Week 2 Homework Problems
clw0dq8
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Accrual Accounting Concepts
Kimmel ● Weygandt ● Kieso
Financial Accounting, Eighth Edition
4
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Prepare adjusting entries for deferrals.
CHAPTER OUTLINE
Explain the accrual basis of accounting and the reasons for adjusting entries.
1
2
LEARNING OBJECTIVES
Prepare adjusting entries for accruals.
3
Prepare an adjusted trial balance and closing entries.
4
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LEARNING OBJECTIVE
Explain the accrual basis of accounting and the reasons for adjusting entries.
1
LO 1
Generally a month, a quarter, or a year.
Fiscal year vs. calendar year.
Accountants divide the economic life of a business into artificial time periods (Periodicity Assumption).
Jan.
Feb.
Mar.
Apr.
Dec.
. . . . .
▼ HELPFUL HINT
An accounting time period that is one year long is called a fiscal year.
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Periodicity Assumption
Review Question
What is the periodicity assumption?
Companies should recognize revenue in the accounting period in which it is earned.
Companies should match expenses with revenues.
The economic life of a business can be divided into artificial time periods.
The fiscal year should correspond with the calendar year.
LO 1
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Companies recognize revenue in the accounting period in which the performance obligation is satisfied.
REVENUE RECOGNITION PRINCIPLE
LO 1
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TEACHING TIP
Service businesses recognize revenue when the services are performed, although many customers may have been billed for the services (on account). The cash has not been received; however, the services have been performed. Therefore, revenue should be recognized.
Illustration: Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the first week of July. The journal entries for June and July would be:
REVENUE RECOGNITION PRINCIPLE
LO 1
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“Let the expenses follow the revenues.”
ILLUSTRATION 4-1
EXPENSE RECOGNITION PRINCIPLE
LO 1
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ILLUSTRATION 4-1
GAAP relationships in revenue and expense recognition
EXPENSE RECOGNITION PRINCIPLE
LO 1
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INVESTOR INSIGHT
Reporting Revenue Accurately
The Until recently, electronics manufacturer Apple was required to spread the revenues from iPhone sales over the two-year period following the sale of the phone. Accounting standards required this because Apple was obligated to provide software updates after the phone was sold. Since Apple had service obligations after the initial date of sale, it was forced to spread the revenue over a two-year period. As a result, the rapid growth of iPhone sales was not fully reflected in the revenue amounts reported in Apple’s income statement. A new accounting standard now enables Apple to report much more of its iPhone revenue at the point of sale. It was estimated that under the new rule revenues would have been about 17% higher and earnings per share almost 50% higher.
Apple Inc.
LO 1
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Accrual-Basis Accounting
Transactions recorded in the periods in which the events occur.
Revenues are recognized when services performed, even if cash was not received.
Expenses are recognized when incurred, even if cash was not paid.
ACCRUAL VERSUS CASH BASIS
LO 1
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Cash-Basis Accounting
Revenues are recognized only when cash is received.
Expenses are recognized only when cash is paid.
Not in accordance with generally accepted accounting principles (GAAP).
ACCRUAL VERSUS CASH BASIS
LO 1
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TEACHING TIP
Explain to students that many businesses use the cash basis of accounting. These businesses outgrow the method when accounts receivable and accounts payable become substantial. Also, if the businesses need audited financial statements, they must comply with GAAP and use the accrual basis. Remind them that companies can use the cash method and that its use does not mean that income is being manipulated. Without this discussion, some students may unfairly criticize an employer, relative or friend who is using the cash basis of accounting.
2016
2017
Illustration: Suppose that Fresh Colors paints a large building in 2016. In 2016, it incurs and pays total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not receive payment until 2017.
ACCRUAL VERSUS CASH BASIS
ILLUSTRATION 4-2
Accrual-versus cash-basis accounting
LO 1
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Periodicity Assumption
Review Question
Which one of these statements about the accrual basis of accounting is false?
Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged.
Companies recognize revenue in the period in which the performance obligation is satisfied.
This basis is in accord with generally accepted accounting principles.
Companies record revenue only when they receive cash, and record expense only when they pay out cash.
LO 1
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Adjusting entries
ensure that the revenue recognition and expense recognition principles are followed.
are required every time a company prepares financial statements.
includes one income statement account and one balance sheet account.
THE NEED FOR ADJUSTING ENTRIES
LO 1
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Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recognized in the period in which the performance obligation is satisfied.
c. balance sheet and income statement accounts have correct balances at the end of an accounting period.
d. All of the above.
Review Question
THE NEED FOR ADJUSTING ENTRIES
LO 1
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Deferrals:
1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned revenues: Cash received before service are performed.
Accruals:
1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.
TYPES OF ADJUSTING ENTRIES
ILLUSTRATION 4-3
Categories of adjusting entries
LO 1
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LO 1
Trial Balance – Each account is analyzed to determine whether it is complete and up-to-date.
TYPES OF ADJUSTING ENTRIES
ILLUSTRATION 4-4
Trial balance
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Timing Concepts
Below is a list of concepts in the left column, with descriptions of the concepts in the right column. There are more descriptions provided than concepts. Match the description of the concept to the concept.
DO IT!
1
LO 1
1. ____ Accrual-basis accounting.
2. ____ Calendar year.
3. ____ Periodicity assumption.
4. ____ Expense recognition principle.
(a) Monthly and quarterly time periods.
(b) Efforts (expenses) should be matched with results (revenues).
(c) Accountants divide the economic life of a business into time periods.
(d) Companies record revenues when they receive cash and record expenses when they pay out cash.
(e) An accounting time period that starts on January 1 and ends on December 31.
(f) Companies record transactions in the period in which the events occur.
f
e
c
b
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Analyze business transactions
Journalize
Post
Trial Balance
Journalize and Post Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
To defer means to postpone or delay.
LO 2
LEARNING OBJECTIVE
Prepare adjusting entries for deferrals.
2
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Deferrals are either:
Prepaid expenses
OR
Unearned revenues.
Deferrals
LO 2
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Expenses paid in cash before they are used or consumed.
insurance
supplies
advertising
Cash Payment
Expense Recorded
BEFORE
rent
equipment
buildings
Prepayments often occur in regard to:
PREPAID EXPENSES
LO 2
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Prepaid Expenses
Costs that expire either with the passage of time or through use.
Adjusting entry results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account.
PREPAID EXPENSES
LO 2
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Adjusting entries for prepaid expenses
Increases (debits) an expense account and
Decreases (credits) an asset account.
ILLUSTRATION 4-5
Adjusting entries for prepaid expenses
PREPAID EXPENSES
LO 2
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Illustration: Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand.
Supplies
1,500
Supplies Expense
1,500
Oct. 31
ILLUSTRATION 4-6
($2,500 – 1,000 = $1,500)
Supplies
LO 2
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Illustration: On October 4, Sierra Corporation paid $600 for a one-year fire insurance policy. Coverage began on October 1. Sierra recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month.
Prepaid Insurance
50
Insurance Expense
50
Oct. 31
ILLUSTRATION 4-7
Insurance
LO 2
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Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired.
Depreciation is the process of allocating the cost of an asset to expense (depreciation) over its useful life.
Depreciation does not attempt to report the actual change in the value of the asset.
Depreciation
LO 2
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Illustration: For Sierra Corporation, assume that depreciation on the office equipment is $480 a year, or $40 per month.
Accumulated Depreciation-Equipment
40
Depreciation Expense
40
Oct. 31
ILLUSTRATION 4-8
Depreciation
LO 2
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Statement Presentation
Accumulated Depreciation-Equipment is a contra asset account.
Appears just after the account it offsets (Equipment) on the balance sheet.
ILLUSTRATION 4-9
Balance sheet presentation of
accumulated depreciation
Depreciation
▼ HELPFUL HINT
All contra accounts have increases, decreases, and normal balances opposite to the account to which they relate.
LO 2
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ILLUSTRATION 4-10
Accounting for prepaid expenses
PREPAID EXPENSES
LO 2
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Receipt of cash recorded as a liability before services are performed.
rent
airline tickets
Cash Receipt
Revenue Recorded
BEFORE
magazine subscriptions
customer deposits
Unearned revenues often occur in regard to:
UNEARNED REVENUES
LO 2
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Adjusting entry is made to record the revenue for services performed during the period and to show the liability that remains.
Adjusting entry results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.
UNEARNED REVENUES
LO 2
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Adjusting entries for unearned revenues
Decrease (a debit) to a liability account.
Increase (a credit) to a revenue account.
ILLUSTRATION 4-11
UNEARNED REVENUES
LO 2
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Illustration: Sierra Corporation received $1,200 on October 2 from R. Knox for guide services for multi-day trips expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. From an evaluation of the service Sierra performed for Knox during October, the company determines that it has earned $400 in October.
Service Revenue
400
Unearned Service Revenue
400
Oct. 31
ILLUSTRATION 4-12
UNEARNED REVENUES
LO 2
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ILLUSTRATION 4-13
Accounting for unearned revenues
Unearned Revenues recorded in liability accounts are now recognized as revenue for services performed.
ACCOUNTING FOR UNEARNED REVENUES
Examples
Reason for
Adjustment
Accounts Before
Adjustment
Adjusting
Entry
Rent, magazine subscriptions, customer deposits for future service.
Liabilities overstated.
Revenues understated.
Dr. Liabilities
Cr. Revenues
UNEARNED REVENUES
LO 2
4-‹#›
ACCOUNTING ACROSS THE ORGANIZATION
Turning Gift Cards into Revenue
Those of you who are marketing majors (and even most of you who are not) know that gift cards are among the hottest marketing tools in merchandising today. Customers purchase gift cards and give them to someone for later use. In a recent year, gift-card sales were expected to exceed $124 billion. Although these programs are popular with marketing executives, they create accounting questions. Should revenue be recorded at the time the gift card is sold, or when it is exercised? How should expired gift cards be accounted for? In a recent balance sheet, Best Buy reported unearned revenue related to gift cards of $406 million.
Source: “2014 Gift Card Sales to Top $124 Billion, But Growth Slowing,” PRNewswire (December 10, 2014).
LO 2
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Adjusting Entries for Deferrals
The ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
An analysis of the accounts shows the following.
1. Insurance expires at the rate of $100 per month.
2. Supplies on hand total $800.
3. The equipment depreciates $200 a month.
4. During March, services were performed for $4,000 of the unearned service revenue reported.
Prepare the adjusting entries for the month of March.
DO IT!
2
LO 2
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Adjusting Entries for Deferrals
The ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
Insurance expires at the rate of $100 per month.
SOLUTION
DO IT!
2
Insurance Expense 100
Prepaid Insurance 100
LO 2
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Adjusting Entries for Deferrals
The ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
Supplies on hand total $800.
SOLUTION
DO IT!
2
Supplies Expense 2,000
Supplies 2,000
LO 2
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Adjusting Entries for Deferrals
The ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
The equipment depreciates $200 a month.
SOLUTION
DO IT!
2
Depreciation Expense 200
Accumulated Depreciation 200
LO 2
4-‹#›
Adjusting Entries for Deferrals
The ledger of Hammond, Inc. on March 31, 2017, includes these selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.
During March, services were performed for $4,000 of the unearned service revenue reported.
SOLUTION
DO IT!
2
Unearned Service Revenue 4,000
Service Revenue 4,000
LO 2
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Analyze business transactions
Journalize
Post
Trial Balance
Journalize and Post Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
Increase both a balance sheet and an income statement account.
LO 3
LEARNING OBJECTIVE
Prepare adjusting entries for accruals.
3
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Made to record:
Revenues for services performed and
OR
Expenses incurred
in the current accounting period that have not been recognized through daily entries.
Adjusting Entries for Accruals
LO 3
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Revenues for services performed but not yet received in cash or recorded.
rent
interest
services performed
BEFORE
Accrued revenues often occur in regard to:
Cash Receipt
Revenue Recorded
Adjusting entry results in:
ACCRUED REVENUES
LO 3
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Accrued Revenues
An adjusting entry serves two purposes:
Shows the receivable that exists, and
Records the revenues for services performed.
ACCRUED REVENUES
LO 3
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Adjusting entries for accrued revenues
Increases (debits) an asset account.
Increases (credits) a revenue account.
ILLUSTRATION 4-14
ACCRUED REVENUES
LO 3
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Illustration: In October, Sierra Corporation performed guide services for $200 that were not billed to clients before October 31.
Service Revenue
200
Accounts Receivable
200
Oct. 31
ILLUSTRATION 4-15
ACCRUED REVENUES
LO 3
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ILLUSTRATION 4-16
Accounting for accrued revenues
Services performed but not yet received in cash or recorded.
ACCOUNTING FOR ACCRUED REVENUES
Examples
Reason for
Adjustment
Accounts Before
Adjustment
Adjusting
Entry
Interest, rent, services performed but not collected.
Assets understated.
Revenues understated.
Dr. Assets
Cr. Revenues
ACCRUED REVENUES
LO 3
4-‹#›
Expenses incurred but not yet paid in cash or recorded.
BEFORE
Accrued expenses often occur in regard to:
Cash Payment
Expense Recorded
utilities
salaries
Adjusting entry results in:
Interest
taxes
ACCRUED EXPENSES
LO 3
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An adjusting entry serves two purposes:
Records the obligations, and
Recognizes the expenses.
ACCRUED EXPENSES
LO 3
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Adjusting entries for accrued expenses
Increases (debits) an expense account.
Increases (credits) a liability account.
ILLUSTRATION 4-17
ACCRUED EXPENSES
LO 3
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Illustration: Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an annual rate of 12%.
Interest Payable
50
Interest Expense
50
Oct. 31
ILLUSTRATION 4-19
ILLUSTRATION 4-18
Formula for computing interest
Accrued Interest
$5,000 x 12% x 1/12 = $50
LO 3
4-‹#›
ILLUSTRATION 4-20
Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 × 3 days).
Accrued Salaries
LO 3
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Salaries and Wages Payable
1,200
Salaries and Wages Expense
1,200
Oct. 31
ILLUSTRATION 4-21
Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 × 3 days).
Accrued Salaries
LO 3
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ILLUSTRATION 4-22
Accounting for accrued expenses
ACCRUED EXPENSES
LO 3
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PEOPLE, PLANET, AND PROFIT INSIGHT
Got Junk?
Do you have an old computer or two in your garage? How about an old TV that needs replacing? Many people do. Approximately 163,000 computers and televisions become obsolete each day. Yet, in a recent year, only 11% of computers were recycled. It is estimated that 75% of all computers ever sold are sitting in storage somewhere, waiting to be disposed of. Each of these old TVs and computers is loaded with lead, cadmium, mercury, and other toxic chemicals. If you have one of these electronic gadgets, you have a responsibility, and a probable cost, for disposing of it. Companies have the same problem, but their discarded materials may include lead paint, asbestos, and other toxic chemicals.
LO 3
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ILLUSTRATION 4-23
Summary of adjusting entries
SUMMARY OF BASIC RELATIONSHIPS
LO 3
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Adjusting Entries for Accruals
Micro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. The following information relates to August.
At August 31, the company owed its employees $800 in salaries that will be paid on September 1.
On August 1, the company borrowed $30,000 from a bank on a 15-year mortgage. The annual interest rate is 10%.
Revenue for services performed but unrecorded for August totaled $1,100.
Prepare the adjusting entries needed at August 31, 2017.
DO IT!
3
LO 3
4-‹#›
Adjusting Entries for Accruals
Micro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. Prepare the adjusting entries needed at August 31, 2017.
At August 31, the company owed its employees $800 in salaries that will be paid on September 1.
SOLUTION
DO IT!
3
Salaries and Wages Expense 800
Salaries and Wages Payable 800
LO 3
4-‹#›
Adjusting Entries for Accruals
Micro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. Prepare the adjusting entries needed at August 31, 2017.
On August 1, the company borrowed $30,000 from a bank on a 15-year mortgage. The annual interest rate is 10%.
SOLUTION
DO IT!
3
Interest Expense 250
Interest Payable 250
LO 3
4-‹#›
Adjusting Entries for Accruals
Micro Computer Services Inc. began operations on August 1, 2017. At the end of August 2017, management attempted to prepare monthly financial statements. Prepare the adjusting entries needed at August 31, 2017.
Revenue for services performed but unrecorded for August totaled $1,100.
SOLUTION
DO IT!
3
Accounts Receivable 1,100
Service Revenue 1,100
LO 3
4-‹#›
Analyze business transactions
Journalize
Post
Trial Balance
Adjusting Entries
Adjusted trial balance
Prepare financial statements
Journalize and post closing entries
Prepare a post-closing trial balance
LO 4
LEARNING OBJECTIVE
Prepare an adjusted trial balance and closing entries.
4
4-‹#›
After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).
The adjusted trial balance’s purpose is to prove the equality of debit balances and credit balances in the ledger.
The adjusted trial balance is the primary basis for the preparation of the financial statements.
PREPARE ADJUSTED TRIAL BALANCE
LO 4
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LO 4
ILLUSTRATION 4-26
Adjusted trial balance
4-‹#›
PREPARE ADJUSTED TRIAL BALANCE
Which of the following statements is incorrect concerning the adjusted trial balance?
An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
The adjusted trial balance provides the primary basis for the preparation of financial statements.
The adjusted trial balance lists the account balances segregated by assets and liabilities.
The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
Review Question
LO 4
4-‹#›
Financial statements are prepared directly from the Adjusted Trial Balance.
Balance Sheet
Income Statement
Retained Earnings Statement
PREPARING FINANCIAL STATEMENTS
LO 4
4-‹#›
ILLUSTRATION 4-27
Preparation of the income statement and retained earnings statement from the adjusted trial balance
4-68
4-‹#›
Tell students to look at the date on the income statement in Illustration 4-27. The date is “For the Month Ending October 31, 2014.” How can one be sure the revenues and expenses reported on the income statement are just for that period? Closing entries transfer the temporary account balances to the stockholders’ equity account and reduce the balances in the temporary accounts to zero. Therefore, at the beginning of the period the temporary accounts have a balance of zero and the revenues and expenses accumulated are for that particular period.
ILLUSTRATION 4-28
Preparation of the balance sheet from the adjusted trial balance
LO 4
4-‹#›
Quality of Earnings – company provides full and transparent information.
Earnings Management - the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Companies may manage earnings by:
one-time items to prop up earnings numbers.
inflating revenue numbers in the short-run.
improper adjusting entries.
As a result of the Sarbanes-Oxley Act, many companies are trying to improve the quality of their financial reporting.
QUALITY OF EARNINGS
LO 4
4-‹#›
Trial Balance
DO IT!
4a
LO 4
4-‹#›
Trial Balance
DO IT!
(a) Determine the net income for the quarter April 1 to June 30.
LO 4
4a
4-‹#›
Trial Balance
DO IT!
Determine the total assets and total liabilities at June 30, 2017.
LO 4
4a
4-‹#›
Trial Balance
DO IT!
Determine the balance in Retained Earnings at June 30, 2017.
Retained earnings, April 1 $ 0
Add: Net income 2,490
Less: Dividends 600
Retained earnings, June 30 $1,890
LO 4
4a
4-‹#›
At the end of the accounting period, companies transfer the temporary account balances to the permanent stockholders’ equity account—Retained Earnings.
ILLUSTRATION 4-29
Temporary versus permanent accounts
CLOSING THE BOOKS
LO 4
4-‹#›
In addition to updating Retained Earnings to its correct ending balance, closing entries produce a zero balance in each temporary account.
ILLUSTRATION 4-30
The closing process
Preparing Closing Entries
LO 4
4-‹#›
LO 4
ILLUSTRATION 4-31
4-‹#›
Illustration 4-32
Posting of closing entries
Preparing Closing Entries
LO 4
4-‹#›
The purpose of the post-closing trial balance is to prove the equality of the permanent account balances that the company carries forward into the next accounting period.
All temporary accounts will have zero balances.
Preparing a Post-Closing Trail Balance
LO 4
4-‹#›
1. Analyze business transactions
2. Journalize the transactions
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
4. Prepare a trial balance
3. Post to ledger accounts
Journalize and post adjusting entries:
Deferrals/Accruals
ILLUSTRATION 4-33
Required steps in the accounting cycle
SUMMARY OF THE ACCOUNTING CYCLE
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
SUMMARY OF THE ACCOUNTING CYCLE
ILLUSTRATION 4-33
Required steps in the accounting cycle
LO 4
4-‹#›
Sierra Corporation’s income statement shows net income of $2,860. Net income and net cash provided by operating activities often differ.
Net income on a cash basis is referred to as “Net cash provided by operating activities.”
The statement of cash flows, reports net cash provided by operating activities.
Illustration 4-27
KEEPING AN EYE ON CASH
LO 4
4-‹#›
The difference for Sierra is $2,840 ($5,700 - $2,860). The following summary shows the causes of this difference.
LO 4
KEEPING AN EYE ON CASH
4-‹#›
Closing Entries
Hancock Company has the following balances in selected accounts of its adjusted trial balance.
Accounts Payable $27,000 Dividends $15,000
Service Revenue 98,000 Retained Earnings 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Expense 51,000 Supplies Expense 7,000
Prepare the entries to close the revenue and expense accounts.
SOLUTION
DO IT!
4b
Service Revenue 98,000
Income Summary 98,000
Income Summary 80,000
Salaries and Wages Expense 51,000
Rent Expense 22,000
Supplies Expense 7,000
LO 4
4-‹#›
Closing Entries
Hancock Company has the following balances in selected accounts of its adjusted trial balance.
Accounts Payable $27,000 Dividends $15,000
Service Revenue 98,000 Retained Earnings 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Expense 51,000 Supplies Expense 7,000
Prepare the entries to close income summary and dividends.
SOLUTION
DO IT!
4b
Income Summary 18,000
Retained Earnings 18,000
Retained Earnings 15,000
Dividends 15,000
LO 4
4-‹#›
LO 5
LEARNING OBJECTIVE
APPENDIX 4A: Describe the purpose and the basic form of a worksheet.
*5
Worksheet
A multiple-column form that may be used in the adjustment process and in preparing financial statements.
Manual or computer spreadsheet.
A working tool, not a permanent accounting record.
Neither a journal nor a part of the general ledger.
4-‹#›
ILLUSTRATION 4A-1
Form and procedure for a worksheet
SIERRA CORPORATION
Worksheet
For the Month Ended October 31, 2017
LO 5
4-‹#›
(a)
(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)
(f)
(f)
(g)
(c)
ILLUSTRATION 4A-1
Form and procedure for a worksheet
SIERRA CORPORATION
Worksheet
For the Month Ended October 31, 2017
LO 5
4-‹#›
KEY POINTS
A Look at IFRS
LEARNING OBJECTIVE
Compare the procedures for adjusting entries under GAAP and IFRS.
6
Similarities
Companies applying IFRS also use accrual-basis accounting to ensure that they record transactions that change a company’s financial statements in the period in which events occur.
Similar to GAAP, cash-basis accounting is not in accordance with IFRS.
LO 6
4-‹#›
A Look at IFRS
KEY POINTS
Similarities
IFRS also divides the economic life of companies into artificial time periods. Under both GAAP and IFRS, this is referred to as the periodicity assumption.
The general revenue recognition principle required by GAAP that is used in this textbook is similar to that used under IFRS.
Revenue recognition fraud is a major issue in U.S. financial reporting. The same situation occurs in other countries, as evidenced by revenue recognition breakdowns at Dutch software company Baan NV, Japanese electronics giant NEC, and Dutch grocer Ahold NV.
LO 6
4-‹#›
A Look at IFRS
KEY POINTS
Differences
Under IFRS, revaluation (using fair value) of items such as land and buildings is permitted. IFRS allows depreciation based on revaluation of assets, which is not permitted under GAAP.
The terminology used for revenues and gains, and expenses and losses, differs somewhat between IFRS and GAAP. For example, income under IFRS includes both revenues, which arise during the normal course of operating activities, and gains, which arise from activities outside of the normal sales of goods and services.
LO 6
4-‹#›
A Look at IFRS
KEY POINTS
Differences
Under IFRS, expenses include both those costs incurred in the normal course of operations as well as losses that are not part of normal operations. This is in contrast to GAAP, which defines each separately.
LO 6
4-‹#›
A Look at IFRS
LOOKING TO THE FUTURE
The IASB and FASB are completing a joint project on revenue recognition. The purpose of this project is to develop comprehensive guidance on when to recognize revenue. It is hoped that this approach will lead to more consistent accounting in this area. For more on this topic, see www.fasb.org/project/revenue_recognition.shtml.
LO 6
4-‹#›
IFRS Practice
IFRS:
uses accrual accounting.
uses cash-basis accounting.
allows revenue to be recognized when a customer makes an order.
requires that revenue not be recognized until cash is received.
A Look at IFRS
LO 6
4-‹#›
IFRS Practice
Which of the following statements is false?
IFRS employs the periodicity assumption.
IFRS employs accrual accounting.
IFRS requires that revenues and costs must be capable of being measured reliably.
IFRS uses the cash basis of accounting.
A Look at IFRS
LO 6
4-‹#›
IFRS Practice
Accrual-basis accounting:
is optional under IFRS.
results in companies recording transactions that change a company’s financial statements in the period in which events occur.
has been eliminated as a result of the IASB/FASB joint project on revenue recognition.
is not consistent with the IASB conceptual framework.
A Look at IFRS
LO 6
4-‹#›
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COPYRIGHT
4-‹#›
Account TitlesDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.
Cash15,200
Supplies2,500
Prepaid Insurance600
Equipment5,000
Notes Payable5,000
Accounts Payable2,500
Unearned Service Revenue1,200
Common Stock10,000
Dividends500
Service Revenue10,000
Salaries & Wages Exp.4,000
Rent Expense900
Totals28,700 28,700
Balance Sheet
AdjustedIncome
Trial BalanceAdjustmentsTrial BalanceStatement
Sheet1
Adjusted | Income | ||||||||||||||||||||
Trial Balance | Adjustments | Trial Balance | Statement | Balance Sheet | |||||||||||||||||
Account Titles | Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | |||||||||||
Cash | 15,200 | ||||||||||||||||||||
Supplies | 2,500 | ||||||||||||||||||||
Prepaid Insurance | 600 | ||||||||||||||||||||
Equipment | 5,000 | ||||||||||||||||||||
Notes Payable | 5,000 | ||||||||||||||||||||
Accounts Payable | 2,500 | ||||||||||||||||||||
Unearned Service Revenue | 1,200 | ||||||||||||||||||||
Common Stock | 10,000 | ||||||||||||||||||||
Dividends | 500 | ||||||||||||||||||||
Service Revenue | 10,000 | ||||||||||||||||||||
Salaries & Wages Exp. | 4,000 | ||||||||||||||||||||
Rent Expense | 900 | ||||||||||||||||||||
Totals | 28,700 | 28,700 | |||||||||||||||||||
Miscellaneous Expense 200 | |||||||||||||||||||||
55,970 55,970 |
Account TitlesDr.Cr.Dr.Cr.Dr.Cr. Dr. Cr. Dr. Cr.
Cash15,200 15,200 15,200
Supplies2,500 1,500 1,000 1,000
Prepaid Insurance600 50 550 550
Equipment5,000 5,000 5,000
Notes Payable5,000 5,000 5,000
Accounts Payable2,500 2,500 2,500
Unearned Service Revenue1,200 400 800 800
Common Stock10,000 10,000 10,000
Dividends500 500 500
Service Revenue10,000 400 10,600 10,600
200
Salaries & Wages Exp.4,000 1,200 5,200 5,200
Rent Expense900 900 900
Totals28,700 28,700
Supplies Expense1,500 1,500 1,500
Insurance Expense50 50 50
Accumulated Depreciation40 40 40
Depreciation Expense40 40 40
Accounts Receivable200 200 200
Interest Expense50 50 50
Interest Payable50 50 50
Salaries and Wages Payable1,200 1,200 1,200
Totals3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income2,860 2,860
Totals10,600 10,600 22,450 22,450
Balance Sheet
Adjusted Income
Trial BalanceAdjustmentsTrial Balance Statement
Sheet1
Adjusted | Income | ||||||||||||||||||||
Trial Balance | Adjustments | Trial Balance | Statement | Balance Sheet | |||||||||||||||||
Account Titles | Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | |||||||||||
Cash | 15,200 | 15,200 | 15,200 | ||||||||||||||||||
Supplies | 2,500 | 1,500 | 1,000 | 1,000 | |||||||||||||||||
Prepaid Insurance | 600 | 50 | 550 | 550 | |||||||||||||||||
Equipment | 5,000 | 5,000 | 5,000 | ||||||||||||||||||
Notes Payable | 5,000 | 5,000 | 5,000 | ||||||||||||||||||
Accounts Payable | 2,500 | 2,500 | 2,500 | ||||||||||||||||||
Unearned Service Revenue | 1,200 | 400 | 800 | 800 | |||||||||||||||||
Common Stock | 10,000 | 10,000 | 10,000 | ||||||||||||||||||
Dividends | 500 | 500 | 500 | ||||||||||||||||||
Service Revenue | 10,000 | 400 | 10,600 | 10,600 | |||||||||||||||||
200 | |||||||||||||||||||||
Salaries & Wages Exp. | 4,000 | 1,200 | 5,200 | 5,200 | |||||||||||||||||
Rent Expense | 900 | 900 | 900 | ||||||||||||||||||
Totals | 28,700 | 28,700 | |||||||||||||||||||
Supplies Expense | 1,500 | 1,500 | 1,500 | ||||||||||||||||||
Insurance Expense | 50 | 50 | 50 | ||||||||||||||||||
Accumulated Depreciation | 40 | 40 | 40 | ||||||||||||||||||
Depreciation Expense | 40 | 40 | 40 | ||||||||||||||||||
Accounts Receivable | 200 | 200 | 200 | ||||||||||||||||||
Interest Expense | 50 | 50 | 50 | ||||||||||||||||||
Interest Payable | 50 | 50 | 50 | ||||||||||||||||||
Salaries and Wages Payable | 1,200 | 1,200 | 1,200 | ||||||||||||||||||
Totals | 3,440 | 3,440 | 30,190 | 30,190 | 7,740 | 10,600 | 22,450 | 19,590 | |||||||||||||
Net Income | 2,860 | 2,860 | |||||||||||||||||||
Totals | 10,600 | 10,600 | 22,450 | 22,450 | |||||||||||||||||
Miscellaneous Expense 200 | |||||||||||||||||||||
55,970 55,970 |