Ch 3 Solution

Topics: Generally Accepted Accounting Principles, Balance sheet, Revenue Pages: 239 (7500 words) Published: October 11, 2013
Module 3
Accounting Adjustments and
Constructing Financial Statements
DISCUSSION QUESTIONS
Q3-1.

The fiscal year is the annual accounting period that a firm adopts. A firm that uses December 31 as its year-end is on a calendar-year basis. Traditionally, fiscal years that end in January through the end of May, are labeled as the prior calendar year. For example, a fiscal year ending January 31, 2010 would be labeled fiscal 2009 because the bulk of the operations occurred in calendar 2009 rather than in 2010.

Q3-2.

A journal entry records a transaction in a company’s “general journal.” A general journal is a book of original entry for the initial recording of any type of transaction or accounting adjustment. It contains space for dates and for accounts to be debited and credited, columns for the amounts of the debits and credits, and a posting reference column for numbers of the accounts that are posted. Most companies have electronic journals but the basics are the same.

Q3-3.

Posting means including the transaction amount in the affected general ledger accounts. This procedure enables company personnel to trace amounts in the ledger back to the originating journal entry and to determine which entries have been added to the ledger so that account totals are updated.

Solutions Manual, Module 3

© Cambridge Business Publishers, 2013
3-1

Q3-4.

1. Prepaid Expenses – Allocating assets to expense to reflect expenses incurred during the period. Example: Recording supplies used by increasing (debiting) Supplies Expense and decreasing (crediting) Supplies or recording depreciation expense and

reducing PPE (or increasing accumulated depreciation).
2. Unearned Revenues – Adjusting unearned revenues to recognize only revenues earned during the period. Example: Recording
service fees earned by decreasing (debiting) Unearned Service Fees, a liability, and increasing (crediting) Service Fees Earned, an equity account.
3. Accrued Expenses – Accruing expenses to reflect expenses incurred during the period that are not yet paid or recorded. Example: Recording unpaid wages by increasing (debiting) Wages Expense and increasing (crediting) Wages Payable or recording interest owing on loans.

4. Accrued Revenues – Accruing revenues to reflect revenues earned during the period that are not yet received or invoiced. Example: Recording commissions earned by debiting Commissions
Receivable and crediting Commissions Earned.

Q3-5.

To adjust the account, we need to move 1/24th of the insurance prepayment from the balance sheet to the income statement to reflect the fact that one month out of 24 has elapsed and the insurance prepayment has been “used up.” The adjustment would be:

Jan. 31 Insurance Expense ........................................... 78
Prepaid Insurance ............................................ 78
To record insurance expense for January ($1,872 / 24 = $78).

Q3-6.

Supplies Expense of $455 must be recorded for the period. This will reduce the asset account and increase the expense account by $455. ($825+$260-$630=$455)
(a) If the adjustment is not made, Supplies Expense is understated by $455.
(b) Supplies (asset) and Equity are both overstated by $455 on the January 31 balance sheet.

© Cambridge Business Publishers, 2013
3-2

Financial & Managerial Accounting for MBAs, 3rd Edition

Q3-7.
Balance Sheet
Transaction
Cash
UR

Cash
Noncash
+
Asset
Assets

=

Income Statement

LiabilContrib.
Earned Rev+
+
ities
Capital
Capital enues



Expenses

Net

= Income

9,720
9,720

Cash
9,720
UR
9,720

(a) Received
$9,720 cash in +9,720
Cash
advance for
subscriptions

=

(b) Delivered
$405 of
magazines

=

+9,720



Unearned
Revenue

=



= +405

UR
405
Sales
405
UR
405
Sales
405

Q3-8.

(a) Jan. 1

-405
Unearned
Revenue

+405
Retained
Earnings

+405
Sales

Cash
9,720
Subscriptions Received in...
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