E3-7Glassify adjustments

Obj 3

t for unearned fees

1t for unearned

Accrual Accounting Concepts 115

The following accounts were taken from the unadjusted trial balance of InterCircle Co., a congressional lobbying firm. Indicate whether or not each accountwould normally require an adjusting entry. If the account normally requires anadjusting entry, use the following n?tation to indicate the type of adjustment:

AE-Accrued ExpenseAR-Accrued RevenueDR-Deferred RevenueDE-Deferred Expense

To illustrate, the answer for the first account is as follows.

Account Answer

Accounts ReceivableAccumulated DepreciationCapital StockDividendsInterest PayableInterest ReceivableLandOffice EquipmentPrepaid RentSuppliesUnearned FeesWages Expense

Normally requires adjustment (AR).

'" Answer each of the following independent questions concerning supplies andthe adjustment for supplies. (a) The balance in the supplies account, beforeadjustment at the end of the year, is $3,175. What is the amount of the adjust-ment if the amount of supplies on hand at the end of the year is $925? (b) Thesupplies account has a balance of $600,~andthe supplies expense account has abalance of $1,850 at December 31,201 1.4f 2011was the first year of operations,what was the amount of supplies purchased during the year?

The prepaid insurance account had a balance of $10,800at the beginning of theyear. The account was increased for $7,200 for premiums on policies purchasedduring the year.What is the adjustment required at the end of the year for each ofthe following independent situations: (a) the amount of unexpired insurance ap-plicable to future periods is $8,000, (b) the amount of insurance expired durin{?tthe year is $12,675?For (a) and (b), indicate each account affected, whether theaccount is increased or decreased, and the amount of the increase or decrease.

The balance in the unearned fees account, before adjustment at the end of theyear, is $27,300. What is the adjustment if the amount of unearned fees at theend of the year is $14,650?Indicate each account affected, whether the accountis increased or decreased, and the amount of the increase or decrease.

For the year ending June 30, 2008, Microsoft Corporation reported short-termunearned revenue of $13,397 million. For the year ending June 30, 2008,Microsoft also reported total revenues of $60,420 million. (a) Assuming that

116

E3-12Effect of omitting adjustment

Obi 3

E3-13Adjustment for accruedsalaries

Obi 3

E3-14Determine wages paid

Obi 3

E3-15Effect of omitting adjustment

Ob] 3

E3-16Effect of omitting adjustment

E3-17Effects of errors on financialstatements ,(

Obj :3

Chapter 3

Microsoft recognized $3,000 million of unearned revenue as revenue duringthe year, what entry for unearned revenue did Microsoft make during the year?Indicate each account affected, whether the account is increased or decreased,and the amount of the increase or decrease. (b) What percentage of totalrevenues is the short-term unearned revenue as ofJune 30, 2008?Round to onedecimal place.

At the end of February, the first month of the business year, the usual adjust-ment transferring rent earned to a revenue account from the unearned rentaccount was omitted. Indicate which items will be incorrectly stated, because ofthe error, on (a) the income statement for February and (b) the balance sheet asof February 28. Also indicate whether the items in error will be overstated orunderstated.

Oceanside Realty Co. paysweeklysalaries of $3,700 on Friday for a five-dayweekending on that day. What is the adjustment at the end of the accounting period,assuming that the period ends (a) on Wednesday, (b) on Thursday? Indicateeach account affected, whether the account is increased or decreased, and theamount of the increase or decrease.

The balances ofthe twowages accounts at December 31, after adjustments at theend of the first year of operations, are Wages Payable, $3,175, and WagesExpense, $93,800. Determine the amount of wages paid during the year.

Accrued salaries of $4,950 owed to employees for December 30 and 31 are notconsidered in preparing the financial statements for the year ended December31, 2010. Indicate which items will be erroneously stated, because of the error,on (a) the income statement for December 2010 and (b) the balance sheet as ofDecember 31,2010. Also indicate whether the items in error willbe overstated orunderstated.

Assume that the error in Exercise 3-15was not corrected and that the $4,950 ofaccrued salaries was included in the first salary payment in Ja~lUary2011. In-dicate which items will be erroneously stated, because of failure to correct theinitial error, on (a) the income statement for January 2011 and (b) the balancesheet as of January 31, 2011.

For a recent year, the balance sheet for The Campbell Soup Company includesaccrued expenses of $1,022,000,000.The income before taxes for The CampbellSoup Company for the year was$1,001,000,000.a. Assume the accruals apply to the current year and were not recorded at the

end of the year. By how much would income before taxes have beenmisstated?

b. What is the percentage of the misstatement in (a) to the reported income of$1,001,000,000? Round to one decimal place.

E3-18ffects of errors on financial

tements

1. a. Revenueunderstated, $21,950

-19of errors on financial

ments

mil for accrued fees

-21, ents for unearned anded fees

-22on financial statementsitting adjustment

;'23ment for depreciation

Accrual Accounting Concepts 117

The accountant for Mystic Medical Co., a medical services consulting firm,mistakenly omitted adjusting entries for (a) unearned revenue earned duringthe year ($21,950) and (b) accrued wages ($6,100). Indicate the effect of eacherror, considered individually, on the income statement for the current yearended July 31. Also indicate the 'effect of each error on the July 31 balance sheet.Set up a table similar to the following, and record your answers by inserting thedollar amount in the appropriate spaces. Insert a zero if the error does not affectthe item.

Error (a) Error (b)Over- Under-stated stated

Over- Under-stated stated

1. Revenue for the year would be2. Expenses for the year would be3. Net income for the year would be4. Assets atJuly 31 would be5. Liabilities atJuly 31 would be6. Stockholders' equity atJuly 31 would be

If the net income for the current year had been $424,300 in Exercise 3-18, whatwould have been the correct net income if the proper adjustments had beenmade?

At the end of the current year, $41,980 of fees have been earned but have notbeen billed to clients. .a. What is the adjustment to record the accrued fees? Indicate each account

affected, whether the account is increased or decreased, and the amount ofthe increase or decrease.

b. If the cash basis rather than the accrual basis had been used, would an ad-justment have been necessary?Explain.

The balance in the unearned fees account, before adjustment at the end of theyear, is $110,000. Of thesefees, $85,000 have been earned. In a9:~ition,$19,200of fees have been earned but have not been billed. What are the adjustments (a)to adjust the unearned fees account and (b) to record the accrued fees? Indicateeach account affected, whether the account is increased or decreased, and Iheamount of the increase or decrease.

The adjustment for accrued feeswasomitted at March 31, the end of the currentyear. Indicate which items will be in error, because of the omission, on (a) theincome statement for the current year and (b) the balance sheet as of March 31.Also indicate whether the items in error will be overstated or understated.

The estimated amount of depreciation on equipment for the current year is$12,700. (a) How is the adjustment recorded? Indicate each account affected,whether the account is increased or decreased, and the amount of the increaseor de"crease. (b) If the adjustment in (a) was omitted, which items would be

118

E3-24Adjustments

Obi 3

E3-25Book value of fixed assets

Obj 4

E3-26Classify assets

E3-27Balance sheet classification

ObJ 4

E3-28Classified balance sheet

Oh,4

,/ Total assets, $182,000

Chapter 3

erroneously stated on (1) the income statement for the year and (2) the balancesheet as of December 31?

Silverado Company is a consulting firm specializing in pollution control. Thefollowing adjustments were made for Silverado Company:

,,-

Adjustments

Account Increase (Decrease)

Accounts ReceivableSuppliesPrepaid InsuranceAccumulated Depreciation-EquipmentWages PayableUnearned Rent

- Fees EarnedWages ExpenseSupplies ExpenseRent RevenueInsurance ExpenseDepreciation Expense

$ 8,400(2,100)(1,800)1,5004,500

(3,000)8,400 '4,5002,1003,0001,8001,500

.Identify each of the six pairs of adjustments. For each adjustment, indicate theaccount, whether the account is increased or decreased, and the amount of theadjustment. No account is affected by more than one adjustment. Use the fol-lowing format. The first adjustment is shown as an example.

Adjustment Account Increase or Decrease Amount

1. Accounts ReceivableFees Earned

IncreaseIncrease

$8,4008,400

For a recent year, Barnes & Noble Inc. reported Property, Plant, and Equipment of$2,400,685,000 and Accumulated Depreciation of $1,576,052,000.a. What was the book value of the fixed assets?b. Would the book values of Barnes & Noble's fixed assets normally approximate

their fair market values?

Identify each of the following as (a) a current asset or (b) property, plant, andequipment:

1. Accounts Receivable2. Building3. Cash

4. 'Office Equipment5. Prepaid Insurance6. Supplies I

At the balance sheet date, a business owes a mortgage note payable of $350,000,the terms of which provide for monthly payments of $7,000. Explain how theliability should be classified on the balance sheet.

Rehab Health Co. offers personal weight reduction 'consulting services to in-dividuals. On June 30, 2010, the balances of selected accounts of Rehab HealthCo. are as follows:

E3-29Classified balance sheet

,I Total assets, $768,870

E3-30Balance sheet

Accrual Accounting Concepts 119

Accounts PayableAccounts ReceivableAccum. Depreciation-EquipmentCapital StockCashEquipment

$ 15,20035,00033,60050,000

?130,000

Prepaid InsurancePrepaid RentRetained EarningsSalaries PayableSuppliesUnearned Fees

$ 11,6007,200

112,0002,8003,0002,000

Prepare a classified balance sheet that includes the correct balance for Cash.

La-~Boy Inc. is one of the world's largest manufacturers of furniture and is bestknown for its reclining chairs. The following data (in thousands) were adaptedfrom the 2008 annual report of La-Z-BoyIne.:

Accounts payableAccounts receivableAccrued expensesAccumulated depreciationCapital stockCashIntangible assetsInventoriesDebt due within one yearLong-term debtOther current assetsOther long-term assetsOther long-term liabilitiesProperty, plant, and equipmentRetained earnings

$ 56,421200,422102,700267,583260,81614,98256,239

178,3614,792

99,57833,723

114,14254,783

438,584189,780

Prepare a classified balance sheet as of April 26; 2008.

List the errors you find in the following balance sheet. Prepare a correctedbalance sheet.

(Continued)

120

..~

Chapter 3

r-oble m eP3-1Accrual basis accounting

SPREADSHEET

Espresso Health Care Ine. is owned and operated by Dr. Merri Eversole, the solestockholder. DuringJuly 2011, Espresso Health Care entered into the followingtransactions:July 1 Received $18,000 from Bradshaw Company as rent for the use of a vacant

office in Espresso Health Care's building. Bradshaw paid the rent sixmonths in advance.

1 Paid $4,200 for an insurance premium on a general business policy.6 Purchased supplies of $1,800 on account.9 Collected $17,500 for services provided to customers on account.

11 Paid creditors $3,000 on account.18 Invested an additional $50,000 in the business in exchange for capital

stock.20 Billed patients $49,000 for services provided on account.25 Received $12,900 for services provided to customers who paid cash.30 Paid expenses as follows:wages, $24,000; utilities, $6,000; rent on medical

equipment, $5,000; interest, $200; and miscellaneous, $2,500.30 Paid dividends of $10,000 to stockholders (Dr. Eversole).

InstructionsAnalyze and record the July transactions for Espresso Healtb Care Inc., using theintegrated financial statement framework. Record each transaction by date andshow the balance for each item after each transaction. The July 1, 2011, baliancesfor the balance sheet are shown below.

Assets LiabilitiesStockholders'

+ EquityAccts. Pre. Ace. Accts. Un. Wages Notes Capital Ret.

Cash + Ree. + Ins. + Supp. + Building - Del'. + Land = Pay. + Rev. + Pay. + Pay. + Stock + Earn.Bal., July 1st20,000 24,500 700 1,000 150,000 -11,200 120,000 7,500 0 0 30,000 40,000 227,500

P3-2Adjustment process

SPREADSHEET

Adjustment data for Espresso Health Care Inc. for July are as follows:1. Insurance expired, $800.2. Supplies on hand on July 31, $1,100.

122 Chapter 3

Net Total Total + Total Stockholders'Income Assets Liabilities Equity

Reported amounts $135,800 $750,000 $250,000 $500,000Corrections:

Adjustment (a) +6,700 +6,700 0 +6,700Adjustment (b) ----Adjustment (c) ----Adjustment (d)

Corrected amounts

P3-6Adjustment process andfinancial statements

Adjustment data for Magnum Therapeutics Inc. for the year ended May 31,2011, are as follows:

a. Wages accrued but not paid at May 31, $1,800b. Depreciation of equipment during the year, $12,500c. Laundry supplies on hand at May 31, $1,900d. Insurance premiums expired, $5,500./ '.!. .. '\('1 inCOIIH'.

SI"".I;OO

Instructions1. Using the following integrated financial statement framework, record each

adjustment to the appropriate accounts, identifying each adjustment by itsletter. After all adjustments are recorded, determine the balances.

StRteme"t ,Df ,ush Flows

IncomeStRtement

Balances, May 31,2011

IStRtement of ush FIDwsOperating (Revenues) 315,000

Financing (CaP.i~al5to9<) 25,000

/pJiH~~t~;~i~%~;~Income StRtement

Laundry revenue

Wages expense

Rent expense

Utilities expense

Misc. expense

315,000

-110,000

-30,000

-18,000

-7,500

I

2. Prepare an income statement and retained earnings statement for the yearended May 31,2011. The retained earnings balance as of June 1,2010, was$51,500.

3. Prepare a classified balance sheet as of May 31, 2011.

4. Prepare a statement of cash flows for the year ended May 31, 2011.

ActivitiesA3-1Accrued revenue

The following is an excerpt from a conversation between Joel Loomis and KristaTruitt just before they boarded a flight to Paris on Delta Air Lines. They are goingto Paris to attend their company's annual sales conference.