CHAPTER 3 Adjusting The Accounts PDF

CHAPTER 3 Adjusting the accounts
5. Prepare
adjusting
entries
for
prepayments.
Prepayments are either prepaid expenses or unearned
revenue. Adjusting entries for prepayments are required at
the reporting date to record the portion of the prepayment
that represents the expense incurred or the revenue earned
in the current accounting period.
6. Prepare adjusting entries for accruals. Accruals are
either accrued revenue or accrued expenses. Adjusting
entries for accruals are required to record revenue
115
earned and expenses incurred in the current accounting period that have not been recognised through daily
entries.
7. Describe the nature and purpose of an adjusted trial
balance. An adjusted trial balance shows the balances of
all accounts, including those that have been adjusted, at
the end of an accounting period. Its purpose is to show the
effects of all nancial events that have occurred during the
accounting period.
KEY TERMS
Accrual-basis accounting (p. 96)
Accrued expenses (p. 106)
Accrued revenue (p. 105)
Adjusted trial balance (p. 111)
Adjusting entries (p. 97)
Calendar year (p. 96)
Carrying amount (p. 102)
Cash-basis accounting (p. 96)
Contra asset account (p. 102)
Depreciation (p. 101)

Expense recognition principle (p. 96)
Financial year (p. 96)
Interim periods (p. 96)
Prepaid expenses (p. 99)
Revenue recognition principle (p. 96)
Time period assumption (p. 95)
Unearned revenue (p. 103)
Useful life (p. 101)
APPENDIX ALTERNATIVE TREATMENT

OF PREPAID EXPENSES AND UNEARNED
REVENUE
In our discussion of adjusting entries for prepaid expenses and unearned revenue, we illustrated
transactions for which the initial entries were made to statement of nancial position accounts.
In the case of prepaid expenses, the prepayment was debited to an asset account. In the case
of unearned revenue, the cash received was credited to a liability account. Some businesses
use an alternative treatment: (1) At the time an expense is prepaid, it is debited to an expense
account; (2) At the time of a receipt for future services, it is credited to a revenue account. The
circumstances that justify such entries and the different adjusting entries that may be required
are described below. The alternative treatment of prepaid expenses and unearned revenue has the
same effect on the nancial statements as the procedures described earlier in the chapter.
LEARNING
OBJECTIVE 8
Prepare adjusting
entries for the
alternative treatment
of prepayments.
Prepaid expenses
Prepaid expenses become expired costs either through the passage of time (e.g. insurance) or
through consumption (e.g. advertising supplies). If, at the time of purchase, the business expects
to consume the supplies before the next reporting date, it may be more convenient initially to
debit (increase) an expense account rather than an asset account.
Assume that Pioneer Advertising Agency expects that all of the supplies purchased on 5 October
will be used before the end of the month. A debit of $2500 to Advertising Supplies Expense (rather
than to the asset account Advertising Supplies) on 5 October will eliminate the need for an adjusting
entry on 31 October, if all the supplies are used. As at 31 October, the Advertising Supplies Expense
account will show a balance of $2500, which is the cost of supplies used between 5 October and
31 October.
But what if the business does not use all the supplies, and an inventory of $1000 of advertising
supplies remains on 31 October? Obviously, an adjusting entry is needed. Prior to adjustment,
5_60_19243_POA_2E_ch03.indd
115
7/14/09
3:53:13 PM
116
Principles of accounting
the expense account Advertising Supplies Expense is overstated $1000, and the asset account
Advertising Supplies is understated $1000. Thus the following adjusting entry is made.
= L +
A
E
+1 000
+1 000 Exp
Oct.
31
Advertising Supplies
Advertising Supplies Expense
(To record supplies inventory)
1 000
1 000
Cash flows
no effect
After posting the adjusting entry, the accounts are as shown in gure 3A.1.
Figure 3A.1 Prepaid
expenses accounts after
adjustment
31/10 Adj.
1 000
5/10
31/10
Bal.
2 500
1 500
31/10 Adj.
1 000
After adjustment, the asset account Advertising Supplies shows a balance of $1000, which is
equal to the cost of supplies on hand at 31 October. In addition, Advertising Supplies Expense
shows a balance of $1500, which is equal to the cost of supplies used between 5 October and
31 October. If the adjusting entry is not made, expenses will be overstated and prot will be
understated by $1000 in the October income statement. Also, both assets and owners equity will
be understated by $1000 on the 31 October statement of nancial position.
A comparison of the entries and accounts for advertising supplies is shown in gure 3A.2.
Figure 3A.2 Adjustment
approaches a comparison
Prepayment initially
debited to asset account
(per chapter)
Oct. 5 Advertising Supplies
Accounts Payable
Prepayment initially
debited to expense account
(per appendix)
2 500
Oct. 31 Advertising Supplies Expense 1 500

2 500
Oct. 5 Advertising Supplies Expense

Accounts Payable
2 500
1 500
Oct. 31 Advertising Supplies

1 000
2 500
1 000
After posting the entries, the accounts appear as shown in gure 3A.3.
Figure 3A.3 Comparison of
accounts
(per chapter)
5/10
31/10
2 500
Bal.
31/10 Adj.
(per appendix)
1 500
31/10 Adj.
1 000

31/10 Adj.
1 000
1 500

5/10
31/10
2 500
Bal.
31/10 Adj.
1 000
1 500
Note that the account balances under each alternative are the same as at 31 October: Advertising
Supplies $1000, and Advertising Supplies Expense $1500.
Unearned revenue
Unearned revenue becomes earned either through the passage of time (e.g. unearned rent) or
through providing the service (e.g. unearned fees). Similar to the case for prepaid expenses, a
revenue account may be credited (increased) when cash is received for future services.
To illustrate, assume that Pioneer Advertising Agency received $1200 for future services on
2 October. The services were expected to be performed before 31 October.2 In such a case,
2
5_60_19243_POA_2E_ch03.indd
116
This example focuses only on the alternative treatment of unearned revenue. In the interest of simplicity,
the entries to Service Revenue pertaining to the immediate earning of revenue ($10 000) and the adjusting
entry for accrued revenue ($200) have been ignored.
7/14/09
3:53:13 PM
117
Service Revenue is credited. If revenue is, in fact, earned before 31 October, no adjustment is
needed.
However, if at the reporting date $800 of the services have not been performed, an adjusting
entry is required. The revenue account Service Revenue is overstated $800, and the liability
account Unearned Revenue is understated $800. Thus, the following adjusting entry is made.
Oct.
31
Service Revenue
Unearned Revenue
(To record unearned revenue)
A =
800
800
L + E
+800
800 Rev
Cash flows
no effect
After posting the adjusting entry, the accounts are as shown in gure 3A.4.
Unearned Revenue
Service Revenue
31/10 Adj.
800
31/10 Adj.
800
2/10
31/10
1 200
Bal.
Figure 3A.4 Unearned

revenue accounts after
adjustment
400
The liability account Unearned Revenue shows a balance of $800. This is equal to the services that will be provided in the future. In addition, the balance in Service Revenue equals the
services provided in October. If the adjusting entry is not made, both revenue and prot will
be overstated by $800 in the October income statement. Also, liabilities will be understated by
$800, and owners equity will be overstated by $800 on the 31 October statement of nancial
position.
A comparison of the entries and accounts for service revenue earned and unearned is shown in
gure 3A.5.
Unearned revenue
initially credited to liability account
(per chapter)
Oct.
Oct. 31
Cash
Unearned Revenue
1 200
Oct.
1 200
Unearned Revenue
Service Revenue
Figure 3A.5 Adjustment

approaches a comparison
Unearned revenue
initially credited to revenue account
(per appendix)
400
Oct. 31
400
Cash
Service Revenue
1 200
1 200
Service Revenue
Unearned Revenue
800
800
After posting the entries, the accounts appear as shown in gure 3A.6.
(per chapter)
Unearned Revenue
31/10 Adj.
400
2/10
31/10
Figure 3A.6 Comparison of

accounts
(per appendix)
Unearned Revenue
1 200
Bal.
800
31/10 Adj.
400
31/10 Adj.
800
HELPFUL HINT
Service Revenue
Service Revenue
31/10 Adj.
800
2/10
31/10
1 200
Bal.
400
Note that the balances in the accounts are the same under the two alternatives: Unearned Revenue
$800, and Service Revenue $400.
The required adjusted

balances here are
Service Revenue $400
and Unearned Revenue
$800.
Summary of additional adjustment

relationships
The use of alternative adjusting entries requires additions to the summary of basic relationships
presented earlier in gure 3.18 (page 109). The additions are shown in 1(b) and 2(b) (in bold) in
gure 3A.7 on the next page.
5_60_19243_POA_2E_ch03.indd
117
7/14/09
3:53:13 PM
118
Alternative adjusting entries do not apply to accrued revenue and accrued expenses because no
entries occur before these types of adjusting entries are made. Therefore, the entries in gure 3.18
for these two types of adjustments remain unchanged.
Figure 3A.7 Summary

of basic relationships for
prepayments
Type of
adjustment
Reason for
adjustment
1. Prepaid expenses
(a) Prepaid expenses initially

recorded in asset accounts have
been used.
(b) Prepaid expenses initially
recorded in expense accounts
have not been used.
(a) Unearned revenue initially
recorded in liability accounts has
been earned.
(b) Unearned revenue initially
recorded in revenue accounts
has not been earned.
2. Unearned revenue
Account balances
before adjustment
Adjusting
entry
Assets overstated
Expenses understated
Dr Expenses
Cr Assets
Assets understated
Expenses overstated
Dr Assets
Cr Expenses
Liabilities overstated
Revenue understated
Dr Liabilities
Cr Revenue
Liabilities understated
Revenue overstated
Dr Revenue
Cr Liabilities
SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX

8. Prepare adjusting entries for the alternative treatment
of prepayments. Prepayments may be initially debited to
an expense account. Unearned revenue may be credited to
a revenue account. At the end of the period, these accounts
may be overstated. The adjusting entries for prepaid
SELF-STUDY QUESTIONS
Answers are at the end of the chapter.
(LO 1) 1. The time period assumption states that:
(a) revenue should be recognised in the accounting period in
which it is earned.
(b) expenses should be matched with revenue.
(c) the economic life of a business can be divided into time
periods.
(d) the nancial year should correspond with the calendar
year.
(LO 2) 2. The principle or assumption dictating that revenue is
recognised when earned is the:
(a) matching principle.
(b) cost assumption.
(c) periodicity principle.
(d) revenue recognition principle.
(LO 2) 3. One of the following statements about the accrual basis of
accounting is false.
(a) Events that change a businesss nancial statements are
recorded in the periods in which the events occur.
(b) Revenue is recognised in the period in which it is earned.
(c) This basis is in accord with generally accepted
accounting principles.
(d) Revenue is recorded only when cash is received, and
expense is recorded only when cash is paid.
(LO 2) 4. Which of the following statements is correct concerning
accrual accounting versus cash accounting?
(a) Revenue is recorded irrespective of whether the cash has
been received.
5_60_19243_POA_2E_ch03.indd
118
expenses are a debit to an asset account and a credit to an

expense account. Adjusting entries for unearned revenue
are a debit to a revenue account and a credit to a liability
account.
* Note: All asterisked questions, exercises and problems relate to material

in the appendix to the chapter.
(b) Revenue is only recorded when the cash is

received.
(c) Depreciation is not an expense.
(d) Wages owing at the end of the reporting period are
treated as an expense when they are paid.
5. The trial balance may not contain up to date and complete
data because:
(a) it is inexpedient to journalise all events on a daily
basis.
(b) some costs are not journalised during the accounting
period because they expire with the passing of time
rather than through recurring daily transactions.
(c) some items may be unrecorded.
(d) all of the above.
(LO 3)
6. Adjusting entries are made to ensure that:

(LO 3)
(a) expenses are recognised in the period in which they are
incurred.
(b) revenue is recorded in the period in which it is earned.
(c) statement of nancial position and income statement
accounts have correct balances at the end of an
accounting period.
(d) all of the above.
7. Each of the following is a major type (or category) of
adjusting entry except:
(a) prepaid expenses.
(b) accrued revenue.
(c) accrued expenses.
(d) earned revenue.
(LO 4)
7/14/09
3:53:14 PM

(LO 7) 8. An unadjusted trial balance shows sales revenue of $27 000.
The sales department advises that an additional $5000
of credit sales made on 30 June was not recorded. The
adjustment necessary is:
(a) Cash
(b) Sales Revenue
5 000
5 000
Accounts Receivable
(c) Accounts Receivable
5 000
5 000
Sales Revenue
(d) Cash
5 000
5 000
Accounts Payable
5 000
(LO 5) 9. The trial balance shows Supplies $1350 and Supplies

Expense $0. If $500 of supplies are on hand at the end of
the period, the adjusting entry is:
(a) Supplies
500
Supplies Expense
500
(b) Supplies
Supplies Expense
850
(c) Supplies Expense
850
850
Supplies
(d) Supplies Expense
850
500
Supplies
400
Salaries Payable
(c) Salaries Expense
400
400
Cash
5 000
Sales Revenue
(a) No entry is required.

(b) Salaries Expense
500
(LO 5)10. Adjustments for unearned revenue now earned are:

(a) decrease liabilities and increase revenue.
(b) have an assets and revenue account relationship.
(c) increase assets and increase revenue.
(d) decrease revenue and decrease assets.
(LO 6)11. Adjustments for accrued revenue now received are:
(a) have a liabilities and revenue account relationship.
(b) have an assets and revenue account relationship.
(c) increase one asset and reduce another asset.
(d) decrease liabilities and increase revenue.
(LO 6)12. Kathy Siska earned a salary of $400 for the last week of
September. She will be paid on 1 October. The adjusting
entry for Kathys employer as at 30 September is:
(d) Salaries Payable

Cash
119
400
400
400
13. Which of the following statements is incorrect concerning (LO 7)

the adjusted trial balance?
(a) 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.
(b) The adjusted trial balance provides the primary basis for
the preparation of nancial statements.
(c) The adjusted trial balance lists the account balances
segregated by assets and liabilities.
(d) The adjusted trial balance is prepared after the adjusting
entries have been journalised and posted.
*14. The trial balance shows Supplies $0 and Supplies Expense (LO 8)
$1500. If $900 of supplies are on hand at the end of the
period, the adjusting entry is:
(a) Debit Supplies $900 and credit Supplies Expense $900.
(b) Debit Supplies Expense $900 and credit Supplies $900.
(c) Debit Supplies $600 and credit Supplies Expense $600.
(d) Debit Supplies Expense $600 and credit Supplies $600.
*15. An annual insurance policy was paid on 31 March at a cost (LO 8)
of $3600 and posted to the insurance expense account. As at
the reporting date, 30 June, the adjusting entry required is:
(a) reduce expenses by $3600 and reduce prepaid insurance
by $3600.
(b) reduce expenses by $2700 and increase prepaid
insurance by $2700.
(c) increase expenses by $600 and reduce prepaid insurance
by $600.
(d) increase expenses by $600 and increase accrued
liabilities by $600.
QUESTIONS
1. (a) How does the time period assumption affect an
accountants analysis of business transactions?
(b) Explain the terms nancial year, calendar year and
interim periods.
2. State two generally accepted accounting principles that
relate to adjusting the accounts.
3. Joe Thomas, a lawyer, accepts a legal engagement in
March, performs the work in April and is paid in May. If
Thomass law rm prepares monthly nancial statements,
when should it recognise revenue from this engagement?
Why?
4. Why do accrual-basis nancial statements provide more
useful information than cash-basis statements?
5. In completing the engagement in (3) above, Thomas incurs
$6000 of expenses in March, which are paid in April. How
much expense should be deducted from revenue in the
month the revenue is recognised? Why?
5_60_19243_POA_2E_ch03.indd
119
6. Adjusting entries are required by the cost principle of

accounting. Do you agree? Explain.
7. Why may a trial balance not contain up-to-date and
complete nancial information?
8. Distinguish between the two categories of adjusting entries,
and identify the types of adjustments applicable to each
category.
9. What is the debit/credit effect of a prepaid expense adjusting
entry?
10. Depreciation is a valuation process that results in the
reporting of the fair value of the asset. Do you agree? Explain.
11. Explain the differences between depreciation expense and
accumulated depreciation.
12. Corts Ltd purchased equipment for $20 000. By the reporting
date, $12 000 had been depreciated. Indicate the presentation
of the data in the statement of nancial position.
7/14/09
3:53:14 PM
120
13. What is the debit/credit effect of an unearned revenue

adjusting entry?
14. A business fails to recognise revenue earned but not yet
received. Which of the following accounts are involved in
the adjusting entry: (a) asset, (b) liability, (c) revenue or
(d) expense? For the accounts selected, indicate whether
they would be debited or credited in the entry.
15. A business fails to recognise an expense incurred but not
paid. Indicate which of the following accounts is debited
and which is credited in the adjusting entry: (a) asset,
(b) liability, (c) revenue or (d) expense.
16. A business makes an accrued revenue adjusting entry for
$900 and an accrued expense adjusting entry for $600. How
much was prot understated prior to these entries? Explain.
17. On 9 January, a business pays $9000 for salaries, of which
$3000 was reported as Salaries Payable on 31 December.
Give the entry to record the payment.
18. For each of the following items before adjustment, indicate
the type of adjusting entry (prepaid expense, unearned
revenue, accrued revenue and accrued expense) that
is needed to correct the misstatement. If an item could
result in more than one type of adjusting entry, indicate
each of the types.
(a)
(b)
(c)
(d)
(e)
(f)
Assets are understated.

Liabilities are overstated.
Liabilities are understated.
Expenses are understated.
Assets are overstated.
Revenue is understated.
19. One-half of the adjusting entry is given below. Indicate the

account title for the other half of the entry.
(a) Salaries Expense is debited.
(b) Depreciation Expense is debited.
(c) Interest Payable is credited.
(d) Supplies is credited.
(e) Accounts Receivable is debited.
(f) Unearned Service Revenue is debited.
20. An adjusting entry may affect more than one statement of
nancial position or income statement account. Do you
agree? Why or why not?
21. Why is it possible to prepare nancial statements directly
from an adjusted trial balance?
*22. Moon Ltd debits Supplies Expense for all purchases of
supplies and credits Rent Revenue for all advanced rentals.
For each type of adjustment, give the adjusting entry.
BRIEF EXERCISES
Indicate why adjusting entries
are needed.
(LO 3)
BE3.1
Identify the major types of

adjusting entries.
(LO 4)
BE3.2
Prepare adjusting entry for

supplies.
(LO 5)
BE3.3

depreciation.
(LO 5)
BE3.4

prepaid expense.
(LO 5)
BE3.5

unearned revenue.
(LO 5)
BE3.6
Prepare adjusting entries for

accruals.
(LO 6)
BE3.7
5_60_19243_POA_2E_ch03.indd
120
The ledger of Lim Lam includes the following accounts. Explain why each account may
require adjustment.
(a) Prepaid Insurance
(c) Unearned Revenue
(b) Depreciation Expense
(d) Interest Payable
Grollo Concepts accumulates the following adjustment data as at 31 December. Indicate (a)
the type of adjustment (prepaid expense, accrued revenue and so on), and (b) the accounts
before adjustment (overstated or understated).
1. Supplies of $250 are on hand.
2. Services provided but not recorded total $1200.
3. Interest of $350 has accumulated on a note payable.
4. Rent collected in advance totalling $1000 has been earned.
Prole Advertisings trial balance as at 31 December shows Advertising Supplies $6700 and
Advertising Supplies Expense $0. On 31 December, there are $1700 of supplies on hand.
Prepare the adjusting entry as at 31 December and, using T accounts, enter the balances in the
accounts, post the adjusting entry and indicate the adjusted balance in each account.
At the end of its rst year, the trial balance of Easton Ltd shows Equipment $30 000 and zero
balances in Accumulated Depreciation Equipment and Depreciation Expense. Depreciation for the year is estimated to be $6000. Prepare the adjusting entry for depreciation as at
31 December, post the adjustments to T accounts and indicate the presentation of the equipment as at 31 December in the statement of nancial position.
On 1 July 2010, Orlow Ltd pays $12 000 to HNH Insurance Ltd for a 3-year insurance contract. Both companies have reporting periods ending 31 December. For Orlow Ltd, journalise
and post the entry on 1 July and the adjusting entry on 31 December.
Using the data in BE3.5, journalise and post the entry on 1 July and the adjusting entry on
31 December for HNH Insurance Ltd. HNH uses the accounts Unearned Insurance Revenue
and Insurance Revenue.
The bookeeper for Cofex Ltd asks you to prepare the following accrued adjusting entries as
at 31 December.
1. Interest on notes payable of $400 is accrued.
3. Salaries earned by employees of $900 have not been recorded.
7/14/09
3:53:14 PM

Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense,
Interest Payable, Salaries Expense and Salaries Payable.
BE3.8
The trial balance of Wow Designs includes the following statement of nancial position
accounts. Identify the accounts that require adjustment. For each account that requires adjustment, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenue, accrued
revenue and accrued expenses) and (b) the related account in the adjusting entry.
Accounts Receivable
Interest Payable
Prepaid Insurance
Unearned Service Revenue
Accumulated Depreciation Equipment
BE3.9
The adjusted trial balance of Hungry Joes as at 31 December 2010 includes the following
accounts: J. Giaro, Capital $25 000; J. Giaro, Drawings $9000; Service Revenue $65 000;
Salaries Expense $32 000; Insurance Expense $1600; Rent Expense $20 000; Supplies
Expense $500; and Depreciation Expense $1500. Prepare an income statement for the year.
BE3.10 Partial adjusted trial balance data for Hungry Joes is presented in BE3.9. The balance in
J. Giaro, Capital is the balance as of 1 January. Prepare a statement of changes in equity for
the year assuming prot is $9400 for the year.
*BE3.11 Basler Gardens records all prepayments in income statement accounts. As at 30 April, the trial
balance shows Supplies Expense $2800, Service Revenue $9200 and zero balances in related
statement of nancial position accounts. Prepare the adjusting entries as at 30 April assuming (a)
$1000 of supplies on hand and (b) $2000 of service revenue should be reported as unearned.
121
Analyse accounts in an
unadjusted trial balance.
(LO 4)
Prepare an income statement

from an adjusted trial balance.
(LO 7)
Prepare a statement of changes
in equity from an adjusted trial
balance.
(LO 7)
Prepare adjusting entries
under alternative treatment of
prepayments.
(LO 8)
EXERCISES
E3.1
Many governments have moved from cash to accrual accounting, and even budgeting, over
the last decade, generating discussion as to how informative and useful accrual-based government nancial statements are to the various stakeholders.
Instructions
E3.2
(a) What is the difference between accrual-basis accounting and cash-basis accounting?
(b) Why would politicians prefer the cash basis over the accrual basis?
(c) What advantages would accrual-based government statements provide to users?
Shumway accumulates the following adjustment data as at 31 December.
2. Store supplies of $300 have been used.
3. Utility expenses of $225 are unpaid.
4. Unearned revenue of $260 has been earned.
5. Salaries of $900 are unpaid.
6. Prepaid insurance totalling $350 has expired.
Distinguish between the

cash-and accrual basis of
accounting.
(LO 2)
Identify types of adjustments

and account relationships.
(LO 4, 5, 6)
Instructions
E3.3
For each of the above items indicate the following.

(a) The type of adjustment (prepaid expense, unearned revenue, accrued revenue or accrued
expense).
(b) The accounts before adjustment (overstatement or understatement).
The ledger of Hocking Rental Agency on 31 March of the current year includes the following
selected accounts before adjusting entries have been prepared.
Debit
Prepaid Insurance
Supplies
Equipment
Accumulated
Depreciation Equipment
Notes Payable
Unearned Rent
Rent Revenue
Interest Expense
Wages Expense
Credit
Prepare adjusting entries from

selected account data.
(LO 5, 6, 7)
$ 3 600
2 800
25 000
$ 8 400
20 000
9 900
60 000
0
14 000
An analysis of the accounts shows the following.

1. The equipment depreciates $300 per month.
2. One-third of the unearned rent was earned during the quarter.
5_60_19243_POA_2E_ch03.indd
121
7/14/09
3:53:14 PM
122
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $900.
5. Insurance expires at the rate of $200 per month.
Instructions
Prepare the adjusting entries as at 31 March. Additional accounts are: Depreciation Expense,
Insurance Expense, Interest Payable and Supplies Expense.
Prepare adjusting entries.
(LO 5, 6, 7)
E3.4
Greg Toohey opened a dental practice on 1 January. During the rst month of operations the
following transactions occurred.
1. Performed services for patients. As at 31 January, $1560 of such services was earned but
not yet recorded.
2. Utility expenses incurred but not paid prior to 31 January totalled $800.
3. Purchased dental equipment on 1 January for $80 000, paying $20 000 in cash and
signing a $60 000, 3-year note payable. The equipment depreciates $400 per month.
Interest is $500 per month.
4. Purchased a 1-year professional indemnity insurance policy on 1 January for $24 000.
5. Purchased $1600 of dental supplies. On 31 January, determined that $800 of supplies
were on hand.
Instructions
Prepare the adjusting entries on 31 January. Account titles are Accumulated Depreciation
Dental Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance
Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense,
Utilities Expense and Utilities Payable.
(LO 5, 6, 7)
E3.5
The trial balance for Pioneer Advertising Agency is shown in gure 3.3, page 99. In lieu of
the adjusting entries shown in the text as at 31 October, assume the following adjustment
data.
1. Advertising supplies on hand as at 31 October total $400.
2. Expired insurance for the month is $200.
3. Depreciation for the month is $100.
4. Unearned revenue earned in October totals $1200.
5. Services provided but not recorded as at 31 October are $650.
6. Interest accrued as at 31 October is $120.
7. Accrued salaries as at 31 October are $1400.
Instructions
Prepare the adjusting entries for the items above.

Prepare correct income
statement.
(LO 2, 5, 6, 7)
E3.6
The income statement of Olympic Ltd for the month of July shows prot of $1400 based
on Service Revenue $5500, Wages Expense $2300, Supplies Expense $1200 and Utilities
Expense $600. In reviewing the statement, you discover the following.
1. Insurance expired during July of $400 was omitted.
2. Supplies expense includes $300 of supplies that are still on hand as at 31 July.
3. Depreciation on equipment of $150 was omitted.
4. Accrued but unpaid wages as at 31 July of $300 were not included.
5. Services provided but unrecorded totalled $1000.
Instructions
Prepare a correct income statement for July.

Analyse adjusted data.
(LO 4, 5, 6, 7)
E3.7
A partial adjusted trial balance of Rio Ltd as at 31 January shows the following.
RIO LTD
Adjusted Trial Balance
as at 31 January
Debit
Supplies
Prepaid Insurance
Salaries Payable
Unearned Revenue
Supplies Expense
Insurance Expense
Salaries Expense
Service Revenue
5_60_19243_POA_2E_ch03.indd
122
Credit
$ 850
2 400
$ 800
750
950
400
1 800
2 000
7/14/09
3:53:15 PM
123
Instructions
E3.8
Answer the following questions, assuming the year begins 1 January.

(a) If the amount in Supplies Expense is the 31 January adjusting entry, and $650 of
supplies was purchased in January, what was the balance in Supplies on 1 January?
(b) If the amount in Insurance Expense is the 31 January adjusting entry, and the original
insurance premium was for 1 year, what was the total premium and when was the policy
purchased?
(c) If $3000 of salaries was paid in January, what was the balance in Salaries Payable as at
31 December?
(d) If $1600 was received in January for services performed in January, what was the
balance in Unearned Revenue as at 31 December?
Selected accounts of Engle Ltd are shown below.
31/7
1/7 Bal.
10/7
Supplies Expense
Salaries Payable
800
Supplies
31/7
Unearned Revenue
1 100 31/7
200
Accounts Receivable
31/7
15/7
31/7
800
3/17
1 200
900
1/7 Bal.
20/7
Service Revenue
500
Salaries Expense
1500
750
14/7
31/7
31/7
1 200
1 200
Journalise basic transactions

and adjusting entries.
(LO 5, 6, 7)
2 000
900
500
Instructions
After analysing the accounts, journalise (a) the July transactions and (b) the adjusting
entries that were made on 31 July. (Hint: July transactions were for cash.)
E3.9
The trial balances before and after adjustment for Villa Ltd at the end of its nancial year are
presented below.
VILLA LTD
Prepare adjusting entries from

analysis of trial balances.
(LO 5, 6, 7)
Trial Balance
as at 30 June
Before
adjustment
Dr
Cash
Accounts Receivable
Office Supplies
Prepaid Insurance
Office Equipment
Accumulated Depreciation Office Equipment
Accounts Payable
Salaries Payable
Unearned Rent
Issued Capital and Retained Earnings
Service Revenue
Rent Revenue
Salaries Expense
Office Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Cr
$ 10 400
8 800
2 300
4 000
14 000
After
adjustment
Dr
$ 10 400
9 400
700
2 500
14 000
$ 3 600
5 800
0
1 500
15 600
34 000
11 000
17 000
0
15 000
0
0
$ 71 500
Cr
$ 4 900
5 800
1 100
600
15 600
34 600
11 900
18 100
1 600
15 000
1 500
1 300
$ 71 500
$ 74 500
$ 74 500
Instructions
Prepare the adjusting entries that were made.

E3.10
The adjusted trial balance for Villa Ltd is given in E3.9.

Instructions
Prepare the income statement and statement of changes in equity for the year and the
statement of nancial position as at 30 June.
5_60_19243_POA_2E_ch03.indd
123
Prepare nancial statements

from adjusted trial balance.
(LO 7)
7/14/09
3:53:15 PM
124
Record transactions on accrual

basis; convert revenue to cash
receipts.
(LO 5, 6)
E3.11
The following data are taken from the comparative statements of nancial positions of Midland
Footy Club, which prepares its nancial statements using the accrual basis of accounting.
31 December
2010
2009
Fees receivable from members

Unearned fees revenue
$12 000
17 000
$ 9 000
20 000
Fees are billed to members based upon their use of the clubs facilities. Unearned fees
arise from the sale of gift certicates, which members can apply to their future use of club
facilities. The 2010 income statement for the club showed that fees revenue of $153 000 was
earned during the year.
Instructions
Prepare adjusting entries, post

to ledger accounts and prepare
an adjusted trial balance.
(LO 5, 6, 7)
E3.12
(Hint: You will probably nd it helpful to use T accounts to analyse these data.)
(a) Prepare journal entries for each of the following events that took place during 2010.
(1) Fees receivable from 2009 were all collected.
(2) Gift certicates outstanding at the end of 2009 were all redeemed.
(3) An additional $35 000 worth of gift certicates were sold during 2010. A portion of
these was used by the recipients during the year; the remainder was still outstanding
at the end of 2010.
(4) Fees for 2010 for services provided to members were billed to members.
(5) Fees receivable for 2010 (i.e. those billed in item [4] above) were partially
collected.
(b) Determine the amount of cash received by the club, with respect to fees, during 2010.
Mr Wrong has prepared his income statement for the 12-month period ended 30 June 2010
and reports a prot of $250 000. However, Mr Wrongs statement is prepared on a cash basis
rather than accrual basis of accounting. The following information is available.
1. The fortnightly wages and salaries bill of $8500 owing is due to be paid on 1 July
2010.
2. The business has $40 000 of ofce furniture and equipment with a useful life of 5 years
and zero expected residual value.
3. A client owes $1700 for services provided in May 2010.
4. The utility bills (e.g. water, telephone, electricity) for the quarter ended June 2010 are
unpaid. Based on previous bills, the quarterly expense is expected to be $1500.
5. The business paid a 2-year subscription for $1200 to a trade magazine on 1 January 2010
and recorded it as a Subscription Expense.
6. The business has received $5000 for services yet to be provided.
7. The business is being taken to court over a claimed breach of contract. An unfavourable
ruling could cost the business between $25 000 and $40 000.
Instructions
Journalise transactions
and adjusting entries using
appendix.
(LO 8)
*E3.13
(a) Prepare journal entries for the above information.

(b) Based on the information, calculate Mr Wrongs accrual-based prot for the period.
At Concord Ltd, prepayments are debited to expense when paid, and unearned revenue is
credited to revenue when received. During January of the current year, the following transactions occurred.
Jan.
2 Paid $2400 for re insurance protection for the year.

10 Paid $1700 for supplies.
15 Received $6100 for services to be performed in the future.
On 31 January, it is determined that $1500 of the services fees have been earned and that
there are $800 of supplies on hand.
Instructions
(a) Journalise and post the January transactions. (Use T accounts.)

(b) Journalise and post the adjusting entries as at 31 January.
(c) Determine the ending balance in each of the accounts.
Prepare adjusting entries, post

to ledger accounts and prepare
an adjusted trial balance.
(LO 5, 6, 7)
5_60_19243_POA_2E_ch03.indd
124
PROBLEMS
P3.1
Marcia Grin started her own consulting rm, Vektek Consulting, on 1 May 2010. The trial
balance as at 31 May is as follows.
7/14/09
3:53:15 PM
125
V E K T E K C O N S U LT I N G
Trial Balance
as at 31 May 2010
Account Number
101
110
120
130
135
200
230
300
400
510
520
Debit
Cash
Accounts Receivable
Prepaid Insurance
Supplies
Office Furniture
Accounts Payable
M. Grifin, Capital
Service Revenue
Salaries Expense
Rent Expense
Credit
$ 15 400
8 000
4 800
3 000
24 000
$ 7 000
6 000
38 200
12 000
6 000
2 000
$63 200
$63 200
In addition to those accounts listed on the trial balance, the chart of accounts for Vektek
Consulting also contains the following accounts and account numbers: No. 136 Accumulated
Depreciation Ofce Furniture, No. 210 Travel Payable, No. 220 Salaries Payable, No. 530
Depreciation Expense, No. 540 Insurance Expense, No. 550 Travel Expense and No. 560
Supplies Expense.
Other data:
1. $1000 of supplies have been used during the month.
2. Travel expense incurred but not paid on 31 May 2010, $400.
3. The insurance policy is for 2 years.
4. $2000 of the balance in the unearned service revenue account remains unearned at the
end of the month.
5. 31 May is a Wednesday, and employees are paid on Fridays. Vektek Consulting has two
employees, who are paid $1000 each for a 5-day work week.
6. The ofce furniture has a 5-year life with no residual value. It is being depreciated at
$400 per month.
7. Invoices representing $2000 of services performed during the month have not been
recorded as at 31 May.
Instructions
P3.2
(a) Prepare the adjusting entries for the month of May. Use J4 as the page number for your
journal.
(b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial balance
as beginning account balances and place a check mark in the posting reference column.
(c) Prepare an adjusted trial balance as at 31 May 2010.
The Mercury Motel opened for business on 1 May 2010. Its trial balance before adjustment
on 31 May is as follows.
M E R C U RY M OT E L
Trial Balance
as at 31 May 2010
Account Number
101
126
130
140
141
149
201
208
275
301
429
610
726
732
Debit
Cash
Supplies
Prepaid Insurance
Land
Buildings
Furniture
Accounts Payable
Unearned Rent Revenue
Mortgage Payable
Sue Phillips, Capital
Rent Revenue
Advertising Expense
Salaries Expense
Utilities Expense
125
Prepare adjusting entries,

post and prepare adjusted
trial balance and nancial
statements.
(LO 5, 6, 7)
Credit
2 500
1 900
2 400
15 000
70 000
16 800
$
5 300
3 600
35 000
60 000
9 200
500
3 000
1 000
$113 100
5_60_19243_POA_2E_ch03.indd
(c) Adj. trial balance $67 200
$113 100
7/14/09
3:53:15 PM
126
In addition to those accounts listed on the trial balance, the chart of accounts for Mercury
Motel also contains the following accounts and account numbers: No. 142 Accumulated
Depreciation Buildings, No. 150 Accumulated Depreciation Furniture, No. 212 Salaries
Payable, No. 230 Interest Payable, No. 619 Depreciation Expense Buildings, No. 621
Depreciation Expense Furniture, No. 631 Supplies Expense, No. 718 Interest Expense and
No. 722 Insurance Expense.
Other data:
1. Insurance expires at the rate of $200 per month.
2. A count of supplies shows $900 of unused supplies on 31 May.
3. Annual depreciation is $2400 on the buildings and $3000 on furniture.
4. The mortgage interest rate is 12%. (The mortgage was taken out on 1 May.)
5. Unearned rent revenue of $2500 has been earned.
6. Salaries of $800 are accrued and unpaid as at 31 May.
Instructions
(c) Adj. trial balance $114 700

(d) Profit $4 400 Ending capital
balance $64 400
Total assets $106 950
Prepare adjusting entries and
nancial statements.
(LO 5, 6, 7)
P3.3
(a) Journalise the adjusting entries on 31 May.

(b) Prepare a ledger using the three-column form of account. Enter the trial balance amounts
and post the adjusting entries. (Use J1 as the posting reference.)
(c) Prepare an adjusted trial balance on 31 May.
(d) Prepare an income statement and a statement of changes in equity for the month of May
and a statement of nancial position as at 31 May.
Fit Equip was registered on 1 April 2010. Semi-annual nancial statements are prepared. The
unadjusted and adjusted trial balances as at 30 September are shown below.
FIT EQUIP
Trial Balance
as at 30 September 2010
Unadjusted
Dr
Cash
Accounts Receivable
Prepaid Rent
Supplies
Equipment
Accumulated Depreciation Equipment
Notes Payable
Accounts Payable
Salaries Payable
Interest Payable
Unearned Rent
P. Fit, Capital
P. Fit, Drawings
Commission Revenue
Rent Revenue
Salaries Expense
Rent Expense
Depreciation Expense
Supplies Expense
Utilities Expense
Interest Expense
Cr
$ 6 700
400
1 500
1 200
15 000
Adjusted
Dr
Cr
$ 6 700
600
900
1 000
15 000
$
$ 5 000
1 510
900
14 000
600
600
14 000
400
9 000
900
14 200
800
9 400
1 500
850
200
510
50
510
$35 810
850
5 000
1 510
400
50
500
14 000
$35 810
$37 310
$37 310
Instructions
(b) Profit $2490
Ending capital $15 890
(LO 5, 6)
1. Insurance expense $4400
5_60_19243_POA_2E_ch03.indd
126
P3.4
(a) Journalise the adjusting entries that were made.

(b) Prepare an income statement and a statement of changes in equity for the 6 months
ending 30 September and a statement of nancial position as at 30 September.
(c) If the note bears interest at 12%, how many months has it been on issue?
A review of the ledger of Khan Ltd as at 31 December 2010 produces the following data
pertaining to the preparation of annual adjusting entries.
1. Prepaid Insurance $9800. The company has separate insurance policies on its buildings
and its motor vehicles. Policy B4564 on the building was purchased on 1 July 2009, for
7/14/09
3:53:16 PM

$6000. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on
1 January 2010, for $4800. This policy has a term of 2 years.
2. Unearned Subscriptions $49 000. The company began selling magazine subscriptions
in 2010 on an annual basis. The magazine is published monthly. The selling price of a
subscription is $50. A review of subscription contracts reveals the following.
Subscription
date
127
2. Subscription revenue $7000
Number of
subscriptions
1 October
1 November
1 December
200
300
480
980
3. Notes Payable $40 000. This balance consists of a note for 6 months at an annual interest
rate of 9%, dated 1 September.
4. Salaries Payable $0. There are eight salaried employees. Salaries are paid every Friday
for the current week. Five employees receive a salary of $500 each per week, and three
employees earn $800 each per week. 31 December is a Wednesday. Employees do not
work weekends. All employees worked the last 3 days of December.
3. Interest expense $1200

4. Salaries expense $2940
Instructions
Prepare the adjusting entries as at 31 December 2010.

P3.5
On 1 November 2010, the account balances of Digital Equipment Repair were as follows.
No.
Debits
101
112
126
153
Cash
Accounts Receivable
Supplies
Store Equipment
No.
$1 395
1 255
1 000
5 000
154
201
209
212
301
Credits
Accumulated Depreciation
Accounts Payable
Salaries Payable
P. Samone, Capital
$ 8 650
$ 250
1 050
700
250
6 400
Journalise transactions and

follow through accounting cycle
to preparation of nancial
statements.
(LO 5, 6, 7)
$8 650
During November the following summary transactions were completed.

Nov. 8
10
12
15
17
20
22
25
27
29
Paid $550 for salaries due to employees, of which $300 is for November.
Received $600 cash from customers on account.
Received $700 cash for services performed in November.
Purchased store equipment on account $1500.
Purchased supplies on account $250.
Paid creditors on account $1250.
Paid November rent $150.
Paid salaries $500.
Performed services on account and billed customers for services provided
$350.
Received $275 from customers for future service.
Adjustment data consist of:

1. Supplies on hand $500.
2. Accrued salaries payable $250.
3. Depreciation for the month is $60.
4. Unearned service revenue of $575 is earned.
Instructions
(a) Enter the 1 November balances in the ledger accounts.

(b) Journalise the November transactions.
(c) Post to the ledger accounts. Use J1 for the posting reference. Use the following
accounts: No. 407 Service Revenue, No. 615 Depreciation Expense, No. 631 Supplies
Expense, No. 726 Salaries Expense and No. 729 Rent Expense.
(d) Prepare a trial balance as at 30 November.
(e) Journalise and post adjusting entries.
(f) Prepare an adjusted trial balance.
5_60_19243_POA_2E_ch03.indd
127
(d) Trial balance $10 225

(f ) Adj. trial balance $10 535
7/14/09
3:53:16 PM
128
(g) Loss $385

Ending capital $6015
Total assets $8215
Prepare adjusting entries,
adjusted trial balance and
nancial statements using
appendix.
(LO 5, 6, 7, 8)
(g) Prepare an income statement and a statement of changes in equity for November and a
statement of nancial position as at 30 November.
*P3.6
Salzer Graphics was established on 1 January 2010 by Jill Salzer. At the end of the rst
6 months of operations, the trial balance contained the following accounts.
Debits
Cash
Accounts Receivable
Equipment
Insurance Expense
Salaries Expense
Supplies Expense
Advertising Expense
Rent Expense
Utilities Expense
Credits
$
9 500
14 000
45 000
1 800
30 000
3 700
1 900
1 500
1 700
$ 109 100
Notes Payable
Accounts Payable
Jill Salzer, Capital
Graphic Revenue
Consulting Revenue
$ 20 000
9 000
22 000
52 100
6 000
$ 109 100
Analysis reveals the following additional data.

1. The $3700 balance in Supplies Expense represents supplies purchased in January. As at
30 June, $1300 of supplies was on hand.
2. The note payable was issued on 1 February. It is a 12%, 6-month note.
3. The balance in Insurance Expense is the premium on a 1-year policy, dated 1 March 2010.
4. Consulting fees are credited to revenue when received. As at 30 June, consulting fees of
$1100 are unearned.
5. Graphic revenue earned but unrecorded as at 30 June totals $2000.
6. Depreciation is $3000 per year.
Instructions
(b) Adj. trial balance $113 600

(c) Profit $18 400
Ending capital $40 400
Prepare adjusting entries and
adjusted nancial statements.
(LO 5, 6, 7, 8)
P3.7
(a) Journalise the adjusting entries as at 30 June. (Assume adjustments are recorded every
6-months.)
(b) Prepare an adjusted trial balance.
(c) Prepare an income statement and statement of changes in equity for the 6 months ended
30 June and a statement of nancial position as at 30 June.
Paul Owens started Paul Owens Catering in January 2010. The accounting information is
maintained on a cash basis. In its rst year, Paul believes that the business has been operating
successfully. The cash-based nancial statements are as follows.
P AU L O W E N S C AT E R I N G
Income Statement
for the 12 months ended 31 December 2010
Income
Catering revenue
Expenses
Insurance expense
Catering supplies expense
Advertising expense
Salaries expense
Utilities expense
Motor vehicle expenses
Interest expense
Total expenses
$ 152 000
$ 4 200
54 000
2 500
33 000
5 300
10 000
600
Profit
109 600
$ 42 400
Statement of Changes in Equity
for the year ended 31 December 2010
P. Owens, Capital 1 January
Investment by owner
Add: Profit
P. Owens, Capital 31 December
5_60_19243_POA_2E_ch03.indd
128
0
60 000
42 400
102 400
7/14/09
3:53:16 PM
129
Statement of Financial Position
as at 31 December 2010
Assets
Cash at bank
Catering equipment
Motor vehicle
Total Assets
$ 17 900
80 000
40 000
137 900
Liabilities
Notes payable
$ 35 500
Total liabilities
Owners equity
Capital
Total liabilities and owners equity
35 500
102 400
102 400
137 900
In reviewing the nancial statements, the accountant informed Paul that he should be
reporting using an accrual basis if he wants to assess the performance and position of the
business. In explaining accrual accounting to Paul, the accountant noted that the nancial
statements do not reect the following.
1. Revenue from the catering jobs completed in December, worth $22 500.
2. The catering supplies on hand at the end of December, worth $8000.
3. Depreciation of the motor vehicle, $4000, and depreciation of the catering equipment,
worth $10 000.
4. The annual insurance policy does not expire until 31 March 2011.
5. Paul has not paid $15 000 owed to casual staff for hours worked in December.
6. The interest owing on the bill is $2000.
7. Paul has not paid the telephone and electricity accounts for the December quarter,
totalling $500.
8. The December petrol account at the garage, totalling $800, has not been paid.
9. Paul has received $10 000 as deposit for a catering job in March 2011.
Instructions
(a) Journalise the adjusting entries as at 31 December.

(b) Prepare an accrual-based income statement, statement of changes in equity and
statement of nancial position as at 31 December.
(c) Explain to Paul why the accrual-based nancial statements provide a better measure of
the performance of the business.
(b) Profit $31 650;

Ending capital $91 650;
B RO A D E N I N G YO U R P E R S P E C T I V E
Financial reporting and analysis
FINANCIAL REPORTING PROBLEM: SINGAPORE AIRLINES
BYP3.1 Locate the most recent nancial statements of Singapore Airlines via the website
www.singaporeair.com.
Instructions
(a) Using the consolidated nancial statements and related information, identify items that
may result in adjusting entries for prepayments.
(b) Using the consolidated nancial statements and related information, identify items that
may result in adjusting entries for accruals.
(c) Using the historical summary of nancial data, what has been the trend for prot?
COMPARATIVE ANALYSIS PROBLEM: SINGAPORE AIRLINES AND CATHAY

PACIFIC
BYP3.2 Locate the most recent nancial statements of Singapore Airlines (via the website
www.singaporeair.com) and Cathay Pacic (via the website www.cathaypacic.com).
5_60_19243_POA_2E_ch03.indd
129
7/14/09
3:53:17 PM
130
Instructions
Based on information contained in these statements, determine the following for each
company.
(a) Net increase (decrease) in property, plant and equipment from previous year to current
year.
(b) Net increase (decrease) in depreciation and amortisation expense from previous year to
current year.
(c) Net increase (decrease) in liabilities from previous year to current year.
(d) Net increase (decrease) in prot from previous year to current year.
(e) Net increase (decrease) in cash from previous year to current year.
INTERPRETING FINANCIAL STATEMENTS: A GLOBAL FOCUS
BYP3.3 Apple Inc.s principal activities are to design, manufacture and market personal computers
and related software, peripherals and personal computing and communicating solutions.
Apple Inc. also designs, develops and markets a line of portable digital music players
along with related accessories and services, including the online sale of third-party audio
and video products and iPhone products. The company sells its products through its online
stores, direct sales force, third-party wholesalers and resellers, and its own retail stores. It
has its operations in the United States, Europe, Japan and AsiaPacic.
Instructions
Answer the following questions.

(a) What prot (net income) is reported in Apple Inc.s most recent consolidated statement
of operations (income statement)? What cash from operating activities is reported in its
most recent statement of cash ows? What might explain this difference?
(b) The company reports a liability related to warranty costs in its balance sheet (statement
of nancial position). What are the possible points in time that warranty costs might be
expensed? At what point do you consider these costs should be expensed in the income
statement?
(c) The companys net sales consist primarily of revenue from the sale of hardware,
software, music products, digital content, peripherals, and service and support contracts.
In the notes to the nancial statements the company notes it recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the sales price is
xed or determinable, and collection is probable. Product is considered delivered to the
customer once it has been shipped and title and risk of loss have been transferred. Is
this consistent with the revenue recognition practices described in this chapter? What
considerations might you want to take into account in determining whether this is the
appropriate approach to recognising revenue?
EXPLORING THE WEB
BYP3.4 A wealth of accounting-related information is available via the internet. For example, the
Rutgers Accounting Web offers access to a great variety of sources.

Address: accounting.rutgers.edu
Instructions
Visit the Rutgers website and click on Accounting Resources. List the categories of
information available through the Accounting Resources page. Select any one of these
categories and briey describe the types of information available.
Critical thinking
GROUP DECISION CASE
BYP3.5 Travel Wise was established on 1 January 2010 by Alice Ho. Alice is a good manager but a
poor accountant. From the trial balance prepared by a part-time bookkeeper, Alice prepared
the following income statement for the quarter that ended 31 March 2011.
5_60_19243_POA_2E_ch03.indd
130
7/14/09
3:53:17 PM
131
T R AV E L W I S E
Income Statement
for the quarter ended 31 March 2011
Income
Booking revenue
Expenses
Advertising
Wages
Utilities
Depreciation
Repairs
$ 90 000
$ 5 200
29 800
900
800
4 000
Total expenses
40 700
Profit
$49 300
Alice knew that something was wrong with the statement because prot had never exceeded
$20 000 in any one quarter. Knowing that you are an experienced accountant, she asks you
to review the income statement and other data.
You rst look at the trial balance. In addition to the account balances reported above in
the income statement, the ledger contains the following additional selected balances as at
31 March 2011.
Supplies
Prepaid Insurance
Notes Payable
$ 6 200
7 200
12 000
You then make inquiries and discover the following.

1. Booking fees include advanced rentals for summer month occupancy $20 000.
2. There were $1300 of supplies on hand as at 31 March.
3. Prepaid insurance resulted from the payment of a 1-year policy on 1 January 2011.
4. The mail on 1 April 2011 brought the following bills: advertising for week of 24 March,
$110; repairs made 10 March, $260; and utilities, $180.
5. There are four employees, who receive wages totalling $350 per day. As at 31 March,
2 days wages have been incurred but not paid.
6. The note payable is a 3-month, 10% note dated 1 January 2011.
Instructions
With the class divided into groups, answer the following.

(a) Prepare a correct income statement for the quarter ended 31 March 2011.
(b) Explain to Alice the generally accepted accounting principles that she did not recognise
in preparing her income statement and their effect on her results.
COMMUNICATION ACTIVITY
BYP3.6 In reviewing the accounts of Karibeth Ltd at the end of the year, you discover that adjusting
entries have not been made.

Instructions
Write a memo to Kari Beth Menzies, the owner of Karibeth Ltd, that explains the following:
the nature and purpose of adjusting entries, why adjusting entries are needed and the types
of adjusting entries that may be made.
ETHICS CASE
BYP3.7 CPA Australia sponsors a student ethics essay prize: the CPA Australia Ethics Essay
Competition. The winner in 2008 was Jeffrey Dummett for his essay titled Ethics in a
global environment. Access the article by going to the course management system that
accompanies this text.
5_60_19243_POA_2E_ch03.indd
131
7/14/09
3:53:17 PM
132
Instructions
Read the essay and answer the following questions:

(a) Summarise the challenges of a globalised business environment to the practice of
effective accounting ethics.
(b) Discuss possible resolutions to these challenges.
(c) Outline the role of the International Federation of Accountants (IFAC).
SUSTAINABILITY CASE
BYP3.8 The Association of Chartered Certied Accountants (ACCA) has conducted annual
ACCA sustainability reporting awards for more than 15 years. The ACCA is involved in
reporting awards in more than 20 countries in Europe, Africa, North America/Canada and
the AsiaPacic region. For Australia and New Zealand, the best sustainability report for
2007 was awarded to BHP Billiton. Only 35% of Australias top 100 companies conduct
sustainability reporting compared with 76% in the United Kingdom.
Instructions
Visit the ACAA sustainability report awards website at www.accaglobal.com under General
public, Technical activities, Subject areas, Sustainability.
(a) Identify the sources of guidance on sustainability reporting.
(b) Select one of these sources and identify the guidance provided.
Source: Management Update, BRW, 511 June 2008, p. 68.
FINANCIAL REPORTING QUALITY CASE
BYP3.9 The scene setter for this chapter described inappropriate revenue recognition by an
Australian company. Misstated nancial statements have occurred in many countries. For
example, personal computer maker Dell intentionally restated its results from 2003 to 2006
and in the rst quarter of 2007 to improve the appearance of its performance. In 2006,
the Malaysian publicly listed company Transmile Group restated its 2005 prot of RM75
million to a loss of RM370 million as a result of ctitious sales. The accounting practices
of Sanyo Electric Co. have been questioned with claims the company misrepresented its
statements by failing to write off 200 billion in losses that were subsequently booked in
later years.
Instructions
Why would companies want to misreport their nancial results and run the risk of being
detected?
Source: P. Ng, Public-listed rms hit by accounting fraud, The Business Times Singapore, 3 July
2007; A. Ricadela, Delinquent Dell gets its house in order, Australian Financial Review, 21 August
2007, p. 32; SESC probes allegations of accounting fraud at Sanyo Elec., Nikkei Report, 23 February
2007.
Answers to self-study questions
1. c 2. d 3. d 4. a
13. c 14. a 15. b
5. d
6. d
7. d
8. c
9. c
10. a
11. c
12. b
Solution to Nokia review it question 4, page 104
Nokias 2008 annual report shows a total of 1617 million depreciation and amortisation.
Please note the 2008 annual report has been used as an example. Students answers will vary
depending on the report accessed.
Note: Amortisation is the same concept as depreciation. The term amortisation is used when
referring to specic assets, for example, intangibles and leased assets.
5_60_19243_POA_2E_ch03.indd
132
7/14/09
3:53:17 PM

CHAPTER 3 Adjusting The Accounts PDF

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

CHAPTER 3 Adjusting The Accounts PDF

Загружено:

Авторское право:

Доступные форматы

CHAPTER 3 Adjusting the accounts

Depreciation (p. 101)

APPENDIX ALTERNATIVE TREATMENT

Advertising Supplies Expense

Oct. 31 Advertising Supplies Expense 1 500

Oct. 5 Advertising Supplies Expense

Oct. 31 Advertising Supplies

Advertising Supplies Expense

Advertising Supplies Expense