Financial Accounting Exercises
Resource: Ch. 3 of Financial Accounting
Prepare written answers to the following assignments from Ch. 3 of Financial Accounting: * Questions 2, 3, 4, & 8 * Exercise E3-7 * Exercise E3-8
2. State two generally accepted accounting principles that relate to adjusting the accounts. Matching principle and revenue recognition principle
3. Rick Marsh, a lawyer, accepts a legal engagement in March, performs the work in April, and is paid in May. If Marsh’s law firm prepares monthly financial statements, when should it recognize revenue from this engagement? Why?
He should record the service revenue in May because that is when he provdes the service.
4. Why do accrual-basis financial statements provide more useful information than cash-basis statements?
Accrual basis does a better job of matching the sales with the expenses and the cash-basis often produces misleading financial statements.
8. Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category.
Accruals consist of accrued revenues and accrued expenses. Deferrals consist of prepaid expenses and unearned revenues.
E3-7 The ledger of Piper Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equip $ 8,400
Notes Payable 20,000
Unearned Rent 9,900
Rent Revenue 60,000
Interest Expense –0–
Wages Expense 14,000
An analysis of the accounts shows the following.
1. The equipment depreciates $400 per month.
2. One-third of the unearned rent was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $700.
5. Insurance expires at the rate of $200 per month.
Instructions
Prepare the adjusting entries at March 31, assuming that
Prepare written answers to the following assignments from Ch. 3 of Financial Accounting: * Questions 2, 3, 4, & 8 * Exercise E3-7 * Exercise E3-8
2. State two generally accepted accounting principles that relate to adjusting the accounts. Matching principle and revenue recognition principle
3. Rick Marsh, a lawyer, accepts a legal engagement in March, performs the work in April, and is paid in May. If Marsh’s law firm prepares monthly financial statements, when should it recognize revenue from this engagement? Why?
He should record the service revenue in May because that is when he provdes the service.
4. Why do accrual-basis financial statements provide more useful information than cash-basis statements?
Accrual basis does a better job of matching the sales with the expenses and the cash-basis often produces misleading financial statements.
8. Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category.
Accruals consist of accrued revenues and accrued expenses. Deferrals consist of prepaid expenses and unearned revenues.
E3-7 The ledger of Piper Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equip $ 8,400
Notes Payable 20,000
Unearned Rent 9,900
Rent Revenue 60,000
Interest Expense –0–
Wages Expense 14,000
An analysis of the accounts shows the following.
1. The equipment depreciates $400 per month.
2. One-third of the unearned rent was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $700.
5. Insurance expires at the rate of $200 per month.
Instructions
Prepare the adjusting entries at March 31, assuming that