Adjustments and Accrual and Cash Basis Accounting

1.     CheckPoint: Adjustments and Accrual and Cash Basis Accounting

·         Resource: Fundamental Accounting Principles, pp. 116–118 & 120

·         Complete Quick Study questions 3-1 & 3-9 on pp. 116 & 117 and Exercises 3-1 & 3-7 on pp. 118 & 120.

·         Post your answers as an attachment.

QS 3-1

Identifying accounting adjustments

C3

Classify the following adjusting entries as involving prepaid expenses (PE), unearned revenues (UR), accrued expenses (AE), or accrued revenues (AR).

a. To record revenue earned that was previously received as cash in advance.

b. To record annual depreciation expense.

c. To record wages expense incurred but not yet paid (nor recorded).

d. To record revenue earned but not yet billed (nor recorded).

e. To record expiration of prepaid insurance.

QS 3-9

Computing accrual and cash income

C1 C2

In its first year of operations, Harden Co. earned $39,000 in revenues and received $33,000 cash from these customers. The company incurred expenses of $22,500 but had not paid $2,250 of them at yearend. Harden also prepaid $3,750 cash for expenses that would be incurred the next year. Calculate the first year’s net income under both the cash basis and the accrual basis of accounting.

EXERCISES

Exercise 3-1

Classifying adjusting entries

C3

In the blank space beside each adjusting entry, enter the letter of the explanation A through F that most closely describes the entry:Exercise 3-1

Classifying adjusting entries

A. To record this period’s depreciation expense.

B. To record accrued salaries expense.

C. To record this period’s use of a prepaid expense.

D. To record accrued interest revenue.

E. To record accrued interest expense.

F. To record the earning of previously unearned income.

______ 1. Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,280

Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,280

______ 2. Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,208

Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,208

______ 3. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,180

Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,180

______ 4. Unearned Professional Fees . . . . . . . . . . . . . . . . . . . . . 19,250

Professional Fees Earned . . . . . . . . . . . . . . . . . . . . . . 19,250

______ 5. Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300

Interest Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300

______ 6. Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 38,217

Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . 38,217

Exercise 3-7

Determining assets and expenses for accrual and cash accounting

C2

On March 1, 2003, a company paid a $16,200 premium on a 36-month insurance policy for coverage beginning on that date. Refer to that policy and fill in the blanks in the following table:

Balance Sheet Insurance Asset Using Insurance Expense Using

Accrual Cash Accrual Cash

Basis Basis Basis Basis

Dec. 31, 2003 $_______         $_______        2003 $_______           $_______

Dec. 31, 2004 _______           _______          2004 _______             _______

Dec. 31, 2005 _______           _______          2005 _______            _______

Dec. 31, 2006 _______           _______          2006 _______            _______

                                                                        Total $_______           $_______