Concept Introduction:
The business activity for each type of adjusting entry is explained as follows:
- Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
- Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
- Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
- Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
- Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period. Requirement-1:
To prepare:
The
Answer to Problem 49E
The journal entries for the cash receipts and payments are as follows:
Greensboro Properties Inc. | |||
Journal Entries | |||
For the year 2019 | |||
Date | Account Title | Debit | Credit |
Mar. 1 | Prepaid Insurance | $ 10,500 | |
Cash | $ 10,500 | ||
May. 1 | Cash | $ 30,000 | |
Unearned Rent Revenue | $ 30,000 | ||
July. 31 | Cash | $ 240,000 | |
Unearned Rent Revenue | $ 240,000 | ||
Nov. 1 | Prepaid Security services | $ 4,500 | |
Cash | $ 4,500 |
Explanation of Solution
The journal entries for the cash receipts and payments are explained as follows:
Greensboro Properties Inc. | |||
Journal Entries | |||
For the year 2019 | |||
Date | Account Title | Debit | Credit |
Mar. 1 | Prepaid Insurance | $ 10,500 | |
Cash | $ 10,500 | ||
(Being amount paid for insurance in advance) | |||
May. 1 | Cash | $ 30,000 | |
Unearned Rent Revenue | $ 30,000 | ||
(Being amount received in advance) | |||
July. 31 | Cash | $ 240,000 | |
Unearned Rent Revenue | $ 240,000 | ||
(Being amount received in advance) | |||
Nov. 1 | Prepaid Security services | $ 4,500 | |
Cash | $ 4,500 | ||
(Being amount paid in advance) |
Concept Introduction:
Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.
The business activity for each type of adjusting entry is explained as follows:
To prepare:
The adjusting entries at the end of the year.
Answer to Problem 49E
The adjusting entries at the end of the year are as follows:
Greensboro Properties Inc. | |||
Adjusting entries | |||
For the year 2019 | |||
Date | Account Title | Debit | Credit |
Dec. 31 | Insurance Expense | $ 8,750 | |
Prepaid Insurance | $ 8,750 | ||
Dec. 31 | Unearned Rent Revenue | $ 20,000 | |
Rent Revenue | $ 20,000 | ||
Dec. 31 | Unearned Rent Revenue | $ 200,000 | |
Rent Revenue | $ 200,000 | ||
Dec. 31 | Security Service Expense | $ 3,000 | |
Prepaid Security services | $ 3,000 |
Explanation of Solution
The adjusting entries at the end of the year are explained as follows:
Greensboro Properties Inc. | |||
Adjusting entries | |||
For the year 2019 | |||
Date | Account Title | Debit | Credit |
Dec. 31 | Insurance Expense (10500*10/12) | $ 8,750 | |
Prepaid Insurance | $ 8,750 | ||
(Being adjustment made for accrued expense) | |||
Dec. 31 | Unearned Rent Revenue | $ 20,000 | |
Rent Revenue (30000*8/12) | $ 20,000 | ||
(Being adjustment made for accrued revenue) | |||
Dec. 31 | Unearned Rent Revenue | $ 200,000 | |
Rent Revenue (240000*5/6) | $ 200,000 | ||
(Being adjustment made for accrued revenue) | |||
Dec. 31 | Security Service Expense (4500*2/3) | $ 3,000 | |
Prepaid Security services | $ 3,000 | ||
(Being adjustment made for accrued expense) |
Concept Introduction:
Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.
The business activity for each type of adjusting entry is explained as follows:
- Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
- Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
- Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
- Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
- Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period. Requirement-3:
To Indicate:
The effect of omission of adjusting entries on the Income statement and balance sheet for the year.
Answer to Problem 49E
The effect of omission of adjusting entries on the Income statement and balance sheet for the year is as follows:
# | Effect of Omission | |||
a | Understatement of Expenses by $8750 | |||
Overstatement of assets by $8750 | ||||
b | Overstatement of Liabilities by $20,000 | |||
Understatement of revenue by $20,000 | ||||
c | Overstatement of Liabilities by $200,000 | |||
Understatement of revenue by $200,000 | ||||
d | Understatement of Expenses by $3000 | |||
Overstatement of assets by $3000 | ||||
Explanation of Solution
The effect of omission of adjusting entries on the Income statement and balance sheet for the year is explained as follows:
Greensboro Properties Inc. | |||||
Adjusting entries | |||||
For the year 2019 | |||||
# | Date | Account Title | Debit | Credit | Effect of Omission |
a | Dec. 31 | Insurance Expense (10500*10/12) | $ 8,750 | Understatement of Expenses by $8750 | |
Prepaid Insurance | $ 8,750 | Overstatement of assets by $8750 | |||
(Being adjustment made for accrued expense) | |||||
b | Dec. 31 | Unearned Rent Revenue | $ 20,000 | Overstatement of Liabilities by $20,000 | |
Rent Revenue (30000*8/12) | $ 20,000 | Understatement of revenue by $20,000 | |||
(Being adjustment made for accrued revenue) | |||||
c | Dec. 31 | Unearned Rent Revenue | $ 200,000 | Overstatement of Liabilities by $200,000 | |
Rent Revenue (240000*5/6) | $ 200,000 | Understatement of revenue by $200,000 | |||
(Being adjustment made for accrued revenue) | |||||
d | Dec. 31 | Security Service Expense (4500*2/3) | $ 3,000 | Understatement of Expenses by $3000 | |
Prepaid Security services | $ 3,000 | Overstatement of assets by $3000 | |||
(Being adjustment made for accrued expense) |
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Chapter 3 Solutions
Cornerstones of Financial Accounting
- Exercise 3-40 Revenue and Expense Recognition Electronic Repair Company repaired a high-definition television for Sarah Merrifield in December 2019. Sarah paid $80 at the time of the repair and agreed to pay Electronic Repair $80 each month for 5 months beginning on January 15, 2020. Electronic Repair used $120 of supplies, which were purchased in November 2020, to repair the television. Assume that Electronic Repair uses accrual-basis accounting. Required: In what month or months should revenue from this service be recorded by Electronic Repaid? In what month or months should the expense related to the repair of the television be recorded by Electronic Repair? CONCEPTUAL CONNECTION Describe the accounting principles used to answer the above questions.arrow_forwardExercise 3-47 Revenue Adjustments Sentry Transport Inc. of Atlanta provides in-town parcel delivery services in addition to a full range of passenger services. Sentry engaged in the following activities during the current year: Sentry received $5,000 cash in advance from Richs Department Store for an estimated 250 deliveries during December 2019 and January and February of 2020. The entire amount was recorded as unearned revenue when received. During December 2019, 110 deliveries were made for Richs. Sentry operates several small buses that take commuters from suburban communities to the central downtown area of Atlanta. The commuters purchase, in advance, tickets for 50 one-way rides. Each So-ride ticket costs S500. At the time of purchase, Sentry credits the cash received to unearned revenue. At year end, Sentry determines that 10,160 one-way rides have been taken. Sentry operates buses that provide transportation for the clients of a social agency in Atlanta. Sentry bills the agency quarterly at the end of January, April, July, and October for the that quarter. The contract price is S7,500 per quarter. Sentry follows the practice of recognizing revenue from this contract in the in which the service is On December 23, Delta Airlines chartered a bus to transport its marketing group to a meeting at a resort in southern Georgia. The meeting will be held during the last week in January 2020, and Delta agrees to pay for the entire trip on the day the bus departs. At year end, none Of these arrangements have been recorded by Sentry. Required: Prepare adjusting entries at December 31 for these four activities. CONCEPTUAL CONNECTION What would be the effect on revenue if the adjusting entries were not made?arrow_forwardExercise 3-44 Revenue Expense and Recognition Carrico Advertising Inc. performs advertising services for several Fortune 500 companies. The following information describes Carricos activities during 2019. At the beginning of 2019, customers owed Carrico $45,800 for advertising services formed during 2018. During 2019, Carrico performed an additional $695,100 of advertising services on account. Carrico collected $708,700 cash from customers during 2019. At the beginning of 2019, Carrico had $13,350 of supplies on hand for which it owed suppliers SS, 150. During 2019, Carrico purchased an additional $14,600 of supplies on account. Carrico also paid $19,300 cash owed to suppliers for goods previously purchased on credit. Carrico had of supplies on hand at the end of 2019. Carricos 2019 operating and interest were $437 and $133,400, respectively. Required: Calculate Carricos 2019 income before taxes. Calculate the ending balance of receivable, the supplies used, and the ending balance of accounts payable. CONCEPTUAL CONNECTION Explain the underlying principles behind why the three accounts computed in Requirement 2 exist.arrow_forward
- Case 3-73 Recognition of Service Contract Revenue Zac Murphy is president of Blooming Colors Inc. which provides landscaping services in Tallahassee, Florida. On November 20, 2019, Mr. Murphy signed a service contract with Eastern State University. Under the contract, Blooming Colors will provide landscaping services for all Of Easterns buildings for a period of 2 years beginning on January l, 2020, and Eastern will pay Blooming Colors on a monthly basis beginning on January 31, 2020. Although the same amount of landscaping services will be rendered in every month, the contract provides for higher monthly payments in the first year. Initially, Mr. Murphy proposed that the revenue from the contract should be recognized when the contract is signed in 2019; however, his accountant, Sue Storm, convinced him that this would be inappropriate. Then Mr. Murphy proposed that the revenue should be recognized in an amount equal to the cash collected under the contract. Again, Ms. Storm argued against his proposal, indicating that generally accepted accounting principles (GAAP) required recognition of an equal amount of contract revenue each month. Required: Put yourself in the position of Sue Storm. How would you convince Mr. Murphy that his two proposals are unacceptable and that an equal amount of revenue should be recognized every month?arrow_forwardCase 3-73 Recognition of Service Contract Revenue Zac Murphy is president of Blooming Colors Inc. which provides landscaping services in Tallahassee, Florida. On November 20, 2019, Mr. Murphy signed a service contract with Eastern State University. Under the contract, Blooming Colors will provide landscaping services for all Of Easterns buildings for a period of 2 years beginning on January l, 2020, and Eastern will pay Blooming Colors on a monthly basis beginning on January 31, 2020. Although the same amount of landscaping services will be rendered in every month, the contract provides for higher monthly payments in the first year. Initially, Mr. Murphy proposed that the revenue from the contract should be recognized when the contract is signed in 2019; however, his accountant, Sue Storm, convinced him that this would be inappropriate. Then Mr. Murphy proposed that the revenue should be recognized in an amount equal to the cash collected under the contract. Again, Ms. Storm argued against his proposal, indicating that generally accepted accounting principles (GAAP) required recognition of an equal amount of contract revenue each month. Required: 3. If Ms. Storms proposal is adopted. how would the contract be reflected in the balancesheets at the end of 2019 and at the end of 2020?arrow_forwardCase 3-73 Recognition of Service Contract Revenue Zac Murphy is president of Blooming Colors Inc. which provides landscaping services in Tallahassee, Florida. On November 20, 2019, Mr. Murphy signed a service contract with Eastern State University. Under the contract, Blooming Colors will provide landscaping services for all Of Easterns buildings for a period of 2 years beginning on January l, 2020, and Eastern will pay Blooming Colors on a monthly basis beginning on January 31, 2020. Although the same amount of landscaping services will be rendered in every month, the contract provides for higher monthly payments in the first year. Initially, Mr. Murphy proposed that the revenue from the contract should be recognized when the contract is signed in 2019; however, his accountant, Sue Storm, convinced him that this would be inappropriate. Then Mr. Murphy proposed that the revenue should be recognized in an amount equal to the cash collected under the contract. Again, Ms. Storm argued against his proposal, indicating that generally accepted accounting principles (GAAP) required recognition of an equal amount of contract revenue each month. Required: 1. Give a reason that might explain Mr. Murphys desire to recognize contract revenue earlier rather than later.arrow_forward
- Exercise 2-38 Events and Transactions The following economic events related to K the bill need not be paid until March 1, 2019. On February, 15, Kqualify and does not qualify. indicate whether each of the above events would qualify as a transaction and be recognized and recorded in the accounting system on the date indicated. 2. CONCEPTUAL CONNECTION For any events that did not qualify as a transaction to be recognized and recorded, explain why it does not qualify.arrow_forwardExercise 2-52 Accounting Cycle Rosenthal Decorating Inc. is a commercial painting and decorating contractor that began operations in January 2019. The following transactions occurred during the year: On January 15, Rosenthal sold shares Of its common stock to William Hensley for $10,000 On January 24, Rosenthal purchased S720 of painting supplies from Westwood Builders' Supply Company on account. On February 20, Rosenthal paid S720 cash to Westwood Builders' Supply Company for the painting supplies purchased on January 24. On April 25, Rosenthal billed Bultman Condominiums $12,500 for painting and decorating services performed in April. On May 12, Rosenthal received $12,500 from Bultman Condominiums for the painting and decorating work billed in April. On June 5, Rosenthal sent Arlington Builders a $9,500 bill for a painting job completed on that day. On June 24, Rosenthal paid wages for work performed during the preceding week in the amount of $6,700. Required: Prepare a journal entry for each of the transactions. Post the transactions to T-accounts. Prepare a trial balance at June 30, 2019.arrow_forwardProblem 2-593 Journalizing Transactions Monilast Chemicals engaged in the following transactions during December 2019: Dec 2 Paid rent on office furniture, $1,200. 3 Borrowed $25,030 on a 9-month, 3% note. 7 Provided services on credit. $42,600. 10 Purchased supplies on credit, $2,850. 13 Collected accounts receivable, $20,150. 19 Issued common stock, $50000. 22 Paid employee wages for December. $13,825. 23 Paid accounts payable, $1,280. 25 Provided services for cash, $13,500. 30 Paid utility bills for December, $1,975. Required: Prepare a journal entry for each transaction.arrow_forward
- Expense Adjustments Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities: On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for 3 months' sponsorship-November 2019, December 2019, and January 2020-in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months' advertising has been and I month remains unused. Required: Prepare adjusting entries at December 31 for these four activities. CONCEPTUAL CONNECTION What would be the effect on expenses if the adjusting entries were not made?arrow_forwardExercise 2-51 Transaction Analysis and Journal Entries Pasta House Inc. was organized in January 2019. During the year, the transactions below occurred: On January 14, Pasta House sold Martin Halter, the firms founder and sole owner, 10,000 shares of its common stock for S8 per share. On the same day, Bank One loaned Pasta House $45,000 on a ID-year note payable. On February 22, Pasta House purchased a building and the land on which it stands from Frank Jakubek for $34,000 cash and a 5-year, $56,000 note payable. The land and building had appraised values Of $30,000 and $60,000, respectively. On March 1, Pasta House signed an $15,000 contract with Cosby Renovations to remodel the inside of the building. Pasta House paid $4,000 down and agreed to pay the remainder when Cosby completed its work. On May 3, Cosby completed its work and submitted a bill to Pasta House for the remaining $11,000. On May 20, Pasta House paid $11,000 to Cosby Renovations. On June 4, Pasta House purchased restaurant supplies from Glidden Supply for $650 cash. Required: Prepare a journal entry for each of these transactions.arrow_forwardCase 2-68 Accounting for Partially Completed Events: 3 Prelude to Chapter 3 Ehrlich Smith. the owner of The Shoe Bone has asked you to help him understand the proper way to account for certain accounting items as he prepares his 2019 financial statements. Smith has provided the following information and observations: (Continued) a. A 3-year fire insurance policy was purchased on 2019, for $2,400. Smith believes that a part of the cost of the insurance policy should be allocated to each period that benefits from its coverage. b. The store building was purchased for 580,000 in January 2011. Smith expected then (as he does now) that the building will be serviceable as a shoe store for 20 years from the date of purchase. In 2011, Smith estimated that he could sell the property for $6,000 at the end of its serviceable life. He feels that each period should bear some portion of the cost of this long-lived asset that is slowly being consumed. c. The Shoe Box borrowed 520300 on a 1-year, 8% note that is due on September 1 next year) Smith notes that $21,600 cash will be required to repay the note at maturity. The $1,600 difference is, he feels, a cost of using the loaned funds and should be spread over the periods that benefit from the use of' the loan funds; Required: Explain what Smith is trying to accomplish with the three items. Are his objectives supported by the concepts that underlie accounting?arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning