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4 - 2 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB
Multiple Choice Questions
38. 1 M C F AN 70. 2 M AP F AN 102. 3 M C F AN
39. 1 E C F AN 71. 2 M C F AN 103. 3 H C F AN
40. 1 E C F AN 72. 2 E C F AN 104. 3 H C F AN
41. 1 E C F AN 73. 2 M AP F AN 105. 3 H AP F AN
42. 1 E AP F AN 74. 2 M AP F AN 106. 3 M AP F AN
43. 1 E C F AN 75. 2 E C F AN 107. 3 M AP F AN
44. 1 M C F AN 76. 2 E C F AN 108. 3 M AP F AN
45. 1 M C F AN 77. 2 M K F AN 109. 3 E AP F AN
46. 1 M C F AN 78. 2 M AP F AN 110. 3 M AP F AN
47. 1 M C F AN 79. 2 M AP F AN 111. 3 M AP F AN
48. 1 M C F AN 80. 2 H AP F AN 112. 3 M AP F AN
49. 1 H C F AN 81. 2 H AP F AN 113. 3 H AP F AN
50. 1 H C F AN 82. 2 M C F AN 114. 4 M C F AN
51. 1 H C F AN 83. 2 M C F AN 115. 4 M AP F AN
52. 1 M C F AN 84. 2 H C F AN 116. 4 M C F AN
53. 1 M C F AN 85. 2 H C F AN 117. 4 E K F AN
54. 1 M C F AN 86. 2 M C F AN 118. 4 E K F AN
55. 1 M C F AN 87. 2 M AP F AN 119. 4 M C F AN
56. 1 M C F AN 88. 2 H AP F AN 120. 4 M K F AN
57. 1 E C F AN 89. 2 M AP F AN 121. 4 M K F AN
58. 1 M K F AN 90. 2 E K F AN 122. 4 E K F AN
59. 2 M C F AN 91. 2 M K F AN 123. 5 M K F AN
60. 2 M C F AN 92. 2 H C F AN 124. 5 M C F AN
61. 2 M C F AN 93. 2 M C F AN 125. 5 E K F AN
62. 2 M AP F AN 94. 2 M AP F AN 126. 5 M K F AN
63. 2 M C F AN 95. 2 M K F AN 127. 5 M K F AN
64. 2 M C F AN 96. 2 M AP F AN 128. 5 M C F AN
65. 2 H C F AN 97. 2,3 H C F AN 129. 5 M C F AN
66. 2 E C F AN 98. 2,3 H C F AN 130. 5 E K F AN
67. 2 H K F AN 99. 3 M C F AN 131. 5 E K F AN
68. 2 M C F AN 100. 3 H K F AN 132. 5 E K F AN
69. 2 M K F AN 101. 3 H C F AN
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4-3 Accrual Accounting Concepts
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4 - 5 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
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4 - 6 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
4-7 Accrual Accounting Concepts
1. Explain the accrual basis of accounting and the reasons for adjusting entries. Under
the accrual basis of accounting, revenues are recognized (recorded) when they are earned,
while expenses are recognized (recorded) when they are incurred. This means that
revenues are recognized when performance obligations have been identified and satisfied,
regardless of whether cash has been received. Expenses are recognized in the period
when the company incurs them in an effort to generate revenue, regardless of whether
cash has been paid.
This differs from the cash basis of accounting in which companies record events only in the
periods in which the company receives (revenues) or pays cash (expenses).
Companies make adjusting entries at the end of each accounting period. These entries
ensure that companies record revenues in the period in which they are earned and that
companies recognize expenses in the period in which they are incurred. There are two
general types of adjusting entries: (1) prepayments, which allocate a portion of an asset’s
cost or unearned revenue to the income statement, and (2) accruals, which increase
expenses or revenues in the income statement and the related payable or receivable in the
statement of financial position.
2. Prepare adjusting entries for prepayments. Prepayments involve accounts that have
previously been recorded as assets (such as when cash was paid in advance for prepaid
expenses) or liabilities (such as when cash was received in advance for unearned
revenues). The adjusting entry for prepaid expenses results in an increase (debit) to an
expense account and a decrease (credit) to an asset account or an increase (credit) to a
contra asset account. The adjusting entry for unearned revenues results in a decrease
(debit) to a liability (Unearned Revenue) account and an increase (credit) to a revenue
account.
3. Prepare adjusting entries for accruals. Adjusting entries for accruals are required in
order to record the expenses and revenues that apply to the current accounting period and
that have not already been recognized through transaction journal entries. Accruals involve
accounts for which there has been no cash received or paid as yet. The adjusting entry for
accrued expenses results in an increase (debit) to an expense account and an increase
(credit) to a liability (payable) account. The adjusting entry for accrued revenues results in
an increase (debit) to an asset (receivable) account and an increase (credit) to a revenue
account.
4. Prepare an adjusted trial balance and financial statements. An adjusted trial balance is
a trial balance that shows the balances of all accounts at the end of an accounting period,
including those that have been adjusted. It demonstrates that total debits equal total credits.
An adjusted trial balance facilitates the preparation of the financial statements.
5. Prepare closing entries and a post-closing trial balance. One purpose of closing entries
is to update the Retained Earnings account to its end-of-period balance. A second purpose
is to reset the balance in all temporary accounts (revenue, expense, and Dividends
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4 - 8 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Declared accounts) to zero for the beginning of the new accounting period. To accomplish
this, entries are made to close each individual revenue and expense account to a
temporary account called Income Summary, which summarizes net income (or net loss).
The Income Summary account is then closed to the Retained Earnings account. The
Dividends Declared account is closed directly to Retained Earnings (and not via the Income
Summary account, because dividends do not affect net income).
A post-closing trial balance lists only permanent accounts (statement of financial position
accounts) because these account balances are carried forward to the next accounting
period. The purpose of the post-closing trial balance, as with other trial balances, is to prove
the equality of total debits and total credits.
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4-9 Accrual Accounting Concepts
TRUE-FALSE STATEMENTS
1. Accounting divides the economic life of a business entity into time periods.
2. An accounting transaction never affects more than one accounting time period.
4. Revenue must be recognized when (or as) the company satisfies the performance obligation,
regardless of whether or not the transaction price has been determined.
8. Under the accrual basis of accounting, expenses are only recognized when they are paid.
9. Under the cash basis of accounting, revenue is only recognized when cash is received.
10. Under the cash basis of accounting, expense recognition generally does not follow revenue
recognition.
11. Since some costs are not recorded, adjusting entries are necessary.
12. For a private company reporting under ASPE, adjusting entries must be prepared at least
quarterly.
13. Prepaid expenses are costs that are paid for before they are used.
14. Expenses paid before being used or consumed are initially recorded as liabilities.
15. When money is received from a customer prior to the delivery of goods or the performance
of a service, it is recorded as revenue.
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4 - 10Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
16. The purchase of certain types of long-lived (non-current) assets is essentially a long-term
prepayment for services.
17. The cost of any depreciable asset less accumulated depreciation reflects the carrying
amount of the asset.
18. The carrying amount of a depreciable asset is always equal to its actual value because
depreciation is a valuation technique.
19. Accumulated Depreciation is a liability account and its normal account balance is a credit.
20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts
should always be the same.
21. A contra asset account is subtracted from a related asset account in the statement of
financial position and has a normal credit balance.
23. If a three-month, 6% bank loan for $5,000 is signed on October 1, the interest expense for
the month of October is $25.
Solution: Correct interest expense: $5,000 x.06 x 1/12 = $25
24. The adjustment for accrued salaries results from services being paid for after the services
are performed.
25. The statement of financial position and income statement can be prepared from the
information provided by an adjusted trial balance.
26. An adjusted trial balance must be prepared before the adjusting entries can be recorded.
27. The purpose of an adjusted trial balance is to ensure all adjusting entries have been
recorded.
28. The statement of changes in equity is prepared from the Common Shares, Retained
Earnings and Dividends Declared accounts on the adjusted trial balance.
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4 - 11 Accrual Accounting Concepts
29. When preparing the statement of financial position, the balance of Retained Earnings is
taken from the Adjusted Trial Balance.
30. The post-closing trial balance will contain only permanent accounts.
31. The Dividends Declared account is closed to the Income Summary account at the end of
each year.
32. Financial statements are generally prepared before the closing entries are posted.
34. When closing entries are posted, the result is a zero balance in each income statement
account.
36. Closing entries result in the transfer of net income or loss into the Retained Earnings
account.
37. The post-closing trial balance will have fewer accounts than the adjusted trial balance.
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4 - 12Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
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4 - 13 Accrual Accounting Concepts
39. Under IFRS, which of the following is generally not a guideline for recognizing revenue?
(a) When (or as) the company satisfies the performance obligation.
(b) The contract is identified with the client.
(c) Collection is reasonably assured.
(d) The transaction price is determinable.
42. Under IFRS, revenue recognition criteria include recognizing revenue when
(a) cash is received.
(b) the company satisfies the performance obligation.
(c) related expenses are recognized.
(d) the revenue is recorded.
43. Recording transactions that affect a company’s financial statements in the periods in which
they occur rather than when cash is received or paid is called
(a) time period accounting.
(b) the cash basis of accounting.
(c) monetary accounting.
(d) the accrual basis of accounting.
44. On February 15, a local business receives an invoice for electricity used in the month of
January and pays it on March 1. In which month should the business recognize the expense?
(a) February
(b) January
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4 - 14Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(c) March
(d) No expense should be recorded.
45. A dress shop makes a dress that sells for $200 and delivers it to the customer on June 30.
The customer is sent a statement on July 7 and a cheque is received by the dress shop on July
11. When should the $200 be recognized as revenue?
(a) July 7
(b) July 11
(c) June 30
(d) July 1
46. A furniture factory's employees work overtime in February to finish an order that is sold on
February 28. The office sends a statement to the customer in early March and payment is
received by mid-March. The overtime salaries should be expensed in
(a) February.
(b) March.
(c) the period when the workers receive their cheques.
(d) either February or March depending on when the pay period ends.
48. Using accrual accounting, expenses are recorded and reported only
(a) when they are incurred for the purpose of generating revenue, whether or not cash is paid.
(b) when they are incurred and paid at the same time.
(c) if they are paid before they are incurred.
(d) if they are paid after they are incurred.
49. Guardian Corp. sells $6,250 of goods on account in the current year and collects $3,250 of
this. It incurs $4,200 in expenses on account during the current year and pays $2,600 of them.
Guardian would report what amount of net income under the cash and accrual bases of
accounting, respectively?
(a) $2,050 on the cash basis and $3,000 on the accrual basis
(b) $3,250 on the cash basis and $4,200 on the accrual basis
(c) $3,000 on the cash basis and $1,600 on the accrual basis
(d) $650 on the cash basis and $2,050 on the accrual basis
Solution: Cash basis: $3,250 – $2,600 = $650; Accrual basis: $6,250 $4,200 $2,050
50. Fang's Tune-Up Shop Ltd. uses the accrual basis of accounting. Fang services a car on
May 31. The customer picks up the vehicle on June 1 and mails payment to Fang on June 5.
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4 - 15 Accrual Accounting Concepts
Fang receives the cheque in the mail on June 6. When would Fang recognize the revenue as
being earned?
(a) June 6
(b) June 5
(c) June 1
(d) May 31
51. Wong's Tune-Up Shop Limited uses the cash basis of accounting. Wong services a car on
May 31. The customer picks up the vehicle on June 1 and mails payment to Wong on June 5.
Wong receives the cheque in the mail on June 6. When would Wong recognize the revenue as
being earned?
(a) June 6
(b) June 5
(c) June 1
(d) May 31
55. Which one of the following is not a justification for adjusting entries?
(a) Adjusting entries are necessary to ensure that revenue recognition criteria are followed.
(b) Adjusting entries are necessary to ensure that expense recognition criteria are followed.
(c) Adjusting entries are necessary to enable financial statements to be in conformity with IFRS
or ASPE.
(d) Adjusting entries are necessary to bring the general ledger accounts in line with the budget.
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4 - 16Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(c) is only required for accounts that do not have a normal balance.
(d) is optional when financial statements are prepared.
58. The general term employed to indicate an expense that has not been paid or revenue that
has not been received and has not yet been recognized in the accounts is a(n)
(a) contra asset.
(b) prepayment.
(c) asset.
(d) accrual.
61. An asset purchased for $130,000 on the first day of the fiscal year with a useful life of 5
years has an annual depreciation expense of
(a) $25,000.
(b) $125,000.
(c) $26,000.
(d) $2,167.
Solution: $130,000 / 5 years= $26,000
63. When a company performs a service for which payment was received in advance, a journal
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4 - 17 Accrual Accounting Concepts
64. Which of the following reflects the balances of prepayment accounts prior to adjustment?
(a) Statement of financial position accounts are understated and income statement accounts are
understated.
(b) Statement of financial position accounts are overstated and income statement accounts are
overstated.
(c) Statement of financial position accounts are overstated and income statement accounts are
understated.
(d) Statement of financial position accounts are understated and income statement accounts are
overstated.
67. Which of the following accounts would not likely need to be adjusted at year end?
(a) Supplies
(b) Equipment
(c) Prepaid Insurance
(d) Unearned Revenue
69. Griffin Inc. purchased supplies costing $4,250 and debited Supplies for the full amount. At
the end of the accounting period, a physical count of supplies revealed $2,100 still on hand. The
appropriate adjusting journal entry to be made at the end of the period would be
(a) debit Supplies Expense, $2,100; credit Supplies, $2,100.
(b) debit Supplies Expense, $2,150; credit Supplies, $2,150.
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4 - 18Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
70. A legal firm received $2,000 cash for legal services to be rendered in the future. The full
amount was credited to Unearned Revenue. If the legal services have been provided at the end
of the accounting period and no adjusting entry has previously been made, this would cause
(a) expenses to be overstated.
(b) net income to be overstated.
(c) liabilities to be understated.
(d) revenues to be understated.
72. The Town Laundry Ltd. purchased $5,500 worth of laundry supplies on June 2 and recorded
the purchase as an asset in the Supplies account. On June 30, a count of the laundry supplies
indicated only $3,000 on hand. The adjusting entry that should be made by the company on
June 30 is
(a) debit Supplies Expense, $3,000; credit Supplies, $3,000.
(b) debit Supplies Expense, $2,500; credit Supplies, $2,500.
(c) debit Supplies, $2,500; credit Supplies Expense, $2,500.
(d) debit Supplies, $3,000; credit Supplies Expense, $3,000.
Solution: $5,500 - $3,000 = $2,500; Dr Supplies Expense and Cr Supplies
73. On July 1, Kingston Store paid $15,000 to Location Realty for six months rent, starting July
1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31,
the adjusting entry to be made by Kingston Store is
(a) debit Rent Expense, $15,000; credit Prepaid Rent, $15,000.
(b) debit Prepaid Rent, $2,500; credit Rent Expense, $2,500.
(c) debit Prepaid Rent, $7,500; credit Rent Expense, $7,500.
(d) debit Rent Expense, $2,500; credit Prepaid Rent, $2,500.
Solution: $15,000 / 6 months = $2,500
74. The balance in the Prepaid Rent account before adjustment at the end of the year is
$12,000 and represents three months rent starting on November 1. The adjusting entry required
on December 31, assuming adjusting entries have not previously been made, is
(a) debit Prepaid Rent, $4,000; credit Rent Expense $4,000.
(b) debit Prepaid Rent, $8,000; credit Rent Expense, $8,000.
(c) debit Rent Expense, $12,000; credit Prepaid Rent, $12,000.
(d) debit Rent Expense, $8,000; credit Prepaid Rent, $8,000.
Solution: $12,000 / 3 = $4,000/month x 2 $8,000
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4 - 19 Accrual Accounting Concepts
75. If a business has received cash in advance of services being performed and credits a
liability account, the adjusting entry needed after the services are performed will be
(a) debit Unearned Revenue and credit Cash.
(b) debit Unearned Revenue and credit Sales.
(c) credit Unearned Revenue and debit Sales.
(d) debit Unearned Revenue and credit Accounts Receivable.
77. The Jasmine Corporation purchased a notebook computer for $3,600 on December 1. The
useful life of the notebook computer is estimated to be 3 years. If financial statements are to be
prepared on December 31, the company should make the following adjusting entry:
(a) debit Depreciation Expense, $1,200; credit Accumulated Depreciation—Equipment, $1,200.
(b) debit Depreciation Expense, $100; credit Accumulated Depreciation—Equipment, $100.
(c) debit Accumulated Depreciation—Equipment, $1,200; credit Depreciation Expense, $1,200.
(d) debit Equipment, $100; credit Accumulated Depreciation—Equipment, $100.
Solution: $3,600 / 36 months $100
78. Ray Autobody purchased a car jack for $16,000 on July 1. The estimated useful life of the
car jack is 4 years. If the financial statements are prepared on December 31, Ray should make
the following adjusting journal entry, assuming adjusting entries are made only annually:
(a) debit Depreciation Expense, $2,000, credit Accumulated Depreciation—Equipment, $2,000.
(b) debit Depreciation Expense, $1,667, credit Accumulated Depreciation—Equipment, $1,667.
(c) debit Depreciation Expense, $4,000, credit Accumulated Depreciation—Equipment, $4,000.
(d) debit Equipment, $2,000, credit Accumulated Depreciation—Equipment, $2,000.
Solution: $16,000 / 48 months x 6 months $2,000
79. McCloud Realty received a cheque for $21,000 on July 1, which represents a 6-month
advance payment of rent on a building it rents to a client. Unearned Revenue was credited for
the full $21,000. Financial statements will be prepared on July 31. McCloud Realty should make
the following adjusting entry on July 31:
(a) debit Unearned Revenue, $3,500; credit Rent Revenue, $3,500.
(b) debit Rent Revenue, $3,500; credit Unearned Revenue, $3,500.
(c) debit Unearned Revenue, $21,000; credit Rent Revenue, $21,000.
(d) debit Cash, $3,500; credit Rent Revenue, $3,500.
Solution: $21,000 / 6 months = $3,500
80. Best Value Trucks Inc. began the year with $1,200 of supplies on hand. During the year the
company purchased $4,000 worth of supplies, debited to the Supplies account. At the end of the
year, there was $1,000 worth of supplies left on hand. The adjusting entry for Supplies at the
end of the year would be
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4 - 20Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
81. A company usually determines the amount of supplies used during a period by
(a) adding the supplies on hand to the balance of the Supplies account.
(b) totalling the amount of supplies purchased during the period.
(c) taking the difference between the supplies purchased and the supplies paid for during the
period.
(d) taking the difference between the change in the beginning and ending balances of the
Supplies account and the cost of supplies on hand.
82. If a company fails to make an adjusting entry to record Supplies Expense, then
(a) shareholders’ equity will be understated.
(b) expenses will be understated.
(c) assets will be understated.
(d) net income will be understated.
83. If supplies are recorded as assets when purchased, the credit to supplies in the adjusting
entry is for the amount of supplies
(a) remaining.
(b) purchased.
(c) used.
(d) purchased less the amount used.
84. If XYZ Corp. fails to adjust the Prepaid Rent account for rent that has expired, what effect
will this have on that month's financial statements?
(a) This will have no effect on the financial statements.
(b) Expenses will be overstated and net income and shareholders’ equity will be understated.
(c) Assets will be overstated and net income and shareholders’ equity will be understated.
(d) Assets will be overstated and net income and shareholders’ equity will be overstated.
85. If Bee Corp. fails to adjust the Unearned Rent account for rent that has been earned, what
effect will this have on that month’s financial statements?
(a) Assets will be understated and revenues will be understated.
(b) Liabilities will be understated and revenues will be understated.
(c) Liabilities will be overstated and revenues will be understated.
(d) Assets will be overstated and revenues will be understated.
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4 - 21 Accrual Accounting Concepts
86. At December 31, 2018, before any year-end adjustments, TBS Corp.'s Insurance Expense
account had a balance of $800 and its Prepaid Insurance account had a balance of $3,400. It
was determined that $1,650 of the Prepaid Insurance had expired. The adjusted balance for
Insurance Expense for the year would be
(a) $2,450.
(b) $1,650.
(c) $1,975.
(d) $ 800.
Solution: $800 + $1650 $2,450
87. At December 31, 2018, before any year-end adjustments, Harvest Inc.'s Prepaid Insurance
account had a balance of $2,000. It was determined that $800 of the Prepaid Insurance had
expired. The adjusted balance for Prepaid Insurance at year end would be
(a) $ 800.
(b) $1,200.
(c) $2,000.
(d) $2,800.
Solution: $2,000 $800 $1,200
88. At the end of the current year, the required adjusting entry for depreciation on equipment
was omitted. Which of the following statements is true regarding the current year’s financial
statements?
(a) Net income will be overstated.
(b) Total assets will be understated.
(c) The statement of financial position and income statement will be misstated but the statement
of changes in equity will be correct.
(d) Retained earnings will be understated.
90. The difference between the balance of a building account and its related accumulated
depreciation account is its
(a) fair value.
(b) contra asset.
(c) carrying amount.
(d) liability.
91. A new accountant working for Astro Limited records $650 depreciation expense on store
equipment at year end as follows:
Depreciation Expense.................................................................... 650
Cash....................................................................................... 650
The effect of this entry is to
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4 - 22Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
92. From an accounting standpoint, the acquisition of long-lived assets is essentially a(n)
(a) accrual of expense.
(b) accrual of revenue.
(c) accrual of unearned revenue.
(d) prepayment for services.
93. A common method for calculating depreciation expense is to divide the asset’s cost by
(a) its fair value at date of purchase.
(b) its useful life.
(c) the accumulated depreciation recorded to date.
(d) the actual amount paid for the asset.
95. If equipment with a 5-year life was purchased on July 1, 2018 for $60,000, by December 31,
2019,
(a) the accumulated depreciation would be $12,000 and the carrying amount would be $48,000.
(b) the accumulated depreciation would be $40,000 and the carrying amount would be $20,000.
(c) the accumulated depreciation would be $30,000 and the carrying amount would be $30,000.
(d) the accumulated depreciation would be $18,000 and the carrying amount would be $42,000.
Solution: Accumulated Depreciation: $60,000 / 60 months x 18 months $18,000; Carrying
Amount: $60,000 - $18,000 = $42,000
96. Which of the following would not result in a credit to Unearned Revenue?
(a) rent collected in advance from tenants
(b) services performed on account
(c) sale of season tickets to hockey games
(d) sale of two-year magazine subscription
97. The primary difference between prepaid and accrued expenses is that prepaid expenses
have
(a) been incurred and accrued expenses have not.
(b) not been paid and accrued expenses have.
(c) been paid and accrued expenses have not.
(d) not been recorded and accrued expenses have.
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4 - 23 Accrual Accounting Concepts
99. An adjusting entry would not include which of the following accounts?
(a) Cash
(b) Interest Receivable
(c) Accounts Payable
(d) Unearned Revenue
103. Failure to prepare an adjusting entry at the end of the period to record an accrued expense
would cause
(a) net income to be understated.
(b) an overstatement of assets and an overstatement of liabilities.
(c) an understatement of expenses and an understatement of liabilities.
(d) an overstatement of expenses and an overstatement of liabilities.
104. Failure to prepare an adjusting entry at the end of a period to record accrued revenue
would cause
(a) net income to be overstated.
(b) an understatement of assets and an understatement of revenues.
(c) an understatement of revenues and an understatement of liabilities.
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4 - 24Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
105. On September 1, Piano Keys Corp. borrowed $30,000 from their bank, and signed a 5%,
3-month bank loan. Principal and interest are due on December 1. If Piano Keys prepares
monthly financial statements, the adjusting entry that it should prepare for interest on
September 30 would be
(a) debit Interest Expense, $125; credit Interest Payable, $125.
(b) debit Interest Expense, $1,500; credit Interest Payable, $1,500.
(c) debit Bank Loan Payable, $375; credit Cash, $375.
(d) debit Cash, $30,000; credit Bank Loan Payable, $30,000.
Solution: $30,000 x.05 x 1/12 = $125
106. The adjusting entry to record accrued interest on a note receivable due next year consists
of a
(a) debit to Interest Expense and a credit to Interest Payable.
(b) debit to Interest Receivable and a credit to Interest Revenue.
(c) debit to Interest Expense and a credit to Interest Receivable.
(d) debit to Interest Receivable and a credit to Cash.
107. D. Debit Inc. has performed $700 of accounting services for a client but has not yet billed
the client at the end of the accounting period. What adjusting entry must D. Debit prepare?
(a) debit Cash and credit Unearned Revenue
(b) debit Accounts Receivable and credit Unearned Revenue
(c) debit Accounts Receivable and credit Service Revenue
(d) debit Unearned Revenue and credit Service Revenue
108. C. Credit Inc. has billed its clients for services performed in October. In November, the
company receives payments from the clients. What entry will it make upon receipt of the
payments?
(a) debit Unearned Revenue and credit Service Revenue
(b) debit Cash and credit Accounts Receivable
(c) debit Accounts Receivable and credit Service Revenue
(d) debit Cash and credit Service Revenue
109. On September 1, Monmouth Microwaves Ltd. signed a 9%, five-month bank loan payable
for $9,000. The amount of interest to be accrued at December 31, assuming adjusting entries
have not been previously made, is
(a) $9,810.
(b) $ 810.
(c) $ 337.
(d) $ 270.
Solution: $9,000 x.09 x 4/12 $270
110. On February 1, Chopper Motorcycles Ltd. signed a 5%, twelve-month bank loan payable
for $168,000 to help finance increases in inventory for the spring and summer season.
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4 - 25 Accrual Accounting Concepts
Assuming no entries have been made previously for the interest on this loan, what is the
required adjusting entry for the interest accrued to December 31?
(a) Interest Expense............................................................................ 7,000
Interest Payable...................................................................... 7,000
(b) Interest Expense............................................................................ 8,400
Interest Payable...................................................................... 8,700
(c) Interest Expense............................................................................ 700
Cash........................................................................................ 700
(d) Interest Expense............................................................................ 7,700
Interest Payable...................................................................... 7,700
Solution: $168,000 x.05 x 11/12 $7,700
111. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to
employees was omitted. Which of the following statements is true?
(a) Salary Expense for the year is overstated.
(b) Liabilities at the end of the year are understated.
(c) Assets at the end of the year are understated.
(d) Shareholders’ equity at the end of the year is understated.
112. Maggie Bakeries has a weekly payroll of $8,250 and pays its employees every Friday.
None of the staff work on weekends. This year, the last day of the company’s fiscal year end is
a Tuesday. What is the correct adjusting entry to accrue salaries expense?
(a) Salaries Expense........................................................................... 1,650
Salaries Payable..................................................................... 1,650
(b) Salaries Expense........................................................................... 3,300
Cash....................................................................................... 3,300
(c) Salaries Expense........................................................................... 3,300
Salaries Payable..................................................................... 3,300
(d) Salaries Expense........................................................................... 8,250
Salaries Payable..................................................................... 8,250
Solution: $8,250 / 5 days = $1,650/day x 2 = $3,300
113. At December 31, Witts Corp. reports Salaries Payable of $20,000 on its statement of
financial position. The next payroll amounting to $50,000 is to be paid in January. What will be
the journal entry to record the payment of salaries in January?
(a) Salaries Expense........................................................................... 50,000
Salaries Payable..................................................................... 20,000
Cash....................................................................................... 30,000
(b) Salaries Expense........................................................................... 50,000
Cash....................................................................................... 50,000
(c) Salaries Expense........................................................................... 50,000
Salaries Payable............................................................................ 20,000
Cash....................................................................................... 70,000
(d) Salaries Expense........................................................................... 30,000
Salaries Payable............................................................................ 20,000
Cash....................................................................................... 50,000
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4 - 26Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
119. The shareholders’ equity section of the statement of financial position uses the amount for
Retained Earnings found on the
(a) unadjusted trial balance.
(b) adjusted trial balance.
(c) statement of changes in equity.
(d) the previous year’s statement of financial position.
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4 - 27 Accrual Accounting Concepts
124. Which of the following is true about closing the books of a corporation?
(a) Expenses are closed to the Expense Summary account.
(b) Only revenues are closed to the Income Summary account.
(c) Revenues and expenses are closed to the Income Summary account.
(d) Revenues, expenses, and the dividends declared account are closed to the Income
Summary account.
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4 - 28Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(d) list all the statement of financial position accounts in alphabetical order for easy reference.
129. Which one of the following accounts shows a balance on the post-closing trial balance?
(a) Interest Expense
(b) Service Revenue
(c) Retained Earnings, beginning of the year
(d) Common Shares
130. The process that begins with analyzing transactions and ends with the preparation of a
post-closing trial balance is called
(a) the fiscal period.
(b) the accounting cycle.
(c) the business cycle.
(d) the accounting year.
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4 - 29 Accrual Accounting Concepts
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4 - 30Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
EXERCISES
Ex. 133
During the year ended December 31, 2018, Amber Inc. received $125,000 cash for sales from
customers. The company began the year with a balance in Accounts Receivable of $18,500, all
of which was received in 2018. At the end of the year, customers owed Amber Inc. $26,000 for
services provided in 2018.
Instructions
Calculate the revenue Amber should report in 2018 using:
(a) the cash basis of accounting.
(b) the accrual basis of accounting.
Solution 133
(a) $125,000
(b) $132,500*
Ex. 134
Paisley Corporation had the following balances in 2019 and 2018:
2019 2018
Accounts receivable $10,800 $8,200
Prepaid rent 4,000 3,600
Supplies 900 400
Accounts payable 3,350 4,225
Unearned revenue 2,000 1,800
In addition, the company collected $62,500 cash from customers and paid $44,800 cash for
operating costs during 2019.
Instructions
(a) Determine Paisley Corporation’s net income on an accrual basis for 2019.
(b) Determine Paisley Corporation’s net income on a cash basis for 2019.
Solution 134
(a) Accounts receivable +$10,800
(8,200) $2,600
Prepaid rent +4,000
(3,600) 400
Supplies +900
(400) 500
Accounts payable (3,350)
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4 - 31 Accrual Accounting Concepts
4,225 875
Unearned revenue (2,000)
1,800 (200)
Accrual basis net income $4,175
Ex. 135
The statement of financial position for Tao Ltd. include the following as at December 31:
2019 2018
Interest receivable....................................................... $2,200 $ -0-
Supplies...................................................................... 4,000 2,500
Salaries payable.......................................................... 2,600 2,800
Unearned revenue....................................................... -0- 4,000
The income statement for the year ended December 31, 2019 shows the following:
Interest revenue.......................................................... $15,400
Service revenue.......................................................... 72,700
Supplies expense........................................................ 7,700
Salaries expense......................................................... 37,000
Instructions
Calculate the following for 2019:
(a) Cash received for interest.
(b) Cash paid for supplies.
(c) Cash paid for salaries.
(d) Cash received for revenue.
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4 - 32Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Ex. 136
The 2019 income statement for Paulette Corporation showed rent expense of $9,900 and salary
expense of $6,350. The related statement of financial position account balances at each year
end were as follows:
2019 2018
Prepaid rent.............................................. $650 $450
Salaries payable........................................ 325 475
Instructions
Calculate the following for 2019:
(a) Cash paid for rent.
(b) Cash paid for salaries.
Ex. 137
Ezra Inc. prepared the following condensed income statement using the cash basis of
accounting:
EZRA INC.
Income Statement, Cash Basis
Year Ended December 31, 2018
Additional data:
1. Depreciation on a company automobile for the year amounted to $9,000. This amount is not
included in the expenses above.
2. On January 1, 2018, paid for a two-year insurance policy on the automobile amounting to
$1,800. This amount is included in the expenses above.
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4 - 33 Accrual Accounting Concepts
3. Service revenue does not include $50,000 of services provided on account in 2018 for
which payment will be received in 2019. It does, however, include $20,000 collected in
2018 for services performed in 2017.
4. Expenses do not include $50,000 of expenses that were incurred in 2018 but won’t be paid
for until 2019.
Instructions
(a) Restate the above income statement on the accrual basis in conformity with generally
accepted accounting principles. Show calculations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of net income.
Service revenue should include the $50,000 for services performed on account, but not the
$20,000 collected in 2018 for services performance in 2017. The accrual basis states that
revenue is recognized in the period when the service is performed (performance obligation
satisfied). Expenses should include the $50,000 for expenses incurred but not yet paid. The
accrual basis states that expenses should be reflected in the period when incurred for the
purpose of generating revenue. Expenses also should only include half of the $1,800
insurance premium since only one-half of the two-year policy applies to 2018. The other
$900 is an asset and should be reflected on the statement of financial position as prepaid
insurance. Since the full $1,800 is included in expenses, $900 will have to be removed. The
$9,000 of depreciation for the automobile must be included as an expense in 2018.
(b) The accrual basis of accounting provides a better measure of net income than the cash
basis. The accrual basis is required under generally accepted accounting principles and
recognizes revenues when earned and expenses when incurred. Revenues and expenses
recognized under the accrual basis are related to the economic environment in which they
occur and thus allow trends to be more meaningfully interpreted.
The cash basis often fails to recognize revenue in the period when earned and expenses
when incurred. As well, expenses are not matched with revenues when earned; therefore,
expense recognition is not achieved.
Ex. 138
The trial balance of Chelsea Corp. at October 31, 2018, showed an insurance expense account
balance of $5,475 reflecting premium costs related to the following policies:
Policy 1, remaining cost of $750, 1-yr. term, effective May 1, 2017;
Policy 2, original cost of $3,600, 2-yr. term, effective Aug. 1, 2018;
Policy 3, original cost of $3,000, 1-yr term, effective Dec. 1, 2017
Policy 4, original cost of $2,100, 1-yr. term, effective Oct. 1, 2017.
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4 - 34Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Instructions
(a) Evaluate and comment on each policy.
(b) Determine the correct insurance expense account balance at October 31, 2018. If
necessary, record an adjusting entry.
Solution 138
(a)
1. Policy 1: Insurance expense has been appropriately recorded up to the end of the policy
term of April 30, 2018. No adjusting entry required.
2. Policy 2: Two (Aug & Sep) months of insurance expense has been recorded but three (Aug
– Oct) months have expired for the fiscal year. An adjusting entry for the October months
insurance usage ($3,600 / 24 = $150) should be recorded for Oct 31, 2018.
3. Policy 3: Ten (Dec 2017 – Sep 2018) months of insurance expense has been recorded but
eleven (Dec 2017 – Oct 2018) months have expired for the fiscal year. An adjusting entry for
the October months insurance usage ($3,000 / 12 = $250) should be recorded for Oct 31,
2018.
4. Policy 4: Insurance expense has been appropriately recorded up to the end of the policy
term of Sept 30, 2018. No adjusting entry required.
(b)
Oct 31 Insurance Expense................................................................. 400
Prepaid Insurance............................................................ 400
To record October insurance expense for policies 2 and 3.
Ex. 139
Determine the missing information in the following table for each respective company:
Pillar Corp. Jar. Corp. Tin Corp.
Supplies on hand, October 31, 2018 $250 $480 $700
Supplies purchased during 2018 3,500 2,850 (c)
Supplies on hand, October 31, 2019 (a) 620 300
Supplies used during the year $3,250 (b) 2,000
Solution 139
Opening Balance, Supplies on hand + Supplies purchased – Closing Balance, Supplies on hand
= Supplies used during the year
Ex. 140
The Blue Canaries, a semi-professional football team, prepares financial statements on a
monthly basis. Their season begins in April, but in March the team engaged in the following
transactions:
1. Paid $540,000 on March 15 to Burger Queen Corp. as advance rent for use of Burger
Stadium for the six-month period April 1 through September 30.
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4 - 35 Accrual Accounting Concepts
2. Collected $432,000 cash on March 20 during a sales blitz for season tickets for the team's
36 home games. This amount was credited to Unearned Revenue.
During the month of April, the Blue Canaries played eight home games and five road games.
Instructions
Prepare the journal entries for March and the adjusting entries required at April 30 for the
transactions above.
Ex. 141
The King Street Zoo operates a drive-through tourist attraction in Toronto. The company adjusts
its accounts at the end of each month. The selected accounts appearing below reflect balances
after adjusting entries were prepared on April 30. The adjusted trial balance shows the
following:
Prepaid rent................................................................. $12,000
Equipment................................................................... 40,000
Accumulated depreciation—Equipment....................... 6,000
Unearned revenue....................................................... 500
Other data:
1. Four months rent had been prepaid on April 1.
2. The equipment is being depreciated at $7,200 per year.
3. The unearned revenue represents tickets sold for future zoo visits. The tickets were sold at
$4.00 each on April 1. During April, twenty-five of the tickets were used by customers.
Instructions
(a) Calculate the following:
1. monthly rent expense
2. the age of the equipment in months
3. the number of tickets sold on April 1.
(b) Prepare the adjusting entries that were made by the King Street Zoo on April 30.
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4 - 36Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
remaining on the prepaid lease. This indicates that the monthly lease is $4,000.
2. The equipment is 10 months old. By dividing annual depreciation ($7,200) by 12, the
monthly depreciation expense is $600. The Accumulated Depreciation account shows
$6,000, which means that depreciation has been taken for 10 months.
3. 150 tickets were originally sold. Twenty-five tickets were used in April at $4.00 each. The
adjusted trial balance shows a balance of $500 indicating that 125 tickets are still
outstanding. By adding the 25 used in April to the 125 still remaining to be used, 150 tickets
must have been sold on April 1.
Ex. 142
Simons Equipment Ltd. purchased a delivery truck on June 1 for $42,000, paying $8,000 cash
and signing a 6%, 2-month bank loan for the remaining balance. Interest is due at maturity. The
estimated useful life of the truck is expected to be 5 years. Simons prepares monthly financial
statements.
Instructions
(a) Prepare the journal entry to record the purchase of the delivery truck on June 1. Simons
uses the Vehicles account to record purchase of all vehicles.
(b) Prepare any adjusting journal entries that should be made on June 30.
(c) Show how the delivery truck will be reflected on Simons Equipment’s statement of financial
position at June 30.
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4 - 37 Accrual Accounting Concepts
$34,000 6% 1 12 = $170)
Ex. 143
Presented below is the unadjusted trial balance and adjusted trial balance for Caldion
Corporation on December 31, 2018.
CALDION CORPORATION
Trial Balances
December 31, 2018
——————————————————————————————————————————
Unadjusted Adjusted
Dr. Cr. Dr. Cr.
Cash $ 2,200 $ 2,200
Accounts receivable 3,125 4,025
Prepaid rent 9,000 7,400
Supplies 1,800 800
Equipment 26,500 26,500
Accumulated depreciation—Vehicles $ 3,300 4,950
Accounts payable 1,900 2,300
Salaries payable 0 950
Unearned revenue 8,000 6,200
Income tax payable 0 3,295
Common shares 12,100 12,100
Retained earnings 3,450 3,450
Service revenue 43,175 45,875
Salaries expense 15,300 16,250
Depreciation expense 0 1,650
Rent expense 13,500 15,100
Supplies expense 500 1,500
Utilities expense 0 400
Income tax expense 0 0000 00 3,295 0000 00
Totals $71,925 $71,925 $79,120 $79,120
Instructions
Prepare in journal entry form, with explanations, the adjusting entries that explain the changes
in the balances from the trial balance to the adjusted trial balance.
Solution 143
Accounts Receivable............................................................................ 900
Service Revenue........................................................................... 900
(To record revenue earned but not yet collected)
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4 - 38Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Ex. 144
Prepare the required year end adjusting entries for each independent case listed below.
Assume no adjustments were made during the year.
Case 1
Ainsworth Corporation began the year with a $6,200 balance in the Supplies account. During
the year, $2,750 worth of additional supplies were purchased. A physical count of supplies on
hand at the end of the year revealed that $3,875 worth of supplies had been used during the
year.
Case 2
Brownstone Co. Ltd. has a calendar fiscal year. On Oct 1, the company purchased equipment
for $45,000. The estimated useful life of the equipment is 9 years.
Case 3
Michaela Management Ltd. is in the business of renting out several apartment buildings and
prepares monthly financial statements. It has been determined that two tenants in $950 per
month apartments and one tenant in the $1,400 per month apartment had not paid their
December rent as of December 31.
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4 - 39 Accrual Accounting Concepts
Case 2 December 31
Depreciation Expense............................................................. 1,250
Accumulated Depreciation—Equipment........................... 1,250
(To record depreciation expense for three months;
$45,000 9 years x 3 12 months = $1,250)
Case 3 December 31
Rent Receivable..................................................................... 3,300
Rent Revenue.................................................................. 3,300
(To accrue rent earned but not yet received
[(2 x 950) + 1,400] = $3,300)
Ex. 145
For each of the following oversights, state whether total assets will be understated (U),
overstated (O), or not affected (NA).
2. O
3. U
4. O
5. NA
6. NA
Ex. 146
Before month-end adjustments are made, the February 28 trial balance of Kicker Enterprises
Ltd. shows revenue of $15,000 and expenses of $8,300, excluding income tax. Adjustments are
necessary for the following items:
1. Depreciation for February is $1,800.
2. Revenue earned but not yet billed is $3,200.
3. Accrued interest expense is $1,000.
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4 - 40Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Instructions
Calculate the correct net income to report on Kicker Enterprises Ltd.’s income statement for
February.
Ex. 147
On December 31, 2018, Spear Limited prepared an income statement and a statement of
financial position, but failed to take into account four adjusting entries. The incorrect income
statement showed net income of $40,000. The statement of financial position showed total
assets of $120,000; total liabilities of $50,000; and shareholders’ equity of $70,000.
Instructions
Complete the following tabulation to correct the financial statement amounts shown (indicate
deductions with parentheses):
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4 - 41 Accrual Accounting Concepts
Ex. 148
Sheik Corporation compiles the following adjustment data at December 31:
1. Revenue of $1,000 collected in advance has been earned.
2. Salaries of $500 are unpaid.
3. Prepaid rent of $650 has expired.
4. Supplies of $550 have been used.
5. Revenue earned but unbilled totals $850.
6. Utility expenses of $200 are unpaid.
7. Interest of $250 has accrued on a bank loan payable.
Instructions
(a) For each of the above items indicate:
1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or
accrued expense).
2. The account relationship (asset/liability, liability/revenue, etc.).
3. The status of account balances before adjustment (understatement or overstatement).
4. The adjusting entry.
(b) Assume net income before the adjustments listed above (and income tax) was $16,500.
Calculate the correct income before income tax.
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4 - 42Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Ex. 149
Rodriguez Ltd.’s trial balance includes the following statement of financial position accounts that
frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid
expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related
account in the adjusting entry.
(a) (b)
Statement of Financial Position Acct Type of Adjusting Entry Related Account
1. Supplies
2. Accounts receivable
3. Prepaid insurance
4. Accumulated depreciation
5. Interest payable
6. Salaries payable
7. Unearned revenue
8. Income tax payable
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4 - 43 Accrual Accounting Concepts
Ex. 150
State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued
revenue (AR) or an accrued expense (AE).
1. Unrecorded interest on savings account is $530.
2. Property taxes that have been incurred but that have not yet been paid or recorded are
$300.
3. Legal fees of $1,000 were collected in advance. By year end, 60% are still unearned.
4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40% is still
unexpired.
5. Unpaid salaries earned by year end but not yet paid or recorded are $475.
2. AE
3. UR
4. PE
5. AE
Ex. 151
Match the statements below with the appropriate terms by entering the appropriate letter code in
the spaces provided.
TERMS:
A. Prepaid Expenses
B. Unearned Revenues
C. Accrued Revenues
D. Accrued Expenses
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4 - 44Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
STATEMENTS:
_____ 1. A revenue not yet earned; collected in advance.
_____ 2. Office supplies on hand that will be used in the next period.
_____ 3. Interest revenue collected; not yet earned.
_____ 4. Rent not yet collected, but already earned.
_____ 5. An expense incurred; not yet paid or recorded.
_____ 6. Revenue earned; not yet collected or recorded.
_____ 7. An expense not yet incurred; paid in advance.
_____ 8. Interest expense incurred; not yet paid.
2. A
3. B
4. C
5. D
6. C
7. A
8. D
Ex. 152
Indicate (with "Yes" or "No") whether or not each of the following accounts could be misstated if
adjusting entries are not made at December 31, 2018.
_____ 1. Accounts Receivable
_____ 2. Prepaid Expenses
_____ 3. Equipment
_____ 4. Unearned Revenue
_____ 5. Income Tax Payable
_____ 6. Common Shares
_____ 7. Retained Earnings, January 1, 2018
_____ 8. Service Revenue
_____ 9. Utilities Expense
2. Yes
3. No
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4 - 45 Accrual Accounting Concepts
4. Yes
5. Yes
6. No
7. No
8. Yes
9. Yes
Ex. 153
Presented below are the income statements, prepared on a cash basis, for Mingwei Ltd. for the
past two years. The manager is puzzled by the fact that net income was lower in 2019 than
2018.
MINGWEI LTD.
Income Statement, Cash Basis
Years Ended December 31
——————————————————————————————————————————
2019 2018
Service revenue.......................................................................... $350,000 $365,000
Expenses
Salaries expense.................................................................. 200,000 190,000
Office expense...................................................................... 54,000 55,000
Repairs and maintenance expense...................................... 20,000 15,000
Interest expense................................................................... 15,000 2,000
Total expenses............................................................................ 289,000 262,000
Income before income tax........................................................... 61,000 103,000
Income tax expense.................................................................... 24,400 41,200
Net income.................................................................................. $ 36,600 $ 61,800
In talking with the manager, you gather the following information, which was not reflected in the
above statements:
1. The company borrowed $200,000 on June 1, 2018 and repaid the amount with interest on
June 1, 2019. The interest rate was 6%.The journal entry to record the repayment on June
1, 2019 was:
Bank Loan Payable.............................................. 200,000
Interest Expense................................................... 12,000
Cash.............................................................. 212,000
2. A customer made a deposit of $15,000 on December 1, 2018 for services to be performed
in January 2019. The journal entry made on December 1, 2018 was:
Cash..................................................................... 15,000
Service Revenue........................................... 15,000
3. A bill for $4,000 maintenance work done in December 2018 was paid on January 15, 2019.
The journal entry to record the payment in 2019 was:
Repairs and Maintenance Expense...................... 4,000
Cash.............................................................. 4,000
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4 - 46Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Instructions
Assuming that no adjusting entries were made for the above transactions, prepare revised
income statements for 2018 and 2019. (Income tax is calculated at 40% of income before
income tax.)
Calculations:
Ex. 154
Prepare adjusting entries for the following transactions. Omit explanations.
1. Depreciation on equipment is $925.
2. Interest incurred and owed on a loan but not paid or recorded is $340.
3. There was a beginning balance of supplies of $225 and the company purchased $380 of
office supplies during the period. At the end of the year $120 of supplies were on hand.
4. Prepaid rent had a $2,650 normal balance prior to adjustment. By year end $750 had
expired.
5. Accrued salaries at year end were $950.
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4 - 47 Accrual Accounting Concepts
Ex. 155
Prepare adjusting entries for the following transactions.
1. Interest accrued on notes receivable is $320.
2. Property taxes owing but not paid or recorded amount to $800.
3. Service revenue of $3,600 was collected in advance. By year end, $1,200 was earned.
4. Prepaid insurance had a $600 debit balance prior to adjustment. By year end, 30% was still
unexpired.
5. Salaries owing at year end but not yet paid or recorded amounted to $1,025.
Ex. 156
Prepare adjusting entries for the following transactions. Omit explanations.
1. Accrued interest on notes receivable is $95.
2. Unearned revenues earned totals $2,000.
3. Four months’ rent, totalling $60,000, was paid in advance one month prior to the end of the
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4 - 48Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
year.
4. Services totalling $2,100 had been performed but not yet billed at the end of the year.
5. Equipment purchased two years ago for $18,000 had an estimated useful life of 4 years.
6. The balance in the Supplies account was $690 at the beginning of the year. By year end,
only $100 in supplies remained.
7. Salaries owed to employees at the end of the year total $1,000.
Ex. 157
One part of an adjusting entry is given below. Indicate the account title for the other part of the
entry.
1. Unearned Revenue is debited.
2. Prepaid Rent is credited.
3. Accounts Receivable is debited.
4. Depreciation Expense is debited.
5. Utilities Expense is debited.
6. Interest Payable is credited.
7. Service Revenue is credited (give two possible debit accounts).
8. Interest Receivable is debited.
2. Rent Expense
3. Service Revenue
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4 - 49 Accrual Accounting Concepts
4. Accumulated Depreciation
5. Utilities Payable
6. Interest Expense
8. Interest Revenue
Ex. 158
The following ledger accounts are used by the Clover Race Track:
Accounts Receivable
Prepaid Printing
Prepaid Rent
Unearned Revenue
Printing Expense
Rent Expense
Admissions Revenue
Concessions Revenue
Instructions
For each of the following transactions, prepare the journal entry (if one is required) to record the
initial transaction and then prepare the adjusting entry, if any, required on September 30, the
end of the fiscal year.
(a) On September 1, paid rent on the track facility for three months, $240,000.
(b) On September 1, sold season tickets totalling $900,000 for admission to the racetrack. The
racing season is year-round with 25 racing days each month.
(c) On September 1, borrowed $150,000 from First Provincial Bank by issuing a 12% bank
loan payable due in three months.
(d) On September 5, schedules for 20 racing days in September, 25 racing days in October,
and 15 racing days in November were printed for $3,000.
(e) The accountant for the company that operates the concessions (food and drink stands)
reported that gross receipts for September were $140,000. Ten percent is due to Clover
Race Track and will be paid by October 10.
Adjusting Entry
Rent Expense......................................................................... 80,000
Prepaid Rent.................................................................... 80,000
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4 - 50Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Adjusting Entry
Unearned Revenue................................................................. 75,000
Admissions Revenue....................................................... 75,000
($900,000 12 = $75,000)
Adjusting Entry
Interest Expense..................................................................... 1,500
Interest Payable............................................................... 1,500
($150,000 12% 1 12 = $1,500)
Adjusting Entry
Printing Expense..................................................................... 1,000
Prepaid Printing............................................................... 1,000
($3,000 20 60 = $1,000)
Adjusting Entry
Accounts Receivable ($140,000 x 10%)................................. 14,000
Concessions Revenue..................................................... 14,000
Ex. 159
Plover Corporation prepares monthly financial statements. Below are listed some selected
accounts and their balances on the September 30 trial balance before any adjustments have
been made for the month of September.
PLOVER CORPORATION
Trial Balance
September 30, 2018
——————————————————————————————————————————
Debit Credit
Cash..................................................................................................... $12,300
Supplies................................................................................................ 2,700
Prepaid insurance................................................................................. 5,775
Equipment............................................................................................ 16,200
Accumulated depreciation—Equipment................................................ $ 540
Accounts payable................................................................................. 1,100
Unearned revenue................................................................................ 1,200
Common shares................................................................................... 10,000
Retained earnings................................................................................ 18,925
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4 - 51 Accrual Accounting Concepts
Instructions
(a) Using the above additional information, prepare the adjusting entries that should be
made by Plover on September 30 (adjusting entries are made on a monthly basis).
(b) Prepare an adjusted trial balance at September 30.
(b)
PLOVER CORPORATION
Adjusted Trial Balance
September 30, 2018
——————————————————————————————————————————
Debit Credit
Cash..................................................................................................... $12,300
Supplies ($2,700 – $1,500)................................................................... 1,200
Prepaid insurance [$5,775 – ($6,600 24)].......................................... 5,500
Equipment ........................................................................................... 16,200
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4 - 52Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Ex. 160
Xiang Insurance Agency Ltd. prepares monthly financial statements. Presented below is an
income statement prepared for the month of July 2018.
When the income statement was prepared, the company accountant forgot to take into
consideration the following information:
1. A utility bill for $800 was received on the last day of the month for electric and gas service
for the month of July.
2. The company sold a life insurance policy on July 20 to a client for a premium of $28,000.
The agency billed the client for the policy and is entitled to a commission of 15%.
3. Supplies on hand at the beginning of the month were $700. The agency purchased
additional supplies during the month for $2,500 in cash and $2,200 of supplies were on
hand at July 31.
4. The agency purchased a used car at the beginning of July for $16,800 cash. The estimated
useful life of the car is 4 years.
6. The agency pays its employees each Friday. Weekly payroll is $7,200. July 31 falls on a
Tuesday.
7. Estimated income tax expense owing was $10,000.
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4 - 53 Accrual Accounting Concepts
Instructions
Prepare a corrected income statement.
Ex. 161
Presented below is the trial balance and adjusted trial balance for Sandhu Corporation on
December 31, 2018.
SANDHU CORPORATION
Trial Balances
December 31, 2018
——————————————————————————————————————————
Before Adjustments After Adjustments
Dr. Cr. Dr. Cr.
Cash $ 2,000 $ 2,000
Accounts receivable 2,800 3,900
Prepaid rent 2,100 1,500
Supplies 1,200 800
Vehicles 18,000 18,000
Accumulated depreciation—Vehicles $ 1,300 $ 1,500
Accounts payable 2,700 3,000
Income tax payable 0 2,000
Bank loan payable 10,000 10,000
Interest payable 120
Salaries payable 600
Unearned revenue 4,460 4,360
Common shares 7,200 7,200
Dividends declared 3,200 3,200
Service revenue 8,000 9,200
Salaries expense 2,060 2,660
Utilities expense 1,800 2,100
Rent expense 500 1,100
Supplies expense 400
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4 - 54Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Instructions
Prepare in journal entry form, with explanations, the adjusting entries that explain the changes
in the balances from the trial balance to the adjusted trial balance.
Ex. 162
Deng Corporation’s fiscal year ends on June 30. Deng also has a policy of paying their weekly
payroll every Friday. Payroll records indicate the following salary costs were incurred late in
June and early July:
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4 - 55 Accrual Accounting Concepts
Date Amount
Monday June 28 $3,000
Tuesday June 29 3,800
Wednesday June 30 2,400
Thursday July 1 3,000
Friday July 2 2,400
Instructions
(a) Prepare any necessary adjusting journal entries that should be made at year end on June
30.
(b) Prepare the journal entry to record the payment of the payroll on July 2.
Ex. 163
Each Friday, Braleigh Ltd. pays its office personnel weekly salaries of $42,500 for a five-day
work week.
Instructions
(a) Prepare the necessary adjusting entry at March 31, assuming March 31 falls on a
Thursday.
(b) Prepare the journal entry for the next payday, which is Friday, April 1.
Ex. 164
The adjusted trial balance of Norfaxx Services Inc. appears below. Using the information from
the adjusted trial balance, prepare, for the month ending December 31, 2018:
(a) an income statement;
(b) a statement of changes in equity; and
(c) a classified statement of financial position.
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4 - 56Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(b)
NORFAXX SERVICES INC.
Statement of Changes in Equity
Month Ended December 31, 2018
——————————————————————————————————————————
Common Shares Retained Earnings Total Equity
Balance, December 1 $12,100 $3,300 $15,400
Net income 1,050 1,050
Dividends declared ______ (1,600) (1,600)
Balance, December 31 $12,100 $ 2,750 $14,850
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4 - 57 Accrual Accounting Concepts
(c)
NORFAXX SERVICES INC.
Classified Statement of Financial Position
December 31, 2018
——————————————————————————————————————————
Assets
Current assets
Cash................................................................................................. $6,000
Accounts receivable......................................................................... 3,000
Supplies........................................................................................... 1,500 $10,500
Property, plant, and equipment
Equipment........................................................................................ $21,000
Less: Accumulated depreciation—Equipment.................................. 4,800 16,200
Total assets................................................................................... $26,700
Ex. 165
Jacquard Industries’ adjusted trial balance for the year ending December 31, 2018 appears
below.
JACQUARD INDUSTRIES
Adjusted Trial Balance
December 31, 2018
——————————————————————————————————————————
Debit Credit
Cash .................................................................................................... $ 3,700
Accounts receivable ............................................................................. 9,100
Prepaid rent.......................................................................................... 400
Supplies ............................................................................................... 600
Equipment ........................................................................................... 34,550
Accumulated depreciation—Equipment ............................................... $ 4,600
Accounts payable ................................................................................ 3,400
Unearned revenue ............................................................................... 2,250
Interest payable ................................................................................... 435
Bank loan payable (due July 1, 2020)................................................... 21,750
Common shares................................................................................... 10,000
Retained earnings ............................................................................... 12,500
Dividends declared .............................................................................. 1,000
Service revenue ................................................................................... 60,000
Salaries expense.................................................................................. 28,850
Supplies expense ................................................................................ 16,650
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4 - 58Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Instructions
Using the information from the adjusted trial balance, prepare the following:
(a) an income statement;
(b) a statement of changes in equity;
(c) a classified statement of financial position;
(d) prepare the closing journal entries
(e) prepare a post-closing trial balance
Solution 165
(a)
JACQUARD INDUSTIRES
Income Statement
Year Ended December 31, 2018
——————————————————————————————————————————
Revenues
Service revenue ............................................................................ $60,000
Expenses
Salaries expense .......................................................................... $28,850
Rent expense ............................................................................... 17,250
Supplies expense ......................................................................... 16,650
Depreciation expense.................................................................... 2,400
Interest expense............................................................................ 435
Total expenses ...................................................................... 65,585
Net loss................................................................................................ $(5,585)
(b)
JACQUARD INDUSTRIES
Statement of Changes in Equity
Year Ended December 31, 2018
——————————————————————————————————————————
Common Shares Retained Earnings Total Equity
Balance, January 1 $10,000 $12,500 $22,500
Net loss (5,585) (5,585)
Dividends declared ______ (1,000) (1,000)
Balance, December 31 $10,000 $ 5,915 $15,915
(c)
JACQUARD INDUSTRIES
Classified Statement of Financial Position
December 31, 2018
——————————————————————————————————————————
Assets
Current Assets
Cash.............................................................................................. $3,700
Accounts receivable....................................................................... 9,100
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4 - 59 Accrual Accounting Concepts
(d)
Service Revenue.................................................................................. 60,000
Income Summary.................................................................... 60,000
(e)
JACQUARD INDUSTRIES
Post-Closing Trial Balance
December 31, 2018
Debit Credit
Cash..................................................................................................... $ 3,700
Accounts receivable............................................................................. 9,100
Prepaid rent.......................................................................................... 400
Supplies................................................................................................ 600
Equipment............................................................................................ 34,550
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4 - 60Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Ex. 166
The following is a list of accounts and their balances (all normal balances) as of July 31, 2018
for Ling Chan Inc. All adjusting entries have been prepared and posted. Note that the list is in
random order.
Cash.............................................................................................. $35,300
Utilities expense............................................................................. 800
Accounts receivable....................................................................... 16,000
Prepaid insurance.......................................................................... 5,000
Service revenue............................................................................. 24,600
Supplies......................................................................................... 1,500
Rent expense................................................................................ 3,600
Accumulated depreciation—Equipment......................................... 3,200
Accounts payable.......................................................................... 11,000
Unearned revenue......................................................................... 9,800
Common shares............................................................................ 27,000
Retained earnings.......................................................................... 17,000
Dividends declared........................................................................ 1,000
Equipment..................................................................................... 20,000
Salaries expense .......................................................................... 8,200
Depreciation expense.................................................................... 1,200
Instructions
Prepare the closing journal entries required.
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4 - 61 Accrual Accounting Concepts
Ex. 167
The adjusted trial balance for Poplar Ltd. at December 31, 2018, is shown below.
POPLAR LTD.
Adjusted Trial Balance
December 31, 2018
——————————————————————————————————————————
Debit Credit
Cash..................................................................................................... $ 30,500
Accounts receivable............................................................................. 23,200
Supplies................................................................................................ 3,950
Prepaid insurance................................................................................. 2,600
Equipment............................................................................................ 48,500
Accumulated depreciation—Equipment................................................ $ 18,800
Accounts payable................................................................................. 3,500
Unearned revenue................................................................................ 8,700
Salaries payable................................................................................... 1,650
Income tax payable.............................................................................. 11,430
Common shares .................................................................................. 24,000
Retained earnings................................................................................ 20,600
Dividends declared............................................................................... 6,600
Service revenue.................................................................................... 76,500
Salaries expense.................................................................................. 28,850
Supplies expense................................................................................. 2,950
Insurance expense............................................................................... 800
Depreciation expense........................................................................... 2,400
Utilities expense................................................................................... 3,400
Income tax expense............................................................................. 11,430 ______
Total..................................................................................................... $165,180 $165,180
Instructions
Prepare the closing journal entries required.
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4 - 62Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Ex. 168
The adjusted trial balance for Chung, Ltd. at December 31, 2018, is shown below:
CHUNG LTD.
Adjusted Trial Balance
December 31, 2018
——————————————————————————————————————————
Debit Credit
Cash..................................................................................................... $ 8,500
Accounts receivable............................................................................. 3,200
Supplies................................................................................................ 950
Prepaid insurance................................................................................. 600
Equipment............................................................................................ 73,500
Accumulated depreciation—Equipment................................................ $ 18,500
Accounts payable................................................................................. 4,500
Salaries payable................................................................................... 1,650
Income tax payable.............................................................................. 630
Common shares .................................................................................. 24,000
Retained earnings................................................................................ 36,000
Service revenue.................................................................................... 33,300
Salaries expense.................................................................................. 15,850
Supplies expense................................................................................. 9,850
Insurance expense............................................................................... 700
Depreciation expense........................................................................... 1,900
Utilities expense................................................................................... 2,900
Income tax expense............................................................................. 630 _______
Total..................................................................................................... $118,580 $118,580
Instructions
Prepare the closing journal entries required.
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4 - 63 Accrual Accounting Concepts
MATCHING
169. Match the items below by entering the appropriate code letter in the space provided.
1. Revenues and expenses are recorded only in periods the company receives or pays
cash.
______ 9. Allocation of the cost of a depreciable asset over its useful life.
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4 - 64Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
ANSWERS TO MATCHING
1. B
2. D
3. I
4. A
5. G
6. C
7. E
8. H
9. F
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4 - 65 Accrual Accounting Concepts
S-A E 170
What is the difference between the accrual basis of accounting and the cash basis of
accounting? Which approach is preferable?
Solution 170
Accrual basis accounting means that transactions and events affecting an entity’s financial
statements are recorded in the period in which they occur, rather than when the entity receives
or pays cash. In other words, the cash component of the transaction is secondary.
Cash basis accounting records revenue only when cash is received from customers, and
records expenses only when they are actually paid.
The cash basis often produces misleading financial statements, since management can change
the revenues and expenses reported by timing the receipt and payment of cash (“earnings
management”). For example, if they wish to show a large net income, they can delay paying
expenses until after year end. Cash basis accounting also does not report accounts receivable
and accounts payable, which may understate current assets and/or current liabilities.
Thus the accrual basis is preferable, since, because all revenues and expenses are reported
each period, it produces a more meaningful picture of operations and financial position.
S-A E 171
Describe the requirements under IFRS and ASPE regarding the frequency required for adjusting
journal entries.
Solution 171
Public companies reporting under IFRS must prepare adjusting journal entries at least quarterly,
as they are required to release quarterly reports to the public. In reality, many public companies
prepare monthly adjusting journal entries.
Private companies reporting under ASPE are only required to prepare adjusting entries
annually, although many prepare them more frequently.
S-A E 172
Anchor Ltd., a small company in its first year of operations, is in the process of preparing
company financial statements for December 31, 2018. Sam Jones, one of the managing
shareholders with a limited background in accounting, has identified the following details:
1. On October 1, 2018 the company purchased new computer equipment in the amount of
$9,000. The equipment has an estimated useful life of 5 years. The only entry recorded
related to the equipment was a debit to Equipment and credit to Cash.
2. Anchor earned $5,000 in fees for services provided that have not yet been billed and not
recorded.
On March 1, 2018, Anchor received its property tax bill of $6,000 for the calendar year. The bill
was due May 31, 2018. Despite Sam’s limited accounting background, on March 1, he recorded
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4 - 66Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
a debit to Property Tax Expense and credit to Property Tax Payable for January and February
property taxes. On May 31, the company paid the bill and Sam recorded the expense incurred
for March, April and May and the payment of the liability recorded on March 1.
Instructions
(a) Explain the purpose of adjusting entries to Sam.
(b) Based on the above, assume that adjusting entries would be prepared annually, at the end
of the accounting period. Identify the impact (understatement, overstatement, or no effect)
on revenue or expenses and net income if these adjusting entries were not made.
Solution 172
(a) Adjusting entries are needed to ensure that revenue recognition and expense recognition
criteria are followed. Their purpose is to bring all accounts up to date. The use of adjusting
entries makes it possible to produce relevant financial information at the end of the period.
(b)
1. To ignore the adjusting entry to appropriately recognize depreciation expense for the three-
month use of the computer equipment during the period October 1 to December 31 would
result in understating expenses and overstating net income by $450.
2. To ignore the adjusting entry to accrue revenue (revenue earned but not yet collected)
would result in understating revenue and net income by $5,000.
3. To ignore the adjusting entry to appropriately recognize the property tax expense for the
remaining portion of the year, June – December, would result in understating expenses and
overstating net income by $3,500 ($6,000 / 12 x 7 months).
S-A E 173
In developing an accounting information system, it is important to establish procedures whereby
all transactions that affect the components of the accounting equation are recorded. Why then,
is it often necessary to adjust the accounts before financial statements are prepared even in a
properly designed accounting system? Identify the major types of adjustments that are
frequently made and give a specific example of each.
Solution 173
Account balances must be adjusted before financial statements are prepared, even in a properly
designed accounting system, because
1. Some events are not recorded daily, because it would not be useful or efficient to do so (for
example, use of supplies),
2. Some costs are not recorded during the accounting period, because these costs expire with
the passage of time (for example, rent, insurance, depreciation), and
3. Some items may not have been recorded (for example, a utility bill for the current period not
received until the next period).
Adjusting entries can be classified as either prepayments or accruals. Prepayments are types of
adjustments of recorded transactions that must be allocated to future periods as well as the
current period. Examples of prepayment adjustments include entries that reduce the balance in
prepaid rent, prepaid insurance, and unearned revenue to recognize a portion of these accounts
in the income statement. Accruals are adjustments giving rise to the initial recording of a
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4 - 67 Accrual Accounting Concepts
revenue or expense that must be recognized in the current period. Examples of accrual-type
adjustments are those that accrue salaries payable, interest payable, and interest receivable.
S-A E 174
Ecrit Inc. is a manufacturing company that specializes in writing instruments. The past year was
a difficult one for the company, as it sought to retain its share in a market in which the largest
competitors were also rapid innovators. Ecrit introduced a new product late in the year, even
though testing was not complete. It was a pen designed with two cartridges: one supplying ink
and the other correction fluid. A person could then switch easily between writing and correcting
errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen,
as the product was named, was an overwhelming success.
The success of the product has Anik Tibault, the manager of the New Products division,
worried, however. She was concerned that quality problems would begin occurring, since the
longevity of the pen and stability of the correction fluid formulation had not been tested. She did
not want sales personnel to get the bonuses that appeared to be indicated, since they might
aggressively promote a product that might eventually fail. She preferred to complete testing of
the pen first, so that more confidence could be placed in the results.
Top management; however, declined the tests. Ms. Tibault then instructed you, the accountant,
not to use Prepaid Expense accounts for insurance or rent expense for the rest of the year, but
to show them as current expenses in total. In this way, the new product would appear to be only
slightly profitable.
Instructions
(a) Who are the stakeholders in this situation?
(b) Describe the alternatives that you as an accountant would have in this situation.
(c) Indicate which alternative you think is best.
Solution 174
(a) The stakeholders in this situation include Anik Tibault, sales personnel, top management,
bankers and others who might rely on the financial statements.
(c) There are probably other alternatives as well. Students should be able to come up with at
least #1 and #2. Of the choices, #1 is unethical because it will cause the financial
statements to be misleading. On the other hand, #3 and #4 are rather drastic measures that
do not seem to be justifiable given the facts, at least not yet. #2, therefore, is the best
choice.
S-A E 175
A new sales representative, Eddy Werner, has just received his copy of the latest monthly
financial reports. He is puzzled by the term "unearned revenue." He has emailed you asking you
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4 - 68Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
to explain what this is. One of this comments in his email was “How can we have unearned
revenue? Either we earned it, or we didn't!”
Instructions
Write a response to email to Eddy.
Solution 175
A proposed email message follows:
Eddy—What a pleasant surprise to hear from you! I hope you are getting along
well with your new job.
To your question. Your unearned revenue is the result of customers who pay in
advance. When they pay before we can get their products made or shipped, we
can't count the money they pay us as revenue. What we actually have is a
liability—an obligation to make and ship products. So that's how we record it—as
a liability. You happened to have about 25% of your sales this month that fit in
that category. When production can catch up with orders, you'll get credit for the
sales. You will receive your commissions the same month the company records
the revenue as "earned."
Thanks for asking this question. I hope I have explained “unearned revenue” to
your satisfaction. If not, please contact me again any time.
Best regards
(Student name)
S-A E 176
Central Tennis Courts, a local tennis club, has just appointed Mr. Holland as the new Treasurer
for the upcoming 2019 season. Mr. Holland, a Chartered Professional Accountant (CPA), is
taking over from Miss Scarsdale who, while not an accountant, has been a long standing
member of the Club. In an informal conversation with Mr. Holland, Miss Scarsdale says: “It has
been a very good year for the Club. I am expecting to report a significant net income, which I’m
sure will please our club members.” In addition, Miss Scarsdale mentioned the below noted
items.
1. Cash of $750 was collected on October 15, 2018 for 2019 membership fees. Miss Scarsdale
recorded a debit to Cash and credit to Fees Earned.
2. The courts (8 in total) were resurfaced on April 1, 2018 at a cost of $18,000. As court
resurfacing is regarded as a form of equipment, Miss Scarsdale recorded a debit to
Equipment and a credit to Cash. The court resurfacing has an estimated useful life of 10
years.
3. The Junior Program Director, Mrs. Crenshaw, has not yet remitted her year-end expense
report but has notified Miss Scarsdale that, while she hasn’t had time to complete the
expense report, the expenses are $1,500 in total. Miss Scarsdale informs Mr. Holland: “Mrs.
Crenshaw is always submitting her expenses late. I’m not going to delay closing the books.
I’ll leave it up to you to follow up with her. You can just record the expenses in the next
season.”
Instructions
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4 - 69 Accrual Accounting Concepts
Assuming that the Club has an October 31 year end and follows ASPE, explain whether or not
Miss Scarsdale has recorded the above noted items correctly, given your knowledge of
adjusting journal entries and revenue and expense recognition. Identify the correction, if any,
and impact on the currently proposed net income.
Solution 176
1. Under ASPE, revenue recognition (recording) occurs when the sales or performance effort
is substantially complete, the amount is reasonably measurable, and collection is
reasonably assured. As the 2019 membership fees have not yet been earned, a liability
should be recorded rather than revenue. The credit side of the entry should be to Unearned
Revenue rather than Fees Earned.
2. An adjusting journal entry for depreciation should be recorded for 7 months use of the
resurfaced courts calculated as follows:
$18,000 x 7/120 months = $1,050 debit to Depreciation Expense and credit to Accumulated
Depreciation—Equipment.
3. Miss Scarsdale should accrue the $1,500 of expenses as advised by Mrs. Crenshaw in the
2018 records. The junior program expenses have been reliably measured and should be
recognized and recorded (matched) in the same period (fiscal 2018) in which the Club
generated its junior program member fees.
Net income would be reduced by $3,300 = ($750 + $1,050 + $1,500)
S-A E 177
Briefly distinguish between a prepayment and an accrual.
Solution 177
Unlike accruals, prepayments adjust assets and liabilities that were previously recorded. They
are adjusted to show the portion of the asset or liability that should be expensed (because a
portion of the benefit of that asset has expired) or recorded as revenue because a portion of the
unearned revenue liability has been earned. An accrual involves the initial recording of an
expense or revenue that has arisen but that has not yet been recorded, paid, or received.
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4 - 70Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
178. From the following list, identify all of the transactions where revenue would be recognized
on the date specified as “today’s date”. Treat each of these items as an independent situation.
Solution 178
(b), (f), and (g) are correct.
(c) The revenue will not be recognized in this case as the beef may not be accepted into the
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4 - 71 Accrual Accounting Concepts
USA and delivery will not be complete. In the case of international sales, if there are
concerns that goods will not be accepted into the receiving country, revenue cannot be
recognized until such as time as they have been accepted.
(d) The revenue will be recognized on November 2 when the merchandise is delivered.
(e) The revenue is recognized (recorded) at the time the service is performed. In this case, the
revenue should be recorded when the law suit is settled. When the $4,000 is received on
January 12, it is recorded to Unearned Revenue, a current liability account.
179. After reviewing the following list of transactions for Bob’s Bikes Incorporated for the
calendar year 2018, identify all the transactions where the correct application of accrual based
accounting was used. Bob’s Bikes prepares adjusting entries monthly.
(a) On January 1, Bob’s Bikes purchased prepaid insurance for $1,000 for the year ended
December 31, 2018. On January 1, the accountant recorded this as a $1,000 debit to Prepaid
Insurance and $1,000 credit to Cash.
(b) The company quoted a customer $1,200 to build a custom bike in February, built the custom
bike in March, delivered the bike in March, sent the customer an invoice in April and received
payment for the bike in May. Bob’s Bikes recorded the sale in April.
(c) A physical count of supplies on hand was taken on both January 1 and January 31 with the
following results:
January 1, $350
January 31, $120
Total purchases of supplies during the month were $670. The accountant recorded $900 as
Supplies Expense for the month of January.
(d) On January 1, Bob’s Bikes borrowed $50,000 from the bank for a two-year period. The bank
loan is due at maturity but monthly interest payments of $375 are due at the end each quarter to
the bank. On March 31, the accountant recorded Interest Expense of $1,125 ($375 x 3) when
the first interest installment was paid.
(e) The Advertising Expense account had a balance of $4,850 on December 31, 2018. The
following information was also available.
Included in the $4,850 was the cost of an ad that was to be placed in the January 2019
issue of Biker Magazine. The ad cost was $450.
An invoice for promotional materials totalling $350 was received on January 3, 2019. The
materials were received by Bob’s on December 28, and are included in the $4,850 balance.
After considering the above, the accountant reduced Advertising Expense on December 31,
2018 by $450.
(f) Bob’s Bikes paid salaries to staff on October 5 totalling $1,370 (for the pay period from Sept
16–30). On October 5, the accountant recorded a debit to Salaries Expense and a credit to
Cash for this amount.
Solution 179
(a), (c), and (e) are correct.
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4 - 72Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(b) Since the bike was delivered in March, the performance obligation was completed in March.
Therefore, the revenue should have been recorded in the company’s financial records in
March, not April.
(d) Bob’s Bikes prepares adjusting entries monthly, the accountant should accrue and record
the interest monthly. The following entries should have been made to accrue each month’s
interest:
(f) The salaries relate to the September 16 to 30 pay period. Therefore, they should be
recorded as follows:
180. Which of the following statements are true with regard to accrual accounting? Identify all of
the statements that are true.
(a) Accrual accounting usually results in a lower net income than cash-based accounting.
(b) Under accrual accounting, cash is always paid for an expense after an expense is
recognized.
(c) If a company uses accrual accounting, reported net income will likely be different than if they
used the cash basis of accounting.
(d) Accrual accounting aims to record revenues when the performance obligation is complete—
generally when the service is performed or the goods are delivered.
(e) Unearned Revenues and Prepaid Expenses are account names that are used only in the
accrual basis of accounting.
(g) If a company forgets to adjust unearned revenue by the amount that has been partially
earned, revenues will be understated and assets will be overstated.
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4 - 73 Accrual Accounting Concepts
(h) For decision making, it really doesn’t matter if accrual-based or cash-based accounting is
used.
Solution 180
(c), (d), (e), and (f) are correct.
(a) Accrual-based accounting may or may not result in lower net income than cash-based
accounting. The intention of accrual accounting is to record revenues and expenses in the
period in which the event that earned the income occurred. Using an accrual basis of
accounting will match revenues and expenses to the period the revenue was earned as
opposed to when cash is paid or received, as under the cash basis.
(b) Under accrual accounting, cash is not always paid after an expense is recognized. Often
cash is paid at the same time an expense is recognized, as in the case of recording the
payment of a monthly phone bill if the phone bill is paid in the same month the expense is
incurred. Moreover, cash may be paid prior to an expense being recognized, as in the case
of prepaid insurance.
(h) Accrual accounting is generally better for decision making. The simplicity of the cash basis
can be misleading for decision makers. When expenses are not matched to related
revenues, understanding the costs of business is difficult.
181. After reviewing each of the following statements, indicate all of the statements that are
true.
(a) The adjusted trial balance is used as the basis of a company’s financial statements.
(b) Revenue, unearned revenue, expenses and prepaid expenses will all have a zero balance
after closing entries are made for a company.
(c) The following are considered temporary accounts: revenues, expenses, income summary
and dividends declared.
(d) The post-closing trial balance is not used to prepare the financial statements as it doesn’t
contain any temporary accounts.
(e) Retained Earnings is part of the closing process but it is not closed itself.
(f) Interest expense, rent expense and service revenues are all examples of temporary
accounts.
(g) Adjusting entries for prepayments do not usually affect the depreciation expense, insurance
expense, and revenue accounts.
(h) Closing entries are only necessary if the company is using the accrual basis of accounting.
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4 - 74Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Solution 181
(a), (c), (d), (e), and (f) are correct.
(b) Revenue and expenses will have a zero balance after the closing entries are made as they
are temporary accounts. However, unearned revenue and prepaid expenses are not
temporary accounts and will, therefore, not necessarily have zero balances.
(g) Adjusting entries for prepayments will affect depreciation expense, insurance expense and
revenues. The following are typical prepayment adjustments that are made at the end of an
accounting period:
(h) Closing entries are required for companies using either the accrual or cash basis of
accounting. Closing entries close revenues, expenses and dividends declared accounts to
zero for the next accounting cycle. This is a requirement of all accounting methods.
182. The unadjusted trial balance for Gibble Ltd. is shown below:
GIBBLE LTD.
Unadjusted Trial Balance
December 31, 2018
Cash $ 2,200
Accounts receivable 5,800
Supplies 750
Prepaid rent 1,000
Equipment 44,000
Accumulated depreciation—equipment $ 4,500
Accounts payable 1,250
Unearned revenue 2,550
Bank loan payable, due 2020 15,900
Retained earnings 4,385
Common shares 7,500
Dividends declared 550
Service revenue 37,500
Salaries expense 10,500
Rent expense 2,500
Office expense 1,485
Income tax expense 4,800 ______
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4 - 75 Accrual Accounting Concepts
$73,595 $73,595
During 2018, the following events took place, but are not reflected in the above unadjusted trial
balance:
1. Unearned revenues of $1,950 were earned.
2. Prepaid rent of $500 expired.
3. Salaries of $1,250 (for the pay period December 15–31, 2018) were incurred but will not be
paid until January 5, 2019.
4. Depreciation expense of $5,000 was incurred on the equipment.
Instructions
Select all the items that are correct for the year ended December 31, 2018.
(a) Total revenues for Gibble for the year ended as reported on its Income Statement, are
$39,450.
(b) The net income reported for the year will be $18,215.
(c) Total current assets on Gibble’s Statement of Financial Position will be $9,250.
(d) Total current liabilities on Gibble’s Statement of Financial Position will be $1,850.
(e) The carrying amount of property, plant, and equipment on Gibble’s Statement of Financial
Position will be $34,500.
(f) After the closing entries are made, total retained earnings will be $17,800.
(g) After closing, total assets will be $49,250.
(h) The adjusted trial balance with have equal debit and credit balances of $79,835.
Solution 182
Students may find it helpful to complete an adjusted trial balance, Income Statement and
Statement of Financial Position prior to answering this question, as follows:
GIBBLE LTD.
Adjusted Trial Balance
December 31, 2018
Cash $ 2,200
Accounts receivable 5,800
Supplies 750
Prepaid rent ($1,000 – $500) 500
Equipment 44,000
Accumulated depreciation–equipment ($4,500 + $5,000) $ 9,500
Accounts payable 1,250
Unearned revenue ($2,550 – $1,950) 600
Salaries payable ($0 + $1,250) 1,250
Bank loan payable 15,900
Retained earnings 4,385
Common shares 7,500
Dividends declared 550
Service revenue ($37,500 + $1,950) 39,450
Office expense 1,485
Salaries expense ($10,500 + $1,250) 11,750
Depreciation expense ($0 + $5,000) 5,000
Rent expense ($2,500 + $500) 3,000
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4 - 76Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
GIBBLE LTD.
Income Statement
Year ended December 31, 2018
Revenues
Service revenue $39,450
Expenses
Office expense $ 1,485
Salaries expense 11,750
Depreciation expense 5,000
Rent expense 3,000 21,235
Income before income tax 18,215
Income tax expense 4,800
Net Income $13,415
GIBBLE LTD.
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash $ 2,200
Accounts receivable 5,800
Supplies 750
Prepaid rent 500 $ 9,250
Property, plant and equipment
Equipment $44,000
Less: Accumulated depreciation 9,500 34,500
Total assets $43,750
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4 - 77 Accrual Accounting Concepts
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