‘CHAPTER 3 THE ADJUSTING PROCESS REVIEW Accounting vocabulary accrual accounting (p. 116) carrying amount (p. 122) accrued expense (p. 123) cash-basis accounting (p. 116) accrued revenue (p. 125) contra account (p, 122) accumulated depreciation (p. 122) deferred revenue (p. 125) adjusted trial balance (p. 129) depreciation (p. 121) adjusting entries (p. 118) prepaid expenses (p. 119) book value (of a non-current asset) (also called —_ property, plant and equipment assets (p. 121) net book value) (p. 122) unearned revenue (p. 125) Student success tips The following are hints on some common trouble areas for students in this chapter: ‘= Remember the difference between accrual accounting and cash-basis accounting: accrual accounting records revenues and expenses when they are EARNED or INCURRED; cash- basis accounting records revenues and expenses when cash is RECEIVED or PAID. = Remember that debits = credits for every adjusting journal entry. = The amount of the adjusting journal entry will ALWAYS affect either a revenue account (credit) ‘or an expense account (debit). The adjustment amount in the adjusting journal entry will equal the additional PROFITS for a revenue account or the additional INCURRENCE of EXPENSE for an expense account. Adjusting entries NEVER affect the Cash account, = Trial balance amount +/- the Adjustment amount = the Adjusted trial balance amount. Use the. rules of debit/credit to determine whether the adjustment is a + or -. ASSESS Quick check 1 What are the distinctive features of accrual accounting and cash-basis accounting? ‘@ Accrual accounting records only receivables, payables and depreci Accrual accounting is superior because it provides more information, © Cash-basis accounting records all transactions. d_Allthe above are true. 2 The profit recognition principle says: Divide time into annual periods to measure revenue properly. b_ Record profit when revenues are earned and matched against expenses incurred. © Costs the basis of profit. d_ Record revenue after you receive cash. 3 Adjusting the accounts is the process of: subtracting expenses from revenues to measure profit or loss b_ recording transactions as they occur during the period updating the accounts at the end of the period d zeroing out account balances to prepare for the next period‘CHAPTER 3 THE ADJUSTING PROCESS. 4 Which types of adjusting entries are natural opposites? 2 profitand loss b_ prepayments and accruals © expenses and revenues d_ prepayments and depreciation 5 Assume that the weekly payroll of In the Woods Camping Supplies is $300. The end of the accounting period, 31 December, falls on Tuesday, and In the Woods will py its employee on Friday for the full week. What adjusting entry will In the Woods make on Tuesday, 31 December? (Use five days as a full work week) 2 salary expense 120 __Salary payable 120 + — : _ Salary payable 3 _Salary expense 300 | © salary expense 180 Cash 180 d_ Noadjustment is needed because the business will pay the payroll on Friday. 6 Get Fit Now gains a client who prepays $540 for a package of six physical training sessions. Get. Fit Now collects the $540 in advance and will provide the training later. After four training sessions, what should Get Fit Now report on its income statement? a Service revenue of $360 b. Service revenue of $540 ¢ _Uneamed service revenue of $360 Cash of $180 7 Assume you prepay Get Fit Now for a package of six physical training sessions. Which type of account should you have in your records? a Accrued revenue b Accrued expense Prepaid expense d_ Unearned revenue 8 Unearned revenue is always: a owners'equity because you collected the cash in advance b revenue © aliability dd anasset 9 The adjusted trial balance shows: amounts that may be out of balance b_ amounts ready for the financial statements © assets, liabilities and owners’ equity only d_ revenues and expenses only 10 Accounting data flow from the: income statement to the statement of changes in equity 'b_ statement of changes in equity to the balance sheet balance sheet to the income statement 4 botha and bare correct(CHAPTER 3 THE ADJUSTING PROCESS Starters $3-1 Comparing accrual and cash-basis accounting Suppose you work summers house-sitting for people while they are away on vacation. Some of your customers pay you immediately after you finish a job. Some customers ask you to send them a bill. It is now 30 June and you have collected $900 from cash-paying customers. Your remaining ‘customers owe you $1 300. Requirements 1 How much service revenue would you have under: a the cash basis? b the accrual basis? 2. Which method of accounting provides more information about your house-sitting business? $3-2 Comparing accrual and cash-basis accounting The Jonty Flowers Law Firm uses a client database. Suppose Jonty Flowers paid 52900 for a computer, Requirements 1. Describe how the business should account for the $2900 expenditure under a the cash basis the accrual basis 2. State why the accrual basis is more realistic for ths situation, $3-3 Applying accrual principles Northwest Magazine sells subscriptions for $36 for 12 issues. The firm collects cash in advance and then mails out the magazines to subscribers each month. Requirement Apply accrual principles to determine: ‘a when Northwest Magazine should record revenue for this situation b the amount of revenue Northwest Magazine should record for three $3-4 Applying accrual principles Suppose on 1 January you prepaid apartment rent of $5700 for the full year. Requirement ‘At 31 July, what are your two account balances for this situation? $3-5 Identifying types of adjusting entries select list of transactions for Anuradha Goals follows: Oia maces 20 Romer for $1000, ues 30 30 Requirement For each transaction, identify what type of adjusting entry would be needed at 30 April. 53-6 Journalising adjusting entries On 1 April your firm prepaid six months of rent, $4800. Requirements 1. Prepare the journal entry for the 1 April payment. 2 Prepare the adjusting entry required at 30 April 3 Post to the two accounts involved and show their balances at 30 April.(CHAPTER 3 THE ADJUSTING PROCESS 3-7 Posting adjusting entries On 1 May your firm paid cash of $54.000 for computers that are expected to remain useful for three years. At the end of three years, the value of the computers is expected to be zero, so depreciation is $18000 per year, Requirements 1 Post the purchase of 1 May and the depreciation on 31 May to T-accounts for the following accounts: Computer equipment, Accumulated depreciation—computer equipment, and Depreciation expense—computer equipment. Show their balances at 31 May. (Assume that the journal entries have been completed) 2 What is the computer equipment’s book value on 31 May? 83-8 Accruing interest expense and posting to T-accounts Thompson Travel borrowed $68000 on 1 October 2013 by taking out a one-year loan from the Commonwealth Bank. Thompson's interest expense for the remainder of the financial year (October to December) is $884. Requirements 1 Make the adjusting entry to accrue interest expense at 31 December 2013. Date the entry and include its explanation. 2 Post to the Taccounts of the two accounts affected by the adjustment. 53-9 Accounting for unearned revenues ‘Melbourne Magazine collects cash from subscribers in advance and then mails the magazines to subscribers over a one-year period. Requirements 1._Journalise the entry to record the original receipt of $170.00 cash. 2. Journalise the adjusting entry that Melbourne Magazine makes to record the earning of $12000 of subscription revenue that was collected in advance. Include an explanation for the entry. $3-10 Preparing an adjusted trial balance Famous Cut Hair Stylists has begun the preparation of its adjusted trial balance as follows: FAMOUS CUT HAIR STYLISTS Preparation of adjusted trial balance sat 31 December 2013 Adjusted Trial balance ‘Adjustments tial balance ‘Account Debit | Credit Debit | Credit | Debit || Credit Cash $800 Supplies 900 Equipment 19100 ‘Accumulated depreciation $ 1000 Accounts payable 200 Interest payable Loan payable 2500 Fabio, capital 7-400 Service revenue 14800 Rent expense 4500 Supplies expense Depreciation expense Interest expense 600. Total $25 900 | $25900(CHAPTERS THE ADJUSTING PROCESS Year-end data include the following: Supplies on hand, $300, b Depreciation, $1 000 © Accrued interest expense, $600 Requirement Complete Famous Cut's adjusted trial balance. Key each adjustment by letter. ‘Note: Starters 3-11 and 3-12 should be used only after completing Starter 3-10. 53-11 Preparing an income statement Refer to the data in Starter 3-10, Requirement Calculate Famous Cuts profit or oss for the year ended 31 December 2013. 3-12 Preparing a balance sheet Refer to the data in Starter 3-10. Requirement Calculate Famous Cut’ total assets at 31 December 2013. Exercises 3-1 Comparing accrual and cash-basis accounting [5-10 min] Momentous Occasions is a photography business that shoots videos at university parties. The first- years pay $100 in advance on 3 March to guarantee ths service fr their party to be held on 2 Apri. The second-years promise a minimum of $280 for filming their formal, and pay cash of $410 on 28 February at the party, Requirement ‘Answer the following questions about the correct way to account for revenue under the accrusl basis. Considering the $100 paid by the first-years, on what date was revenue earned? Did the earnings occur on the same date cash was received? Considering the $410 paid by the second-years, on what date was revenue earned? Did the ‘earnings occur on the same date cash was received? £3-2 Comparing accrual and cash-basis accounting, preparing adjusting entries and Preparing income statements [15-25 min] ‘Sweet Catering completed the following selected transactions during May 2013: May Prepaid rent for three months, 51 500, 5 Paid electricity expenses, $400, 9 Received cash for meals served to customers, $2600, 14 Paid cash for kitchen equipment, $2400, 23 Served a banquet on credit, $3000. 31. Made the adjusting entry for rent (from 1 May). 31 Accrued salary expense, $1 400. 31__Recorded depreciation for May on kitchen equipment, $40. Requirements 1 Prepare journal entries for each transaction, 2. Using the journal entries as a guide, show whether each transaction would be handled as a Fevenue or an expense using both the cash and accrual basis by completing the following table: Hee Amount of revenue (expense) for May Cashvbasis amount ofrevenue (expense) _Accrual-basis amount of revenue (expense) Date‘CHAPTER 3 THE ADJUSTING PROCESS. 3 After completing the table, calculate the amount of profit or loss for Sweet Catering under the accrual and cash basis for May. 4. Considering your results from Requirement 3, which method gives the best picture of the true ‘earnings of Sweet Catering? Why? E3-3 Applying accrual principles [5-10 min] Consider the following situations: ‘2 Business receives $2000 on January 1 fora 10-month service contract for the period 1 January t031 October. Total salary forall employees is $3 000 per month. Employees are paid on the 1st and 15th of. the month © Work performed but not yet invoiced to customers for the month is $900. The firm pays interest on its $10.000, 6% loan of $50 on the first day of each month. Requirement ‘Assume the business records adjusting entries monthly, Calculate the amount of each adjustment needed, if any, as of 28 February, 3-4 Applying accrual principles and preparing journal entries for prepaid rent [10-15 min] Consider the facts presented in the following table for Tropical View: Situation FEE A B c D Beginning Prepaid rent $1200 $900 $ 200 $ 700 Payments for prepaid rent during the year 1400 b 1800 a Total amount to account for 2600 1400 z ? Subtract: Ending Prepaid rent 600 00 c 400 Rent expense 3a s_ 900 $1900 $1100 Requirements 1. Complete the table by filing in the missing values. 2. Prepare one journal entry for each situation, if required, for the missing amounts (a-d). Label the journal entries by letter. E3-5 Classifying and journalising adjusting entries [10-15 min] Consider the following independent situations at 31 December 2014: a On 1 August, a business collected $3300 rent in advance, debiting Cash and crediting Unearned rent revenue. The tenant was paying one year’s rent in advance. At 31 December the business must account for the amount of rentit has earned b Salary expense is $1 700 per day—Monday to Friday—and the business pays employees each Friday. This year 31 December falls on a Thursday. ¢ The unadjusted balance of the Supplies account is $3 500. Supplies on hand total $1 700. Equipment depreciation was $300. (On 1 March, when the business prepaid $600 for a two-year insurance policy, the business debited Prepaid insurance and credited Cash. Requirements 1 For each situation, indicate which category of adjustment is described, 2_Journalise the adjusting entry needed on 31 December for each situation. Use the letters to label the journal entries.‘CHAPTER THE ADJUSTING PROCESS £3-6 Recording adjustments in T-accounts and calculating ending balances [10-20 min] ‘The accounting records of Moira Grayson Architect include the following selected, unadjusted balances at 31 March: Accounts receivable, $1400; Supplies, $1 100; Salary payable, $0; Uneamed service revenue, $600; Service revenue, $4200; Salary expense, $1 300; Supplies expense, $0, The data developed for the 31 March adjusting entries ae as follows: a. Service revenue accrued, $900 b_ Unearned service revenue that has been earned, $200 Supplies on hand, $600 d. Salary owed to employee, $400 Requirement Open a T-account for each account and record the adjustments directly in the T-accounts, keying each adjustment by letter. Show each accounts adjusted balance. Journal entries are not required. 3-7 Preparing adjusting entries and preparing an adjusted trial balance [10-15 min] First Class Maids, the cleaning service, started the preparation of its adjusted tral balance as follows: FIRST CLASS MAIDS Preparation of adjusted trial balance 3st 30 June2013 “Tal balance ‘Account Debit creat Cosh $700 Supplies 3000 Prepaid insurance 800 Equipment 29000 Accumulated deprecation $7000 Accounts payable 2000 Salary payable Unearned service revenue 300 Moly capital 1 July 2012 7200 | Moths drowings 3000 Service revenve 25000 Salary expense 6000 Supplies expense Depreciation expense Insurance expense Total During the 12 months ended 30 June 2013, First Class Maids: ‘a used supplies of $1 800 bused up prepaid insurance of $620 ¢ used up $460 of the equipment through depreciation accrued salary expense of $310 that First Class Maids hasn't paid yet eared $360 of the uneamed service revenue Requirement Prepare an adjusted tral balance. Use Exhibit 3-6 as a guide. Key each adjustment by letter.(CHAPTER 3 THE ADJUSTING PROCESS Note: Exercise 3-8 should be used only in conjunction with Exercise 3-7. 3-8 Using an adjusted trial balance to prepare adjusting journal entries [10 min] Refer to the data in Exercise 3-7. Requirement Journals the five adjustments, all dated 30 June 2013. Explanations are not required. 3-9 Using the adjusted trial balance to determine the adjusting journal entries [10-15 min] The adjusted tral balance of Jobs-4-U Employment Service follows but is incomplete. JOBS-4-U EMPLOYMENT SERVICE ‘Adjusted trial balance sat 30 April 2013, ‘Trial balance ‘Adjusted trial balance ‘Account Debit Credit. Debit Credit Cash $900 $900 Accounts receivable 4100 5.600 ‘Supplies 11000 500 Equipment 32500 32500 Accumulated depreciation 314.400 $15 400 Salary payable 1200 ‘Yost, capital 31 March 2013 23300 23300 Yost, drawings 4800 4800 Service revenue 9100 10600 Salary expense 2500 3700 Rent expense 1000 1000 Depreciation expense 1000 Supplies expense 500 Total $46 800 350500 | $50500 Requirements 1. Calculate and enter the adjustment amounts directly in the missing Adjustments columns. 2. Prepare each adjusting journal entry for the arnounts calculated in Requirement 1. Date the entries and include explanations. E3-10 Journalising adjusting entries and analysing their effect on the income statement [5-10 min} ‘The following data at 31 January 2013 is given for EBM: a Depreciation, $500 b_ Prepaid rent expired, $600 Interest expense accrued, $300 d_ Employee salaries owed for Monday to Thursday of a five-day worki 313000 fe Unearned service revenue earned, $1 300 Requirements 1 Journalise the adjusting entries needed on 31 January 2013. 2. Suppose the adjustments made in Requirement 1 were not made. Calculate the overall ‘overstatement or understatement of profit as a result of the omission of these adjustments. week; weekly payroll,‘CHAPTER THE ADJUSTING PROCESS £3-11 Using adjusting journal entries and calculating financial statement amounts {10-201 ‘The adjusted tril balances of Superior Intemational at 31 August 2013 and 31 August 2012 include the following amounts: 2013 2012 Supplies $2400 «§ 1200 Salary payable 2500 4100 Unearned service revenue 1210017100 [Analysis of the accounts at 31 August 2013 reveals the following transactions for the financial year ending in 2013: ash payments for supplies $6100 Cash payments for salaries 147300 Cash teceipts in advance for service revenue 83200 Requirement Calculate the amount of Supplies expense, Salary expense and Service revenue to report on the Superior Intemational income statement for 2013, "Note: Exercise 3-12 should be used only in conjunction with Exercise 3-7. 3-12 Using an adjusted trial balance to prepare financial statements [10 min] Refer to the data in Exercise 3-7. Requirements 1. Calculate FirstClass Malds’net income for the period ended 30 June 2013. 2 Calculate FirstClass Maids total assets at 30 June 2013. (Note: Exercise 3-13 should be used only after completing Exercise 3-9 3-13 Preparing the financial statements [20 min] Refer to the adjusted trial balance in Exercise 3-9 for the month ended 30 April 2013. Requirements 1 Prepare the income statement. 2 Prepare the statement of changes in equity. 3. Prepare the balance sheet, 3-14 Preparing the income statement [15 min] ‘The accountant for Reva Su, Accountant, has posted adjusting entries (a) to (e) to the accounts at 30 June 2013. Selected balance sheet accounts and all the revenues and expenses of the entity follow in -account form. Accounts receivable Supplies 2700 1200 | (a) 00 fe 800 spr-—building 30000 @ 5000 Salary payable Service revenue @ 900 105 700 Cy) 800CCHAPTER3 THE ADJUSTING PROCESS Salary expense Supplies expense 28200 | @ 600 @ 900 Depreciation expense—equi Depreciation expense—bidg. © 1900 @ ‘5000 Requirements 1 Prepare the income statement of Reva Su, Accountant, forthe year ended 30 June 2013. 2. Were 2013 operations successful? E3-15 Preparing the statement of changes in equity [10-15 min] Rolling Hill Interiors began the year with Hil, capital of $20000. On 12 July, Dana Hil, the owner, invested $14000 cash. The income statement for the year ended 31 December 2013 reported 2 profit of $63 000. During this financial year, Hill withdrew cash of $6000 each month. Requirement Prepare Rolling ill Interiors'statement of changes in equity for the year ended 31 December 2013. Problems P3-1 Comparing accrual and cash-basis accounting [15-25 min] Schaad’s Stews completed the following transactions during June 2012: Prepaid ret for June to September, $3600. Purchased computer for cash, $900 Performed catering services on crecit, $2300 Paid internet service provider invoice, $100. Catered wedding event for customer and received cash, $1500. 8 Purchased $150 of supplies on credit. 10 Collected $1200 on account. 14 Paid account payable from 8 June. 15 Paid salary expense, $1200. 30 Recorded adjusting entry forrent (see 1 June). 30 _ Recorded $25 depreciation on computer. 30__ There ae $40 of supplies stil on hand. Requirement Show whether each transaction would be handled as a revenue or an expense for the month of June, ‘using both the cash and accrual basis, by completing the following table. fei ee feat es ese ee “Amount of revenue (expense) for June Cash-basis amount ofrevenue expense) _Aecrual-basis amount of revenue (expense) 3-2 Applying accrual principles (10-20 min} CCrum’s Cookies uses the accrual method of accounting and records transactions on the date they ‘occur. Descriptions of customer transactions follow: ‘a Received $3000 cash from customer for six months of service beginning 1 April 2013. Catered event for customer on 28 April. Customer paid Crum’s invoice of $600 on 10 May. Scheduled catering event to be held 3 June. Customer paid Crums a $500 deposit on 25 May. Catered customer's wedding on 3 May. Customer paid Crum’s an $800 deposit on 15 April and the balance due of $1 000 on 3 May.‘CHAPTER 3THE ADJUSTING PROCESS €€. The business provided catering toa local churchs annual celebration service on 15 May. The ‘church paid the $800 fee to Crums on the same day. £ The business provides food to the local homeless shelter two Saturdays each month. The cost ‘of each event to the shelter is $280. The shelter paid Crum $1 120 on 25 May for April ancl May's events. 3 On 1 Apri, Crum’s entered into an annual service contract with an oll company to provide Catering for the customer's monthly staff events. he contract’ total amount was $4000, but Crum’ offered a 2.5% discount since the customer paid the entire year in advance at the signing of the contract. The first event was held in April. h Crum signed a contract for $1 000 on § May to provide catering for X-treme sports events tobe held 15 June, 27 June, 1 October and 15 November. Requirement Calculate the amount of revenue earned during May 2013 for Crurn’s Cookies for each transavtion. 3-3 Explain why an adjusting entry is needed and calculate the amount of the adjustment (15-25 min} Descriptions of transactions and how they were recorded follow for October 2012 for Ausley Acoustics ‘a Received $1 500 cash from a customer for three months of service beginning 1 October 2012 and ending 31 December 2012. The business recorded a $1 500 debit to Cash and a $1 500 credit to Unearned service revenue. bb Employees are paid $1 000 every Friday for the five-day working week, 31 October 2012 5 on Wednesday. © The business pays $240 on 1 October for their six-month car insurance policy. The business recorded a $240 debit to Prepaid insurance and a $240 credit to Cash. The business purchased office furniture for $6300 on 2 January 2012. The business recorded a $6300 debit to Office furniture and a $6300 credit to Accounts payable. Annual depreciation for the furniture is $900. ‘€ The business began October with $50 of supplies on hand, On 10 October, the business Purchased supplies on account of $100. The business recorded a $100 debit to Supplies and 2100 credit to Accounts payable. The business used $120 of supplies during October. £ The business received its electricity bill on 30 October for $125 but did not pay it until TONovember. On 10 November, it recorded a $125 debit to Electricity and gas expense and $125 credit to Cash. 9. The business paid November's rent of $800 on 30 October. On 30 October, the business recorded an $800 debit to Rent expense and an $800 credit to Cash, Requirement Indicate if an adjusting entry is needed for each item on 31 October and why the entry is needed (that is, an asset or liability account is over/understated). Indicate which specific account on the balance sheet is misstated. Finally, indicate the correct balance that should appear in the balance sheet account after the adjustment is made. Use the following table guide. Item (a) is completed as ‘an example: Adjustment ‘Over/ Balance sheet Correct balance tem needed? _Assetfiability _understated?_account__on 31 October_ @ Yes ability Overstated Unearnedservice $1000‘CHAPTER THE ADJUSTING PROCESS (PSG ommpavAAG accrual and cash-basis accounting, preparing adjusting entries and preparing income statements [15-25 min] Charlotte's Golf School completed the following transactions during March 201: ‘Mar Prepaid insurance for March to May, $600. 4 Performed services (gave golf lessons) on credit, $2500. 5. Purchased equipment on credit, $1600. 8 Paid rates expense, $100 11 Purchased office equipment for cash, $1500. 19 Performed services and received cash, $900, 24 Collected $400 on account. 26 Paid account payable from 5 March. 29. aid salary expense, $1000. 31 Recorded adjusting entry for March insurance expense (see 1 March). 31 ted revenue in an adjusting ent Requirements 1. Prepare journal entries for each transaction. 2. Using the journal entries as a guide, show whether each transaction would be handled asa revenue or an expense for the month of March 2013, using both the cash and accrual basis, by completing the following table. “Amount of revenue (expense) for March Deve Ceshcbasisamount ofrevenue (expense) Acrual:bass amount of revenue (expense) ESS ee 3. After completing the table, calculate the amount of profit or loss or the business under the accrual and cash basis for March 2013. 4 Considering your results from Requirement 3, which method gives the best picture ofthe true earnings of Charlotte’ Golf School? Why? P3-5 Journalising adjusting entries [15-25 min] Laughter Landscaping has the following independent cases atthe end of the year on 31 December 2ov4: 2 Each Friday, Laughter pays employees for the current weeks work. The amount ofthe weekly payrolls $7000 fora five-day working week. This year 31 December falls on a Wednesday. 'b_ Details of Prepaid insurance are shown inthe account: ___ Prepaid insurance Jon $4500 Laughter prepays a full year's insurance each year on 1 January. Record insurance expense for the year ended 31 December. ©The beginning balance of Supplies was $4000. During the year, Laughter purchased supplies for $5200, and at 31 December the supplies on hand total $2400. d_ Laughter designed a landscape plan and the client paid Laughter $7 000 at the start of the project. Laughter recorded this amount as Unearned service revenue. The job will ake several ‘months to complete and Laughter estimates that the business has earned 60% of the total revenue during the current year, ©. Depreciation for the current year includes Equipment, $3 700; and Trucks, $1 300. Make a ‘compound entry. Requirement Journalise the adjusting entry needed on 31 December 2014 for each of the previous items affecting Laughter Landscaping.(CHAPTER THE ADJUSTING PROCESS P3-6 Analysing and journalising adjustments [15-20 min] Galant Theatre Productior’s unadjusted and adjusted tral balances at 30 June 2014 follow: GALANT THEATRE PRODUCTION Adjusted trial balance sat 30 June 2014 ‘rial balance ‘Adjusted trial balance Account Debit Credit Debit Credit Cash $ 3900 $3900 ‘Accounts receivable 6100 6900 Supplies 1700 300 Prepaid insurance 2700 2100 Equipment 25000 25000 Accumulated depreciation 5 8800 $ 13200 Accounts payable 4000 4000 Salary payable 300 Golant, capital 20300 20 300 Galant, drawings 30500 30500 Service revenue 71000 71.800 Depreciation expense 4400 Supplies expense 1400 Electricity and gas expense 4700 4700 Salary expense 29500 29 800 Insurance expense 600 Total $104 100104100 $109.60 5109600 _ Requirement Journalise the adjusting entries that account for the differences between the two trial balances.‘CHAPTER THE ADJUSTING PROCESS 3-7 Journalising and posting adjustments to the T-accounts and preparing an adjusted tri balance [45-601 ‘The trial balance of Adelaide Air Purification System at 30 June 2014 and the data needed for the month-end adjustments follow: ADELAIDE AIR PURIFICATION SYSTEM Trialbalance asat30 une 2014 Account Debit | can $7700 Accounts receivable 19200 Prepaid ent 2400 | supoties 1300 Equipment 19900 ‘Accumulated deprecation | recounts payable Salary payable Uneamed service revenue Able, capital ‘Able, drawings 9500 Service revenue Salary expense 3500 Rent expense Depreciation expense Advertising expense 1900 Supplies expense Total 365400 ‘Adjustment data at 30 June follow: a Unearned service revenue still unearned, $1 100 b Prepaid rent stillin effect, $500 Supplies used during the month, $600 d_ Depreciation for the month, $900 e Accrued advertising expense, $900 (credit Accounts payable) £ Accrued salary expense, $1 100 Requirements 1. Journalise the adjusting entries. 2. The unadjusted balances have been entered for youin the general ledger accounts. Post the adjusting entries to the ledger accounts. Prepare the adjusted trial balance. How will Adelaide Air Purification System use the adjusted trial balance?‘CHAPTER 3 THE ADJUSTING PROCESS 3-8 Preparing and posting adjusting journal entries, preparing an adjusted trial balance and financial statements [45-60 min] The trial balance of Lamington Inn at 30 June 2014 and the data needed for the month-end adjustments follow: LAMINGTON INN ‘Trial balance ‘asat30 June 2014 ‘Account Debit Croat cash $ 12100 Accounts receivable 14300 Prepaid insurance 2300 ‘Supplies 1100 Building 411000 ‘Accumulated depreciation $31 Accounts payable Salary payable Unearned service revenue Calvasina, beginning capital ’ Calvasina, drawings 2860 Service revenue Salary expense 2700 Insurance expense Depreciation expense Advertising expense 830 Supplies expense Total S447 190__ $48 Ss Adjustment data at 30 June follow: ‘2 Prepaid insurance stil in effect, $700 Supplies used during the month, $500 Depreciation for the month, $1 600 d_ Accrued salary expense, $400 © Uneared service revenue still unearned, $1 400 Requirements 1 Journalise the adjusting entries. 2 The unadjusted balances have been entered for you in the general ledger accounts. Post the adjusting entries tothe ledger accounts, 3. Prepare the adjusted trial balance. 4 Prepare the income statement, statement of changes in equity and balance sheet for the business for the month ended 30 June 2014,(CHAPTER THE ADJUSTING PROCESS 3-9 Prepare an adjusted trial balance and financial statements [45-60 min] Consider the unadjusted trial balance of Reliable Limo Service at 30 June 2013 and the related month-end adjustment data: RELIABLE LIMO SERVICE ‘Telal balance ast 30 June 2013 ‘Account Debit Credit cash $ 6900 ‘Accounts receivable 1100 Prepaid rent 3500 supplies 1100 Vehicle 7000 ‘Accumulated depreciation $3400 Accounts payable 3300 Salary payable Wake, beginning capital 0000 Wake, drawings 4.400 Service revenue 9600 Salary expense 1500 Rent expense Fuel expense ‘800 Depreciation expense Supplies expense Total ‘Adjustment data at 30 June follow: a Acctued service revenue at 30 June, $1 500 b_ One-fifth of the prepaid rent expired during the month, Supplies on hand at 30 June, $700, ¢ Depreciation on vehicle for the month, $1 400 d_ Accrued salary expense at 30 June for one day only. The five-day weekly payrolls $1 500. Requirements 11 Write the trial balance on a worksheet, using Exhibit 3-6 as an example, and prepare the adjusted trial balance of Reliable Limo Service at 30 June 2013. Key each adjusting entry byletter. 2. Prepare the income statement and the statement of changes in equity for the month ended 30 June 2013, and the balance sheet at that date.(CHAPTER 3 THE ADJUSTING PROCESS P3-10 Preparing financial statements from an adjusted trial balance [20-30 min] The adjusted trial balance of Party Piano Tuning Service at the financial year-end 31 May 2013, follows: PARTY PIANO TUNING SERVICE ‘Adjusted trial balance asat31 May 2013, ‘Account ttle Debit Credit | cash § 12600 Accounts receivable 10800 Supplies 1900 | Equipment 25900 ‘Accumulated depreciation $ 12500 | Accounts payable 3300 Unearned service revenue Salary payable Loan payable LUndros, beginning capital 13.600 Lindros, drawings 38000 | Service revenue 165000 Depreciation expense 5.600 Salary expense 9600 Electricity and gas expense 3.900 Insurance expense 3700 ‘Supplies expense 1.900 otal $5113.900_|_ $113,900 —_—_—_—_—_— Requirements 1. Prepare Party's 2013 income statement. 2. Prepare the statement of changes in equity for the year. 3. Prepare the year-end balance sheet. 4. Which financial statement reports Party's results of operations? Were the 2013 operations, successful? Cite specifics from the financial statements to support your evaluation. 5 Which statement reports the business’ financial position? Continuing exercise 3-16 Preparing adjusting entries and preparing an adjusted trial balance [20-30 min] ‘This exercise continues the Lawlor Lawn Service situation from Exercise 2-15 of Chapter 2. Start from the tial balance and the posted T-accounts that Lawlor Lawn Service prepared at 31 May 2012. Requirements 1 Open these additional T-accounts: Accumulated depreciation—equipment; Depreciation expense—equipment; Supplies expense. 2. Mindy Lawlor determines that there are $40 in Lawn supplies left at 31 May 2012. Depreciation con the equipment was $30 for the month. Journalise any required adjusting journal entries. 3. Post to the -accounts, keying alliterns by date. 4. Prepare the adjusted tral balance, as illustrated in Exhibit 3-6.‘CHAPTER THE ADJUSTING PROCESS Continuing problem 3-11 Preparing adjusting entries, preparing an adjusted trial balance and preparing financial statements from an adjusted trial balance [40-50 min] ‘This problem continues the Draper Consulting situation from Problem 2-18 of Chapter 2, Start from the trial balance and the posted T-accounts that Draper Consulting prepared at 18 December 2012, as follows: DRAPER CONSULTING Trial balance as at 18 December 2012 Balance ‘Account title Debit credit Cash $16500 ‘Accounts receivable 1500 ‘Supplies 900 Equipment 1800 Accumulated depreciation—equipment Furniture 4200 ‘Accumulated depreciation—furniture ‘Accounts payable $5100 Salary payable Unearned service revenue Carl Draper, beginning capital 18000 Carl Draper, drawings Service revenue 2600 Rent expense 550 Electricity and gas expense 250 Salary expense Depreciation expense—equipment Depreciation expense—furniture Supplies expense Total Later in December, the business completed these transactions, as follows: Dec Received $1400 in advance for client service to be performed evenly over the next 30 days 21 Hired. secretary to be paid $2055 on the 20th day of each month. The secretary begins work immediately. 26 Paid $450.0n account. 28 Collected $300 on account. 30 Carl Draper withdrew cash of $1400. Requirements 1. Open these additional T-accounts: Accumulated depreciation—equipment; Accumulated depreciation—furniture; Salary payable; Unearned service revenue; Salary expense: Depreciation expense—equipment; Depreciation expense—furniture; Supplies expense. 2. Journalise the transactions of 21-30 December. 3 Post to the T-accounts, keying all items by date.(CHAPTER THE ADJUSTING PROCESS 4 Prepare a tral balance at 31 December. Also set up columns for the adjustments and for the adjusted trial balance, as illustrated in Exhibit 36, 5 At31 December, the business gathers the following information for the adjusting entries a Accrued service revenue, $550 b_ Earned $700 of the service revenue collected in advance on 21 December © Supplies on hand, $200 Depreciation expense—equipment, 30; furniture, $70, Accrued $685 expense for secretary's salary (On your worksheet, make these adjustments directly in the adjustments columns and complete the adjusted trial balance at 31 December. To avoid rounding complications, base adjust ng entries on 30-day months and 360-day years. 6 Joumnalise and post the adjusting entries. In the T-accounts, denote each adjusting amount as ‘Adjand an account balance as Bal 7. Prepare the income statement and the statement of changes in equity of Draper Consulting for the month ended 31 December 2012, and prepare the balance sheet at that date. APPLY De In cases case 3-1 Thu Nguyen has been the owner and has operated Worldcom Advertising since its beginning 10 years ago. The firm has prospered. Recently, Nguyen mentioned that she would sell the business forthe right price Assume that you are interested in buying World.com Advertsing, You obtain the most recent monthly tral balance, which follows. Revenues and expenses vary litle from month to month, and January isa typical month. The tril balance shown isa preliminary or unadjusted tral balance. The controller informs you that the necessary accrual adjustments should include revenues of $3800 and expenses of $1 100 Also if you were to buy World.com Advertsing, you would hire a manager ‘so you could devote your time to other duties. Assume that this person would require a monthly salary f $5000,‘CHAPTER3 THE ADJUSTING PROCESS "WORLD.COM ADVERTISING Trial balance as at 31 January 2015 ‘Account ttle cash $s 9700 Accounts receivable 14100 Prepaid expenses 2.600 | Building 221300 ‘Accumulated depreciation $ 88.600 ‘Accounts payable 13000 Salary payable Uneatned service revenue 56700 ‘ThuNguyen, capital 110.400 ‘Thu Nguyen, drawings 2000 Service revenue 12300 Rent expense Salary expense 3.400 Electricity and gas expense 900 Depreciation expense Supplies expense Total 3261000 §261000 Requirements 1. Assume that the most you would pay forthe business is 20 times the monthly profit you could ‘expect to earn from itCalculate this possible price. 2 Nguyen states the least she will take for the business is an amount equal to the business’ ‘owners’ equity balance on 31 January. Calculate this amount. 3. Under these conditions, how much should you offer Nguyen? Give your reason. Case 3-2 ‘One year ago, Josh Gamer founded Swift Classified Ads. Gamer remembers that you took an accounting course while in college and comes to you for advice. He wishes to know how much profit his business earned during the past year in order to decide whether to keep the firm going. His accounting records consist of the T-accounts from his ledger, which were prepared by an ‘accountant who moved to another city. The ledger at 31 December follows. The accounts have not been adjusted. Garner indicates that, at year-end, customers owe him $1 600 for accrued service revenue. These revenues have not been recorded, During the year, Garner collected $4000 service revenue in advance from customers, but he earned only $900 of that amount. Rent expense for the year was $2400, and he used up $1 700 of the supplies. Garner determines that depreciation on hisequipment ‘was $5000 forthe year. At 31 December he owes his employee $1 200 accrued salary.(CHAPTER THE ADJUSTING PROCESS Cash Accounts receivable. Prepaid rent ‘Supplies mee seen aeeat 1200 it 208] ia 24) Accumulated Equipment depreciation Accounts payable doen D3 250 Uneamed service revenue Salary payable er Garner, capital Garner, drawings Service revenue [oec3i 20000 Dect 2000] Dest 59500 Depreciation Electricity and gas Salary expense expense Rent expense expense dest 1709 aor wo Supplies expense Requirement Help Josh Gamer calculate his profit fr the year. Advise him whether to continue operating Swift Classified Ads. Focus on ethics ‘The net income of All Goods, a department store, decreased sharply during 2014. Matt Southern, ‘manager of the store, anticipates the need for a bank loan in 2015. Late in 2014, Matt instructs the store's accountant to record a $2000 sale of furniture to the Southern family, even though the goods will not be shipped from the manufacturer until January 2015. He also tells the accountant not to make the following 31 December 2014, adjusting entries: Salaries owed to employees $900 Prepaid insurance that has expired 400 Requirements 1 Calculate the overall effects ofthese transactions on the store's reported income for 2014. 2. Whyis Matt taking this action? Is his action ethical? Give your reason, identifying the parties helped and the parties harmed by his action. (Challenge) 3. Asa personal friend, what advice would you give the accountant? (Challenge) Fraud case XM was a small engineering firm that built high-tech robotic devices for electronics manufacturers. ‘One very complex device was partially completed at the end of 2014. Barb McLauren, head engineer ‘and owner, knew the experimental technology was a failure and XM would not be able to complete the $20000000 contract next year. However, she was getting ready to sell the firm and retire in January. She told the accountant that the device was 80% complete at year-end and on track for successful completion the following spring; the accountant accrued 80% of the contract revenue in, December 2014. Barb McLauren sold the firm in January 2015 and retired. By mid-year, it became‘CHAPTER THE ADJUSTING PROCESS apparent that XM would not be able to complete the project successfully and the new owner would never recoup his investment. Requirements 1. For complex, high-tech contracts, how would you guess a business might determine the percentage of completion and the amount of revenue to accrue? 2. What action do you think was taken by XM in 2015 with regard to the revenue that had been accrued the previous year? Financial statement case JB Hi-Fi—like all other businesses—makes adjusting entries prior to year-end in order to measure assets liabilities, revenues and expenses properly. Examine JB Hi-Fis balance sheet and Notes thereto. Pay particular attention to Accumulated depreciation. Requirements 1 Open T-accounts forthe following accounts withthe balances shown inthe latest annual reports at 30 June (amounts in milions as in the JB Hi-i financial statements): ‘Accumulated depreciation, 37 “rade and other payables ™ Other current assets n 2. Assume that during the current period JB Hi-Fi completes the following transactions (amounts in millions). Journalise each transaction (explanations are not required): a Recorded depreciation expense, $7. bb Paid the balance of trade and other payables at 30 June (round to nearest whole § millon). ¢ Purchased inventory on account, $16. d_ Purchased other assets for cash of $2. 3 Post to the three accounts.