CH 04 Practice JR
CH 04 Practice JR
0001
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
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.
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
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?
3
E1.
Req. 1
Prepaid Advertising is a deferred expense that needs to be adjusted each period for the amount used during the period.
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.
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
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)
...................................................................................
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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.
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E4
Req. 1
The annual reporting period for this company is January 1 through December 31.
Both transactions are accruals because expenses have been incurred but no cash has yet been paid.
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.