Mastering Adjusting Entries Section 1: ACCRUED REVENUE No.

1 Select the term on the right that best completes the statement on the left. Terms may be used once, more than once, or not at all. Failing to make the entry to accrue revenue _____ net income. a. increases The entry to record accrued revenue ____ assets. b. decreases Accrued revenue is revenue that is ____ but not collected c. overstates Failing to make the entry to accrue revenue _____ assets. d. understates The entry to record accrued revenue _____ net income. e. earned f. unearned No. 2 Intell licenses technologies to a manufacturer. The agreement calls for Intell to receive $3 for each unit manufactured with licensing fees remitted quarterly. As of December 31, Intell has received the following payments: Period 1/1 to 3/31 4/1 to 6/30 7/1 to 9/30 10/1 to 12/31 Units manufactured 475 350 525 600 Licensing fees $1,425 $1,050 $1,575 $1,800

Intell has received checks for the first two quarters, but not the third; the fourth-quarter check is not due until January. If Intell is on the accrual basis, what adjusting entry should it record at year end to recognize revenue earned from this manufacturer? No. 3 Your firm holds a $15,000, 8% note receivable issued on August 1, 20X0. Interest is paid once a year on July 31. On July 31, 20X6, you receive the normal interest payment. What adjusting entry must you record December 31, 20X6? No. 4 Kurtz Rentals rents equipment to Ditka on February 1. Lease terms require Ditka to make payments to Kurtz of $2,000 each quarter: April 30, July 31, October 31, and January 31. Kurtz receives payments for April, July, and October. What journal entry should Kurtz record on December 31? No. 5 Your company, which has a fiscal year ending October 31, sells scented bars of soap for a 12% commission. As of October 31, total sales are $400,000. Your company has received $30,000, which you credited to Revenue. a) b) How much additional revenue must you record for the fiscal year? What is the journal entry to record the additional revenue?

Section 2: ACCRUED EXPENSES (ACCRUED LIABILITIES) No. 1 DillCo borrows $200,000 on September 1, 20X0, from First Bancorp. Monthly interest is $1,200. The loan agreement requires DillCo to pay the interest every 6 months. The first interest payment is due February 28, 20X1. What adjusting entry must DillCo make on December 31, 20X0, to recognize the accrued interest? No. 2 Salary expense at QuickDinner Inc. is $7,500 per week for a MondayFriday workweek. Employees are paid each Friday. If the companys year ends on a Wednesday, what adjusting entry must it record? No. 3 Salary expense at SlowCooker is $6,000 per week for a TuesdaySunday workweek. Employees are paid on Sunday. If the companys year ends on a Tuesday, what adjusting entry must it make? Rojo Equipment, which has an October 31 fiscal year, reports income of $200,000 for the year ended 10/31/20X7. On October 31, Rojo discovers the following: A $2,000 utility bill booked on October 30, 20X7, was not paid. Rojo has a $10,000 note payable with a 12% annual interest rate. Payments are due every six months. The last interest payment was made on June 30, 20X7. Rojos has 4 salaried employees, each paid $800 a week for a MondayFriday workweek. Paychecks are distributed on Fridays. October 31 is a Thursday. Prepare the adjusting entries required for the year ended October 31, 20X7. What is Rojos net income for 20X7

a) b)

Section 3: REVENUE COLLECTED IN ADVANCE (UNEARNED REVENUE) No. 1 WyCos fiscal year ends September 30. On September 10, it collects $30,000 for a painting job and credits Unearned Painting Revenue. As of September 30, 60% of the work has been done. What adjusting entry must WyCo record on September 30? No. 2 On August 1, InsureCo writes a 2-year policy for a total of $12,000 and receives the entire payment in advance. If InsureCo credits Revenue, what adjusting entry must it record on December 31? No. 3 On November 1 ATD enters a 1-year contract to provide security for CorpCos warehouses for $12,000 a year and receives the first 3 months payment at signing. a) If ATD books the payment as revenue, what adjusting entry must it record at year end? How will its financial statements be misstated if the entry is not recorded? b) If ATD books the payment as a liability, what adjusting entry must it record at year end? How will its financial statements be misstated if the entry is not recorded? No. 4 The following table shows subscription revenue for three unrelated companies: I $2,400 40,000 ? 39,000 Company II $ 3,000 25,000 4,000 ? III $ 4,500 ? 2,000 25,000

Beginning balance in Unearned Subscription Revenue Payments received during the year Ending balance in Unearned Subscription Revenue Subscription revenue earned during the year a) b)

Fill in the missing amounts. Ignoring peso amounts, what journal entries may have recorded the payments?

No. 5 On February 1, Altas collects $60,000 for a job and credits Revenue. As of April 30, Altas year end, 45% of the work is completed. What adjusting entry does Alta record on April 30?

Section 4: PREPAID (DEFERRED) EXPENSES No. 1 On December 1, 20X7, company pays an annual insurance premium of $3,600 that covers December 1, 20X7, to November 30, 20X8. a) Show the adjusting entry on December 31, 20X7, if the $3,600 payment was recorded in Prepaid Insurance. b) Show the adjusting entry on December 31, 20X7, if the $3,600 payment was recorded in Insurance Expense. No. 2 GilCo pays $900 for office supplies in April and debits Office Supplies. On May 31, GilCos yea r end, a physical count, finds $200 in supplies. What is the adjusting entry? No. 3The following table shows the insurance premiums paid by three unrelated companies: Case I II Beginning balance in Prepaid Insurance $ 500 $ 300 Premiums paid during the year 4,000 2,500 Ending balance in Prepaid Insurance ? 400 Insurance used up during the year 3,000 ? a) b) Fill in the missing information. Ignoring dollar amounts, give all possible journal entries to record the premium payments.

III $4,500 ? 200 5,500

No. 4 On September 1, BarCo signs a 2-year rental agreement paying $6,000 rent in advance. a) If the prepayment was booked as prepaid rent, what is the year-end adjusting entry? b) If the prepayment was booked as rent expense, what is the year-end adjusting entry? No. 5 In August, JemCo, which has an October 31 year end, pays $1,200 for office supplies and records it in Supplies Expense. On October 31, a physical count reveals $440 of supplies unused. What adjusting entry must JemCo record on October 31?

Section 5: OTHER END-OF-PERIOD ADJUSTMENTS No. 1 GoCo purchases a building for $350,000. If the building has an estimated life of 30 years and a residual value of $50,000, what is the adjusting entry in the year of purchase? No. 2 For 20X9, PyCo has credit sales of $200,000. Based on past experience, PyCo estimates that 3% of credit sales will be uncollectible. At year end, the balance in Allowance for Doubtful Accounts is $4,000. What is the adjusting entry to record 20X9 bad debt expense? No. 3 At the end of 20X9, Spend Co has accounts receivable of $70,000, of which it estimates 10% will be bad debt. Allowance for Doubtful Accounts has a debit balance of $4,000. a) b) c) What does the debit balance in Allowance for Doubtful Accounts imply about 20X8? What is the 20X9 adjusting entry for bad debt? What is the term for the difference between the closing balances in Accounts Receivable and Allowance for Doubtful Accounts?

No. 4 Match the terms in the lefthand column below with the descriptions on the right. ____ ____ ____ ____ 1. 2. 3. 4. Percentage of credit sales method Direct write-off method Allowance method Percentage of accounts receivable method a. Required to recognize bad debt under GAAP b. Estimate of bad debt expense based on the age of outstanding receivables c. Estimate of bad debt based on credit sales d. Required to recognize bad debt under tax law

No. 5 Below are PruCos entries to two accounts for the year.

a) b) c)

What do the debits to the Allowance account represent? Show the three journal entries that led to the three debits in the Allowance account. PruCo uses the percentage of credit sales method. If it estimates that 2% of its $250,000 in credit sales will not be collected, what adjusting entry does PruCo record to recognize bad debt expense for the year? Now assume that Pruco uses the percentage of accounts receivable method. If it estimates that $4,000 of its receivables will not be collectible, what adjusting entry does PruCo record to recognize bad debt expense for the year?

Section 7: FROM UNADJUSTED TRIAL BALANCE TO FINANCIAL STATEMENTS Using Thornes unadjusted trial balance below and facts a-h, prepare the adjusted trial balance, and the financial statements Thorne Construction Unadjusted trial blance For the year ended July 31, 20X8 Debit Cash 12,500 Accounts Receivable 40,000 Allowance for Doubtful Accounts Office Supplies 1,850 Prepaid insurance 6,500 Prepaid Rent Equipment 154,000 Accum. Depreciation Equipment Accounts Payable Interest Payable Wages Payable

Credit

2,000

38,500 23,000

Long-term Notes Payable W. Thorne, Capital W. Thorne, Drawing Constuction Revenues Bad Debt Expense Depreciation ExpenseEquipment Wage Expense Interest Expense Insurance Expense Rent Expense Office Supplies Expense Repairs Expense Utilities Expense Totals

30,000 82,300 25,000 112,000

29,400 900 10,800 100 6,750 287,800

287,800

a) b) c) d) e) f) g) h)

A physical count of office supplies as of July 31, 20X8, shows $800 in supplies on hand. On March 1, 20X7, Thorne Construction prepaid $9,000 for an 18-month insurance policy of which 5 months ($2,500) was used up during fiscal year 20X7. The equipment has a 28-year life and no salvage value. Thorne uses straight-line depreciation. Julys electric bill for $420 is not included because it arrived after the worksheet was prepared. There are $1,800 of accrued wages as of the fiscal year end. Thornes rent of $800 a month is payable quarterly, in advance. Its most recent payment was $2,400O on June 30,, 20X8, to cover July, August and September 20X8. Thorne estimates bad debt at 2% of credit sales. The long-term note payable bears interest at 1% a month payable by the 10th of the following month. The interest for July has neither been paid nor recorded.

Cash Accounts Receivable Allow. for Doubtful Accts Office Supplies Prepaid Insurance Prepaid Rent Equipment Accum. Depr.Equip. Accounts Payable Interest Payable Utilities Payable Wages Payable Long-term Notes Payable W. Thorne, Capital W. Thorne, Drawings Constuction Revenues Bad Debt Expense Depr. Exp.Equipment Wage Expense Interest Expense Insurance Expense Rent Expense Office Supplies Expense Repairs Expense Utilities Expense Totals

Unadjusted trial balance Dr Cr 12,500 40,000 2,000 1,850 6,500 154,000 38,500 23,000

Thorne Construction Worksheet July 31, 20X8 Adjusted Adjustments trial balance Dr Cr Dr Cr

Income statement Dr Cr

Balance sheet Dr Cr

30,000 82,300 25,000 112,000

29,400 900 10,800 100 6,750 287,800

287,800