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CH 04 Practice JR

The document contains practice exercises for accounting students, focusing on adjusting entries and their effects on financial statements. It includes multiple scenarios for recording adjusting entries related to advertising, equipment depreciation, accrued revenues, and expenses. Solutions to the exercises are provided, emphasizing the importance of proper accounting practices for accurate financial reporting.

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0% found this document useful (0 votes)
5 views8 pages

CH 04 Practice JR

The document contains practice exercises for accounting students, focusing on adjusting entries and their effects on financial statements. It includes multiple scenarios for recording adjusting entries related to advertising, equipment depreciation, accrued revenues, and expenses. Solutions to the exercises are provided, emphasizing the importance of proper accounting practices for accurate financial reporting.

Uploaded by

haolunli0422
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 8

ACCT-UB.

0001

Chapter 4, Practice Exercises

To solidify your understanding of this chapter, to better prepare you for the chapter’s homework assignment, and to help
you prepare for our course’s upcoming exam, it is recommended that you attempt to understand and solve the exercises
starting on the next page.

While these exercises are intended to be similar in format, length and level of difficulty to the questions you may find in
our course’s exams, the format or subject matter of the exam’s questions will not necessarily be the same as that of the
exercises below.

You will find the solutions to the exercises in the pages following the exercises

1
E1

Recording Adjusting Entries and Reporting Balances in Financial Statement

Gauge Construction Company is making adjusting entries for the year ended March 31 of the current year. In developing
information for the adjusting entries, the accountant learned the following:

1. The company paid $1,800 on January 1 of the current year to have advertisements placed in the local monthly
neighborhood paper. The ads were to be run from January through June. The bookkeeper debited the full amount
to Prepaid Advertising on January 1.
2. At March 31 of the current year, the following data relating to Construction Equipment were obtained from the
records and supporting documents.

Construction equipment (at cost) $340,000


Accumulated depreciation (through March 31 of the prior year) 132,000
Estimated annual depreciation for using the equipment 34,000

Required:

1. Using the process illustrated in the chapter, record the adjusting entry for advertisements at March 31 of the
current year.
2. Using the process illustrated in the chapter, record the adjusting entry for the use of construction equipment
during the current year.
3. What amount should be reported on the current year’s income statement for Advertising Expense? For
Depreciation Expense?
4. What amount should be reported on the current year’s balance sheet for Prepaid Advertising? For Construction
Equipment (at net book value)?

E2

Recording Seven Typical Adjusting Entries

Johnson’s Boat Yard, Inc., repairs, stores, and cleans boats for customers. It is completing the accounting process for the
year just ended on November 30. The transactions for the past year have been journalized and posted. The following data
with respect to adjusting entries at year-end are available:

1. Johnson’s winterized (cleaned and covered) three boats for customers at the end of November but did not record
the service for $3,300.
2. On October 1, Johnson’s paid $2,200 to the local newspaper for an advertisement to run every Thursday for 12
weeks. All ads have been run except for three Thursdays in December to complete the 12-week contract.
3. Johnson’s borrowed $300,000 at an 11 percent annual interest rate on April 1 of the current year to expand its
boat storage facility. The loan requires Johnson’s to pay the interest quarterly until the note is repaid in three
years. Johnson’s paid quarterly interest on July 1 and October 1.
4. The Sanjeev family paid Johnson’s $4,500 on November 1 to store its sailboat for the winter until May 1 of the
next fiscal year. Johnson’s credited the full amount to Unearned Storage Revenue on November 1.
5. Johnson’s used boat-lifting equipment that cost $180,000; $18,000 was the estimated depreciation for the current
year.
6. Boat repair supplies on hand at the beginning of the current year totaled $18,900. Repair supplies purchased and
debited to Supplies during the year amounted to $45,200. The year-end count showed $15,600 of the supplies on
hand.

2
7. Wages of $5,600 earned by employees during November were unpaid and unrecorded at November 30. The next
payroll date will be December 5 of the next fiscal year.

Required:

1. Identify each of these transactions as a deferred revenue, deferred expense, accrued revenue, or accrued expense.
2. Prepare the adjusting entries that should be recorded for Johnson’s at November 30, end of the current year.

E3

Analyzing the Effects of Adjusting Entries on the Income Statement and Balance Sheet

On December 31, Fawzi Company prepared an income statement and balance sheet and failed to take into account four
adjusting entries. The income statement, prepared on this incorrect basis, reflected pretax income of $65,000. The balance
sheet (before the effect of income taxes) reflected total assets, $185,000; total liabilities, $90,000; and stockholders’
equity, $95,000. The data for the four adjusting entries follow:

1. Wages amounting to $37,000 for the last three days of December were not paid and not recorded (the next
payroll will be at the beginning of next year).
2. Depreciation of $19,000 for the year on equipment that cost $190,000 was not recorded.
3. Rent revenue of $10,500 was collected on December 1 of the current year for office space for the period
December 1 to February 28 of the next year. The $10,500 was credited in full to Unearned Rent Revenue when
collected.
4. Income taxes were not recorded. The income tax rate for the company is 30 percent.

Required:

Complete the following tabulation to correct the financial statements for the effects of the four errors (indicate deductions
with parentheses):

E4

Elana’s Traveling Veterinary Services, Inc., completed its first year of operations on December 31. All of the year’s
entries have been recorded except for the following:
a. On March 1 of the current year, the company borrowed $60,000 at a 10 percent interest rate to be repaid in
five years.
b. On the last day of the current year, the company received a $360 utility bill for utilities used in December. The
bill will be paid in January of next year.
Required:
1. What is the annual reporting period for this company?
2. Identify whether each transaction results in adjusting a deferred or an accrued account. Using the process
illustrated in the chapter, prepare the required adjusting entry for transactions (a) and (b). Include appropriate
dates and write a brief explanation of each entry.
3. Why are these adjustments made?

Solution Start on Next Page

3
E1.

Req. 1
Prepaid Advertising is a deferred expense that needs to be adjusted each period for the amount used during the period.

The amount of expense is computed as follows:


$1,800 x 3 months/6 months = $900 used

Adjusting entry:
Advertising expense (+E, SE).................................................... 900
Prepaid advertising (A) ................................................. 900

Req. 2
Construction Equipment is a deferred expense that needs to be adjusted at the end of the period for the amount of the
equipment used during the period.

The amount used for the year is given as $34,000.

Adjusting entry:
Depreciation expense (+E, SE) .................................................. 34,000
Accumulated depreciation (+XA, A) ............................ 34,000

Req. 3
Prepaid Advertising Advertising Expense
1/1 1,800
AJE 900 AJE 900
End. 900 End. 900

Accumulated Depreciation Depreciation Expense


132,000 Beg.
34,000 AJE AJE 34,000
166,000 End. End. 34,000

Construction Equipment

End. 340,000

Income statement:
Advertising expense $900 Depreciation expense $ 34,000

Req. 4
Balance sheet:
Prepaid advertising $900 Construction equipment $340,000
Less: Accumulated depreciation 166,000
Construction equipment (net) $174,000

4
E2.

Req. 1
a. Accrued revenue
b. Deferred expense
c. Accrued expense
d. Deferred revenue
e. Deferred expense
f. Deferred expense
g. Accrued expense

Req. 2 Computations
a. Accounts receivable 3,300 Given
(+A)
...................................................................................
Service revenue (+R, 3,300
+SE)
...................................................................................

b. Advertising expense (+E, 1,650 $2,200 x 9/12 =


SE)
...................................................................................
Prepaid advertising 1,650 $1,650 used
(A)
...................................................................................

c. Interest expense (+E, 5,500 $300,000 x 0.11


SE)
...................................................................................
Interest payable 5,500 x 2/12 (since last
(+L) payment) = $5,500
................................................................................... incurred

d. Unearned storage revenue 750 $4,500 x 1/6 =


(L)
...................................................................................
Storage revenue (+R, 750 $750 earned
+SE)
...................................................................................

e. Depreciation expense (+E, 18,000 Given


SE)
...................................................................................
Accumulated depreciation (+XA, A) 18,000

f. Supplies expense (+E, 48,500 $18,900 +


SE)
...................................................................................
Supplies 48,500 $45,200 – $15,600
(A)
...................................................................................
= $48,500 used

5
g. Wages expense (+E, 5,600 Given
SE)
...................................................................................
Wages payable 5,600
(+L)
...................................................................................

6
E3.
Net Income Total Assets Total Stockholders’
Items Liabilities Equity
Balances reported $65,000 $185,000 $90,000 $95,000
Additional adjustments:
a. Wages (37,000) 37,000 (37,000)
b. Depreciation (19,000) (19,000) (19,000)
c. Rent revenue 3,500 (3,500) 3,500
Adjusted balances 12,500 166,000 123,500 42,500
d. Income taxes (3,750) 3,750 (3,750)
Correct balances $ 8,750 $166,000 $127,250 $38,750

Computations:
a. Given, $37,000 accrued and unpaid.
b. Given, $19,000 depreciation expense.
c. $10,500 x 1/3 = $3,500 rent revenue earned. The remaining $7,000 in unearned revenue is a liability for two
months of occupancy "owed'' to the renter.
d. $12,500 income before taxes x 30% = $3,750.

7
E4

Req. 1

The annual reporting period for this company is January 1 through December 31.

Req. 2 (Adjusting entries)

Both transactions are accruals because expenses have been incurred but no cash has yet been paid.

(a) 1. Interest expense is incurred.


2. Cash will be paid in the next period to the bank for using the borrowed funds in the current
period -- an accrued expense needs to be recorded.
3. Amount: $60,000 principal x .10 rate x 10 months/12 months = $5,000

Adjusting entry – December 31


Interest expense (+E, SE) .......................................... 5,000
Interest payable (+L) ............................................. 5,000
To record interest accrued at year-end.

(b) 1. Utilities expense is incurred.


2. Cash will be paid in the future – an accrued expense needs to be recorded.
3. Amount: $360 given

Adjusting entry – December 31


Utilities expense (+E, 360
SE)
................................................................................
Utilities payable 360
(+L)
................................................................................
To record utilities incurred at year-end.

Req. 3

Adjusting entries are necessary at the end of the accounting period to ensure that all revenues earned and expenses
incurred and the related assets and liabilities are measured properly. The entries above are accruals; entries (a) and (b) are
both accrued expenses (incurred but not yet recorded). In applying the accrual basis of accounting, expenses should be
recognized when incurred in generating revenues.

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