insurance 2,040
($24,480
/ 24 months = $ 1,020 per month
$1,020
× 2 months = $2,040 for February and March)
Topic:
Recording transactions and adjusting accounts
LO:
2, 3, 4
15.
On January 1, 2022, the first month of
the fiscal year, the Gift Certificates account had a credit balance of $4,500. During
January, customers purchased an added $42,600 worth of gift certificates. As of January 31, 2022, $6,800 of certificates
were unredeemed.
A. How will the adjustment affect the income
statement for the month ending January 31, 2022?
B. How will the adjustment affect the balance
sheet prepared at January 31, 2022?
Answer:
A. Gift certificates earned for the period = $4,500 + $42,600‒
$6,800= $40,300
This
adjustment increases revenue and net income by $40,300.
B. The adjustment will reduce the gift certificate
account (Unearned Revenue) to its January 31 balance of $6,800.
Topic:
Recording transactions and adjusting accounts
LO: 2, 3,
4
16. The publisher of Business Monthly, a monthly business magazine, received $32,400 for
three-year subscriptions on January 1, 2022.
A. What
entry would be made to record the cash receipt on January 1, 2022?
B. What entry should be made before the financial
statements are prepared for the month ending January 31, 2022?
Answer:
A.
Jan.1 Cash 32,400
Unearned
subscription revenue 32,400
B.
Jan.31 Unearned
subscription revenue 900
Subscription
revenue 900
($32,400/
36 months = $900 per month)
Topic:
Recording transactions and adjusting accounts
LO: 1, 2,
3, 4
17. Ava Aviation pays employees each Friday for
the five day work-week ending on that day. Ignoring taxes and other
withholdings, the company’s normal gross weekly payroll is £14,400. If the last Friday of the month falls on
January 25, what adjusting entry should be made on January 31, the fiscal year end?
Answer:
Jan. 31 Wages expense 11,520
Wages payable
11,520
Friday is January 25 and the next workday
is Monday, January 28. The company will
accrue Monday, January 28, through Thursday, January 31, or 4 days. £14,400 ×
4/5 = £11,520
Topic:
Recording transactions and adjusting accounts
LO: 2, 3,
4
18. Ava
Aviation earns 3% annual interest on its £42,000 of investments. Interest is paid every six months on June 30
and December 31.
A. If
monthly financial statements are prepared, what adjusting entry should be made
on January 31?
B. What effect on the January 31 balance sheet
does the adjusting entry have?
Answer:
A.
Interest receivable
105
Interest revenue 105
£42,000 × 3% × 1/12 = £
105
B. Interest
receivable, an asset, is increased by £105.
Topic: Adjusting unearned revenue
LO: 3
19. Ghent Ltd. received an
advance payment of $72,000 for a consulting contract on August 3. The balance
in the Unearned Consulting Revenue account at the beginning of August was
$6,000. At the end of August, $4,000 was
still unearned.
A.
How much would Ghent report as Consulting Revenue on its income statement for
the month of August?
B.
Use the following FSET to show the effects the recognition of consulting
revenue had on Ghent’s August financial statements:
|
|
Balance
Sheet |
Income
Statement |
||||||||||||
|
|
Cash Asset |
+ |
Noncash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|
|
|
|
|
= |
|
|
|
|
|
|
|
|
= |
|
Answer:
A. Unearned revenue
(EB) = Unearned revenue (BB) + New Unearned revenue – Revenue earned
4,000
= 6,000 + 72,000 – Revenue earned
Revenue
earned = 6,000 + 72,000 -4,000 = $74,000
B.
|
|
Balance
Sheet |
Income Statement |
||||||||||||
|
|
Cash Asset |
+ |
Noncash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|
|
|
|
|
= |
-74,000 Unearned Consulting Revenue |
|
|
|
+74,000 Retained Earnings |
+74,000 Consulting Revenue |
|
|
= |
+74,000 |
Problems
Topic: Inferring
transactions from financial statements
LO: 2, 4
1. Cells and More operates a kiosk in a local mall selling cell
phones and other equipment. During the
year, the company purchased $62,000 of inventory, all on account. The following T-accounts reflect information
contained in the company’s 2022 and 2021 balance sheets.
|
Merchandise
Inventories (A) |
|
Accounts Payable (L) |
||
|
2021
Bal. 24,000 |
|
|
|
10,000 2021 Bal. |
|
… |
|
|
|
… |
|
2022 Bal. 16,300 |
|
|
|
23,200 2022
Bal. |
A. Prepare the journal entry, using the
financial statement effects template and in journal entry form, to record Cells
and More’s purchases during 2022.
B. How much will Cells and More report at
December 31, 2022 on its balance sheet for Inventory? For Accounts Payable?
C. If Cells and More pays $13,000 of the amounts
due for inventory on January 4, 2023, how much will the liability be on that
date immediately after payment?
D. How much will Cells and More report for the
year ending December 31, 2022 on its income statement as Cost of Goods Sold?
Answer:
A.
|
|
Balance Sheet |
Income Statement |
||||||||||||
|
Transaction |
Cash Asset |
+ |
Noncash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|
Purchase
of inventory on account |
|
|
+ 62,000 Merchandise
inventory |
= |
+ 62,000 Accounts
Payable |
|
|
|
|
|
‒ |
|
= |
|
|
Merchandise inventory............................................................... |
62,000 |
|
|
........ Accounts payable............................................................. |
|
62,000 |
|
To recognise the purchase of merchandise inventory on
account |
|
|
B. Amount reported as Inventory = $16,300
Amount reported as Accounts Payable = $23,200
C. Accounts payable due = $23,200 – $13,000
=$10,200
D. Amount reported as Cost of Goods Sold = $24,000
+ $62,000 ‒ $16,300 = $69,700
Topic: Adjusting
entries
LO: 3
2.
Bigger Bagels had the
following separate situations occur during 2022. The company’s accountant is preparing the
annual financial statements at December 31, 2022 and has asked you to prepare
the adjusting entries for each situation using the financial statement effects
template.
|
a. |
On June 1, 2022, Bigger
Bagels paid the annual lease amount on its warehouse space. The annual lease is $13,200 and was recorded
by debiting Prepaid Rent and crediting Cash. No adjusting entries have been prepared
since June 1, 2022. |
|
b. |
The Unearned Revenue
account has an unadjusted balance of $4,000 consisting of gift cards sold to
customers. Redeemed gift cards that
have not yet been recorded total $2,400. |
|
c. |
The company has not
yet received a bill or paid for utilities for the month of December. The expense is estimated to be $1,680 |
|
d. |
On December 1, 2022, Bigger
Bagels received $3,000 cash from a customer related to a special order. The special order was delivered to the
customer on December 29 but no entry has been made to record the
delivery. |
|
e. |
At December 31, 2022,
employee wages of $4,600 have been incurred but not paid or recorded. |
|
f. |
At December 31, 2022,
$880 of interest has been incurred, but not yet paid or recorded. |
|
g. |
Unrecorded depreciation on equipment is $5,600. |
Answer:
a. Rent expense = $13,200 × 7/12 = $ 7,700
|
|
Balance Sheet |
Income Statement |
|||||||||||||||
|
Transaction |
Cash Asset |
+ |
Noncash Assets |
= |
Liabilities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
|||
|
a. Adjusting entry for rent expense |
|
|
- 7,700 Prepaid Rent |
= |
|
|
|
|
-7,700 Retained
Earnings |
|
- |
+ 7,700 Rent Expense |
= |
- 7,700 |
|||
|
b. Adjusting entry for gift cards redeemed |
|
|
|
= |
-2,400 Unearned
Revenue |
|
|
|
+ 2,400 Retained Earnings |
+2,400 Sales |
- |
|
= |
+ 2,400 |
|||
|
c. Adjusting entry for utilities expense |
|
|
|
= |
+ 1,680 Utilities
Payable |
|
|
|
- 1,680 Retained Earnings |
|
- |
+ 1,680 Utilities Expense |
= |
- 1,680 |
|||
|
d. Adjusting entry for unearned revenues |
|
|
|
= |
- 3,000 Unearned Revenue |
|
|
|
+3,000 Retained
Earnings |
+3,000 Sales |
- |
|
= |
+ 3,000 |
|||
|
e. Adjusting entry for wage expense |
|
|
|
= |
+4,600 Wages Payable |
|
|
|
- 4,600 Retained Earnings |
|
- |
+ 4,600 Wage Expense |
= |
- 4,600 |
|||
|
f. Adjusting entry for interest incurred |
|
|
|
= |
+880 Interest Payable |
|
|
|
-880 Retained Earnings |
|
- |
+ 880 Interest Expense |
= |
- 880 |
|||
|
g. Adjusting entry for depreciation |
|
|
-5,600 Accum. Deprec. |
= |
|
|
|
|
-5,600 Retained Earnings |
|
- |
+ 5,600 Depreciation Expense |
= |
- 5,600 |
|||
Topic: Adjusting
entries
LO: 3
3.
Bigger Bagels had the
following separate situations occur during 2022. The company’s accountant is preparing the
annual financial statements at December 31, 2022 and has asked you to prepare
the adjusting entries for each situation using the journal entry form.
|
a. |
On June 1, 2022, Bigger
Bagels paid the annual lease amount on its warehouse space. The annual lease is $13,200 and was recorded
by debiting Prepaid Rent and crediting Cash. No adjusting entries have been prepared
since June 1, 2022. |
|
b. |
The Unearned Revenue
account has an unadjusted balance of $4,000 consisting of gift cards sold to
customers. Redeemed gift cards that
have not yet been recorded total $2,400. |
|
c. |
The company has not
yet received a bill for utilities nor paid for the month of December. The expense is estimated to be $1,680. |
|
d. |
On December 1, 2022, Bigger
Bagels received $3,000 cash from a customer related to a special order. The special order was delivered to the
customer on December 29 but no entry has been made to record the
delivery. |
|
e. |
At December 31, 2022,
employee wages of $4,600 have been incurred but not paid or recorded. |
|
f. |
At December 31, 2022,
$880 of interest has been incurred, but not yet paid or recorded. |
|
g. |
Unrecorded depreciation on equipment is $5,600. |
Answer:
a. Rent expense 7,700
Prepaid
rent 7,700
To record
rent expense for the period ($13,200× 7/12 = $7,700)
b. Unearned
revenue 2,400
Sales 2,400
To record
redeemed gift cards.
c. Utilities expense 1,680
Utilities
payable 1,680 To
record accrued utilities expense
d. Unearned revenue 3,000 Sales revenue 3,000 To
record revenue earned.
e. Wages expense 4,600
Wages
payable 4,600 To record accrued wages at the end of the
year
f. Interest expense 880
Interest
payable 880
To record
accrued interest at the end of the period.
g. Depreciation expense-equipment 5,600
Accumulated
depreciation-equipment 5,600
To record depreciation for
the period.
Topic: Financial
analysis using adjusted data
LO: 4
4.
LLL AG has been in
operation since January, 2001. Selected T-account
balances for LLL AG are shown below as of January 31, 2022. Adjusting entries have already been posted. The firm uses a calendar-year accounting
period but prepares monthly adjustments.
|
+
Supplies (A) - |
|
+ Supplies Expense (E) - |
|||||||||||||||
|
Jan 31 Bal. |
2,200 |
|
|
|
Jan 31 Bal. |
5,200 |
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||
|
+
Prepaid Insurance(A) - |
|
+ Insurance Expense (E) - |
|||||||||||||||
|
Jan 31 Bal. |
3,240 |
|
|
|
Jan 31 Bal. |
360 |
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||
|
- Wages Payable (L) + |
|
+ Wages Expense (E) - |
|
||||||||||||||
|
|
|
3,200 |
Jan
31 Bal. |
|
Jan 31 Bal. |
48,800 |
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
+ Truck
(A) - |
|
+
Accumulated Depreciation - Truck (XA) - |
|
||||||||||||||
|
Jan 31 Bal. |
44,400 |
|
|
|
|
|
8,880 |
Jan 31 Bal. |
|
||||||||
|
A. |
During January, €3,600
worth of supplies were purchased. If
the amount in Supplies Expense represents the January 31 adjustment for the
supplies used in January, what was the January 1 beginning balance of
Supplies? |
|
B. |
The insurance premium
purchased was valid for one year. The
amount in the Insurance Expense account represents the adjustment made at
January 31 for January insurance expense. What was the amount of the premium and on
what date did the insurance policy start? |
|
C. |
No beginning balance
existed in Wages Payable or Wages Expense on January 1. How much cash was paid as wages during
January? |
|
D. |
The truck has a useful life of five years,
what is the monthly amount of depreciation expense and how many months has LLL
AG owned the truck? |
Answer:
A. Balance, January 1 = €2,200‒ €3,600 + €5,200=
€600
B. Amount of
premium = € 360 ´
12 = €4,320.
Therefore,
nine months' premium (€4,320 - €3,240
= €1,080 / 360 = 9) has expired by January 31. The policy term began on May 1 of
the previous year.
C. Wages paid in January = €48,800 - €3,200 = €45,600
D. Monthly
depreciation expense = €44,400 / 60 months = €740 per month
LLL AG has owned the truck for 12 months (€8,880 / €740=
12 months).
Topic: Preparing
closing entries and post-closing trial balance
LO: 5
5.
Perfect Pet provides
pet grooming and boarding services for domestic cats. The company has been in existence for 12
years. At December 31, 2022, Perfect Pet’s
adjusted trial balance is as follows:
|
Perfect Pet |
||
|
Adjusted Trial Balance |
||
|
December 31, 2022 |
||
|
|
Debit |
Credit |
|
Cash |
$ 44,800 |
|
|
Accounts receivable |
32,000 |
|
|
Prepaid insurance |
5,200 |
|
|
Equipment |
360,000 |
|
|
Accumulation depreciation |
|
$ 84,000 |
|
Accounts payable |
|
9,200 |
|
Share Capital |
|
162,800 |
|
Retained earnings |
|
69,000 |
|
Service fees earned |
|
420,000 |
|
Miscellaneous income |
|
8,200 |
|
Salaries expense |
228,000 |
|
|
Rent expense |
32,800 |
|
|
Insurance expense |
7,200 |
|
|
Depreciation expense |
16,800 |
|
|
Income tax expense |
51,200 |
|
|
Income tax payable |
|
24,800 |
|
|
$778,000 |
$
778,000 |
A. Prepare
closing entries in journal entry form.
B. After Perfect Pet’s closing
entries are posted, what is the balance in the Retained Earnings account?
C. Prepare Perfect Pet’s
post-closing trial balance.
Answer:
A. Debit Credit
Dec 31 Service
fees earned
420,000
Miscellaneous income 8,200
Retained earnings 428,200
To close the revenue accounts
31 Retained Earnings 336,000
Salaries expense 228,000
Rent expense 32,800
Insurance expense
7,200
Depreciation expense
16,800
Income tax expense 51,200
To close the expense accounts
B. Retained Earnings = $69,000 + $428,200 -
$336,000 = $161,200
C.
|
Perfect Pet Post-Closing Trial Balance December 31, 2022 |
||
|
|
Debit |
Credit |
|
Cash |
$ 44,800 |
|
|
Accounts receivable |
32,000 |
|
|
Prepaid insurance |
5,200 |
|
|
Equipment |
360,000 |
|
|
Accumulation depreciation |
|
$ 84,000 |
|
Accounts payable |
|
9,200 |
|
Income tax payable |
|
24,800 |
|
Share Capital |
|
162,800 |
|
Retained earnings |
_______ |
161,200 |
|
|
$
442,000 |
$
442,000 |
Topic: Inferring
transactions from financial statements
LO: 2, 3,
4
6. Selected balance sheet
data of Dixie plc are given below:
|
Selected Balance Sheet Data in thousands |
June 29, 2022 |
June 30, 2021 |
|
Inventories |
£ 580,089 |
£ 658,040 |
|
Accounts payable |
344,345 |
345,955 |
A. During its year ending June 29, 2022, Dixie
purchased on account, £4,884,557 thousand of inventory for sale in its
stores. Prepare the entry, using the
financial statement effects template and in journal entry form, to record cost
of goods sold for the year ended June 29, 2022.
B. What amount of cash did Dixie pay to its
suppliers during its year ending June 29, 2022?
Answer:
A. Cost of
goods sold = £658,040 + £4,884,557 ‒ £580,089 = £4,962,508
|
|
Balance Sheet |
Income Statement |
|
|||||||||||||||
|
Transaction |
Cash Asset |
+ |
Noncash Assets |
= |
Liabi-lities |
+ |
Contrib. Capital |
+ |
Earned Capital |
Revenues |
- |
Expenses |
= |
Net Income |
||||
|
Recognise
cost of goods sold |
|
|
- 4,962,508 Inventory |
= |
|
|
|
|
- 4,962,508 Retained Earnings |
|
- |
+4,962,508COGS Expense |
= |
- 4,962,508 |
|
|||
|
Cost
of goods sold ............................................................... |
4,962,508
|
|
|
Inventory
....................................................................... |
|
4,962,508 |
|
To
recognise the cost of goods sold |
|
|
B. Beg AP +
Purchases – End AP = Payments made
£345,955 + £4,884,557– Payments = £344,345
Payments = £4,886,167
Topic: Preparing an Unadjusted Trial Balance and
Adjustments
LO: 3
7. First
Street Grill, an upscale restaurant on the beach, has just completed its first
full year of operations on December 31, 2022. It provides meals both in its restaurant and
catering. Selected balances from its general
ledger before year-end adjustments follow. (All balances are normal.)
|
Cash |
64,000 |
Accounts
payable |
42,400 |
|
Accounts
receivable |
36,000 |
Share
Capital |
24,000 |
|
Prepaid
advertising |
4,800 |
Sales
revenue |
196,000 |
|
Supplies |
3,600 |
Wages
expense |
108,000 |
|
Equipment |
91,200 |
Rent
expense |
12,000 |
|
Notes
payable |
34,000 |
Utilities
expense |
5,500 |
An analysis of the firm’s records
reveals the following.
1. The balance in Prepaid Advertising represents
the amount paid for newspaper advertising for 1 year. The agreement, which calls for the same amount
of space each month, covers the period from February 1, 2021, to January 31, 2022.
First Street Grill did not advertise
during its first month of operations.
2. Equipment purchased January 1, 2022, has an
estimated life of eight years.
3. Utilities expense does not include the expense
for December, estimated at $ 500. The
bill will not arrive until January, 2023.
4. At year-end, employees have earned $6,400 in
wages that will not be paid until January.
5. Supplies available at year-end amounted to $1,300.
6. At year-end, unpaid interest of $ 240 has
accrued on the notes payable.
7. The firm’s lease calls for rent of $1,000 per
month payable on the first of each month, plus an amount equal to 2% of annual sales.
The rental percentage is payable within
15 days after the end of the year.
Prepare adjusting
entries in journal entry form.
Answer:
Debit Credit
Dec
31 Advertising
expense 4,400
Prepaid advertising 4,400
To record 11 months' advertising
expense ($ 4,800 ´
11/12 = $ 4,400)
31 Depreciation
expense 11,400
Accumulated depreciation 11,400
To record depreciation for the year ($
91,200/8 years = $ 11,400).
31 Utilities
expense
500
Utilities payable 500
To record estimated December
utilities expense.
31 Wages
expense
6,400
Wages payable 6,400
To record unpaid wages at December
31.
31 Supplies
expense 2,300
Supplies 2,300
To record supplies expense for the
year ($3,600 ‒ $ 1,300 = $ 2,300)
31 Interest
expense 240
Interest payable 240
To record accrual of interest
expense at December 31
31 Rent
expense 3,920
Rent payable 3,920
To record additional rent owed under
lease (2% ´
$ 196,000 = $ 3,920)
Essays
Topic:
Fiscal year-end
LO: 1
1. Why
would a company want to have a fiscal year-end that does not match the calendar
year-end?
Answer:
A company might set a
fiscal year-end that is different from its calendar year end to allow them to
prepare closing accounting records that does not coincide with the busiest
shopping season of the year or busiest production time. Thus the decision about a fiscal year may
minimise workload compression and move it to the slowest part of the business
year. As such, the fiscal year serves as
a period of accounting cycle reference, with the decision allowing a better
match for submission of accounting documents to regulatory agencies and
inspection by auditors.
Topic: Accounting cycle
LO: 1
2. Do the steps in the accounting cycle occur
with equal frequency? Why or why not?
Answer:
No, the steps in the
accounting cycle do not occur with equal frequency because companies analyse
and record daily transactions throughout the accounting period. However, they only adjust and report when
management requires financial statements, often monthly or quarterly, but at
least annually. The last step in the
accounting cycle is closing, which only occurs once during the accounting
cycle, at the period-end.
Topic: Closing process
LO: 5
3. What
are the two major steps in the closing process? Why is the closing process necessary?
Answer:
The first step is to
close revenues to retained earnings. The
second step is to close expenses to retained earnings. The closing process has two purposes: 1) to transfer temporary balances to the
permanent accounts and 2) to ready the accounts for the next accounting period.
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Financial Accounting using IFRS, 3e by Wong
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