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tb03

Course Number: MGT C07/C08, Spring 2012

College/University: University of Toronto

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C HAPTER 3 THE ACCOUNTING INFORMATION SYSTEM MULTIPLE CHOICEConceptual Answer d d c b d a a c d c d d c c b b d c d c d b c b d b c c d d d No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. *30. *31. Test Bank Description Purpose of an accounting system. Criteria for recording events. Purpose of trial balance. Trial balance Book of original entry....

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HAPTER C 3 THE ACCOUNTING INFORMATION SYSTEM MULTIPLE CHOICEConceptual Answer d d c b d a a c d c d d c c b b d c d c d b c b d b c c d d d No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. *30. *31. Test Bank Description Purpose of an accounting system. Criteria for recording events. Purpose of trial balance. Trial balance Book of original entry. Transaction analysis. Definition of transaction. Event recording. Purpose of income summary account. Purpose of adjusting entries. Limitations of trial balance. Purpose of adjusting entries. Matching principle. Special journals. Special journals. Cash-basis of accounting. Definition of accrued expense. Adjusting entry for accrued expense. Factors to consider in estimating depreciation. Timing of financial statements. Effect of adjusting entries. Prepaid expense and the matching principle. Accrued revenue and the matching principle. Unearned revenue and the matching principle. Identification of a real account. Identification of a temporary account. Effect of understating ending inventory. Recordable transactions. Limitations of trial balance. Identification of reversing entries. Identification of reversing entries. Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited Test Bank for Intermediate Accounting, Ninth Canadian Edition 3-2 MULTIPLE CHOICEComputational Answer b a d c b b b b d c c c c d a a No. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. *46. *47. Description Determine adjusting entry. Determine adjusting entry. Determine adjusting entry. Adjusting entry for bad debts. Adjusting entry for bad debts. Unearned rent adjustment. Calculate cash received for interest. Calculate cash paid for salaries. Calculate cash paid for insurance. Calculate insurance expense. Calculate interest revenue. Calculate salary expense. Adjusting entry for interest receivable. Calculate property tax adjustment. Determine reversing entry. Determine year-end adjustment. MULTIPLE CHOICECPA Adapted Answer c b b c a b a a No. 48. 49. 50. 51. 52. 53. 54. 55. Description Determine accrued interest payable. Determine balance of unearned revenues. Calculate prepaid insurance. Determine interest receivable. Calculate sales adjustment. Calculate accrued salaries. Calculate royalty revenue. Calculate payroll adjustment. *This topic is dealt with in an Appendix to the chapter. EXERCISES Item E3-56 E3-57 E3-58 E3-59 E3-60 E3-61 E3-62 E3-63 Test Bank Description Definitions. Terminology. Accrued and deferred items. Adjusting entries. Adjusting entries. Accrual basis. Accrual basis. Accrual basis. Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System PROBLEMS Item *P3-64 P3-65 P3-66 P3-67 P3-68 P3-69 P3-70 P3-71 P3-72 P3-73 P3-74 P3-75 P3-76 Test Bank Description Adjusting and reversing entries. Closing entries. Adjusting entries. Adjusting entries and account classifications. Adjusting entries. Adjusting and closing entries. Eight-column work sheet. Cash to accrual accounting. Accrual accounting. Multi step income statement Adjusting and closing entries Journal entry Trial balance correction Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3-3 3-4 Test Bank for Intermediate Accounting, Ninth Canadian Edition MULTIPLE CHOICEConceptual 1. Factors that shape an accounting information system include the a. nature of the business. b. size of the firm. c. volume of data to be handled. d. all of these. 2. Which of the following criteria must be met before an event or item should be recorded for accounting purposes? a. The event or item can be measured objectively in financial terms. b. The event or item is relevant and reliable. c. The event or item is an element. d. All of these must be met. 3. A trial balance a. is a list of accounts at a specific point in time. b. can be used for the preparation of financial statements. c. is best described by (a.) and (b.) d. is none of the above. 4. A post-closing trial balance. a. includes temporary accounts only. b. includes permanent accounts only. c. includes both temporary and permanent accounts. d. may include expenses. 5. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called the a. ledger. b. account. c. trial balance. d. none of these. 6. The debit and credit analysis of a transaction normally takes place a. before an entry is recorded in a journal. b. when the entry is posted to the ledger. c. when the trial balance is prepared. d. at some other point in the accounting cycle. 7. An example of a transaction is a. the receipt of cash from a customer prior to performing the service. b. the recording of depreciation. c. the accrual of salaries owed. d. all of these. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 8. Some events are not recorded in the accounting information system because a. the amounts are not material. b. the service has not been provided yet although the cash has been received. c. the problems measuring them are too complex. d. all of these. 9. 3-5 The income summary account a. is used only at year-end. b. is used to record dividends. c. is used to bring temporary accounts to zero. d. is best described by (a) and (c). 10. Which of the following best describes adjustments: a. adjustments ensure proper matching. b. they are used to record external events. c. (a) and (d). d. they are usually prepared at the end of the accounting period. 11. A trial balance may prove that debits and credits are equal, but a. an amount could be entered in the wrong account. b. a transaction could have been entered twice. c. a transaction could have been omitted. d. all of these. 12. Adjusting entries are necessary to a. obtain a proper matching of revenue and expense. b. achieve an accurate statement of assets and equities. c. adjust assets and liabilities to their fair market value. d. both a and b. 13. Why are certain costs of doing business capitalized when incurred and then amortized over subsequent accounting cycles? a. To reduce the income tax liability b. To aid management in cash-flow analysis c. To match the costs of production with revenues as earned d. To adhere to the accounting constraint of conservatism 14. A payment that is received would most likely be recorded directly in that company's: a. general ledger. b. cash disbursements journal. c. cash receipts journal. d. trial balance. 15. A cheque that is issued would most likely be recorded directly in that company's: a. expense journal. b. cash disbursements journal. c. cash receipts journal. d. none of the above. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3-6 Test Bank for Intermediate Accounting, Ninth Canadian Edition 16. Consider a cheque received in payment for revenues that have not yet been earned. Assuming that company uses the cash-basis of accounting, how would that payment be recorded? a. it would be recorded as unearned revenue until it is actually earned. b. the entire amount would be recognized as revenue in the current period. c. it would be recorded as a prepaid expense. d. none of the above. 17. An accrued expense can best be described as an amount a. paid and currently matched with earnings. b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings. 18. If, during an accounting period, an expense item has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve a. a liability account and an asset account. b. an asset or contra-asset and an expense account. c. a liability account and an expense account. d. a receivable account and a revenue account. 19. Which of the following must be considered in estimating depreciation on an asset for an accounting period? a. The original cost of the asset b. Its useful life c. The decline of its fair market value d. Both the original cost of the asset and its useful life. 20. Which of the following statements best describes the frequency of when financial statements are issued? a. financial statements should only be issued at the end of the year. b. financial statements should only be issued quarterly. c. financial can be issued anytime during the year. d. none of the above. 21. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries? a. Expiration of prepaid insurance b. Depreciation of long-lived assets c. Accrued wages payable d. All of these 22. A prepaid expense can best be described as an amount a. paid and currently matched with revenues. b. paid and not currently matched with revenues. c. not paid and currently matched with revenues. d. not paid and not currently matched with revenues. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 23. An accrued revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses. 24. An unearned revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses. 25. Which of the following is a real (permanent) account? a. Goodwill b. Sales c. Accounts Receivable d. Both Goodwill and Accounts Receivable 26. Which of the following is a nominal (temporary) account? a. Unearned Revenue b. Salary Expense c. Inventory d. Retained Earnings 27. 3-7 If the inventory account at the end of the year is understated, the effect will be to a. overstate the gross profit on sales. b. understate the net purchases. c. overstate the cost of goods sold. d. overstate the goods available for sale. 28. Which of the following items should be journalized? a. a letter advising an employee of a pay raise. b. a customer's pending bankruptcy (assuming an adequate allowance for doubtful accounts has already been set up). c. a customer's pending bankruptcy (assuming an adequate allowance for doubtful accounts has not already been set up). d. (a) and (b). 29. Below are several statements about the trial balance. Which of these statements is not correct? a. debits and credits must balance. b. the equality of credits and debits ensures that no errors were made. c. the post-closing trial balance includes temporary accounts only. d. (b) and (c). Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3-8 Test Bank for Intermediate Accounting, Ninth Canadian Edition *30. Adjusting entries that should be reversed include those for prepaid or unearned items that a. create an asset or a liability account. b. were originally entered in a revenue or expense account. c. were originally entered in an asset or liability account. d. create an asset or a liability account and were originally entered in a revenue or expense account. *31. Adjusting entries that should be reversed include a. all accrued revenues. b. all accrued expenses. c. those that debit an asset or credit a liability. d. all of these. Multiple Choice AnswersConceptual Item 1. 2. 3. 4. 5. Register to View Answerd c b d Item 6. *7. *8. *9. 10. Register to View Answera c d c Item 11. 12. 13. 14. 15. Register to View Answerd c c b Item 16. 17. 18. 19. 20. Register to View Answerd c d c Item 21. 22. 23. 24. 25. Ans. Item Ans. Item Register to View Answerb c b d 26. 27. 28. *29. *30. b c c d d *31. d Solutions to those Multiple Choice questions for which the answer is none of these. 5. journal. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3-9 MULTIPLE CHOICEComputational 32. Jackson Company made the annual lease payment of $9,000 for its fleet of delivery trucks. The payment was made on September 1, 2010 and covered the period September 1, 2010 to August 31, 2011. Assuming the entire amount had originally been charged to lease expense, the required adjustment on December 31, 2010 is a. debit lease expense and credit prepaid lease $6,000. b. debit prepaid lease and credit lease expense $6,000. c. debit prepaid lease and credit lease expense $9,000. d. debit lease expense and credit prepaid lease $9,000. 33. Penny Resources determines that it has not yet recorded the accrual for 2010 interest revenue to be received in 2011. Assuming the amount to be recorded for 2010 is $8,000, the required adjustment on December 31, 2010 is a. debit interest receivable and credit interest revenue $8,000. b. debit interest revenue and credit interest receivable $8,000. c. debit interest payable and credit interest revenue $8,000. d. no entry required. 34. Scott Company purchased equipment on November 1, 2010 and gave a 3-month, 9 percent note with a face value of $50,000. The December 31, 2010 adjusting entry is a. debit Interest Expense and credit Interest Payable, $4,500. b. debit Interest Expense and credit Interest Payable, $3,750. c. debit Interest Expense and credit Cash, $750. d. debit Interest Expense and credit Interest Payable, $750. 35. Blue Company's account balances at December 31, 2010 for Accounts Receivable and the related Allowance for Doubtful Accounts are $284,000 debit and $1,000 credit, respectively. From an aging of accounts receivable, it is estimated that $10,000 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for a. $8,500. b. $10,000. c. $9,000. d. $1,000. 36. Breg Company's account balances at December 31, 2010 for Accounts Receivable and the Allowance for Doubtful Accounts are $860,000 debit and $1,200 credit. Sales during 2010 were $3,000,000. It is estimated that 2 percent of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for a. $17,176 b. $60,000. c. $17,200. d. $18,000. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 10 37. Test Bank for Intermediate Accounting, Ninth Canadian Edition Perez Corporation received cash of $12,000 on August 1, 2010 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2010 adjusting entry is a. debit Rent Revenue and credit Unearned Rent, $5,000. b. debit Rent Revenue and credit Unearned Rent, $7,000. c. debit Unearned Rent and credit Rent Revenue, $5,000. d. debit Cash and credit Unearned Rent, $7,000. Use the following information for questions 38 through 40: The income statement of Carsen Corporation for 2010 included the following items: Interest revenue $75,500 Salaries expense 65,000 Insurance expense 9,600 The following balances have been excerpted from Carsen Corporation's balance sheets: December 31, 2010 December 31, 2009 Accrued interest receivable $9,100 $7,500 Accrued salaries payable 8,900 4,200 Prepaid insurance 1,100 1,500 38. 39. 40. The cash received for interest during 2010 was a. $66,400. b. $73,900. c. $75,500. d. $77,100. The cash paid for salaries during 2010 was a. $69,700. b. $60,300. c. $60,800. d. $73,900. The cash paid for insurance premiums during 2010 was a. $8,500. b. $8,100. c. $10,000. d. $9,200. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 11 Use the following information for questions 41 through 43: Poole Company paid or collected during 2010 the following items: Insurance premiums paid Interest collected Salaries paid $ 12,400 25,900 125,200 The following balances have been excerpted from Poole's balance sheets: December 31, 2010 December 31, 2009 Prepaid insurance $ 1,200 $ 1,500 Interest receivable 3,700 2,900 Salaries payable 12,300 10,600 41. The insurance expense on the income statement for 2010 was a. $9,700. b. $12,100. c. $12,700. d. $15,100. 42. The interest revenue on the income statement for 2010 was a. $19,300. b. $25,100. c. $26,700. d. $32,500. 43. The salary expense on the income statement for 2010 was a. $102,300. b. $123,500. c. $126,900. d. $148,100. 44. Perry Corporation loaned $78,000 to another corporation on December 1, 2010 and received a three-month, 9 percent interest-bearing note with a face value of $78,000. What adjusting entry should Rice make on December 31, 2010? a. Debit Interest Receivable and credit Interest Revenue, $900. b. Debit Cash and credit Interest Revenue, $585. c. Debit Interest Receivable and credit Interest Revenue, $585. d. Debit Cash and credit Interest Receivable, $1,755. *45. Digger Oil & Gas has received its invoice in the amount of $85,000 for property taxes for the year 2010. The invoice was received and paid in June 2010 and the entire amount was debited to property tax expense. Assuming Digger does NOT prepare interim financial statements, the required adjustment on December 31, 2010 is a. debit property tax expense and credit prepaid property tax $49,583. b. debit prepaid property tax and credit property tax expense $49,583. c. debit property tax expense and credit prepaid property tax $35,417. d. no entry required. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 12 Test Bank for Intermediate Accounting, Ninth Canadian Edition 46. At December 31, 2010, Patula Corporation has not yet received its December invoice for utilities. On December 31, 2010 it accrues an estimate of $10,000. On January 15, 2011 Patula receives the invoice in the amount of $11,000. Assuming the accrual had already been reversed, the entry on January 15, 2011 is a. debit utilities expense and credit cash $11,000. b. debit cash and credit utilities expense $11,000. c. debit utilities expense and credit cash $1,000. d. debit cash and credit utilities expense $1,000. *47. On December 10, 2010 Copeta Inc. received a cheque in the amount of $50,000 from a customer for services that Copeta had yet to perform. By December 31, 2010 it had earned $20,000 of that amount. Assuming the appropriate year end adjustments were made, the 2010 balance in Copeta's unearned revenue account will be a. $30,000. b. $20,000. c. $50,000. d. Zero. Multiple Choice AnswersComputational Item 32. 33. 34. Register to View Answera d Test Bank Item 35. 36. 37. Register to View Answerb b Item 38. 39. 40. Register to View Answerb d Item 41. 42. 43. Register to View Answerc c Item 44. 45. 46. Register to View Answerd a Item 47. Register to View Answer Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 13 MULTIPLE CHOICECPA Adapted 48. On September 1, 2009 Calmex Corp. issued a note payable to National Bank in the amount of $900,000, bearing interest at 8 percent, and payable in three equal annual principal payments of $300,000. On this date, the bank's prime rate was 7 percent. The first payment for interest and principal was made on September 1, 2010. At December 31, 2010, Calmex should record accrued interest payable of a. $24,000. b. $21,000. c. $16,000. d. $14,000. 49. Denny Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenues. This account had a balance of $1,100,000 at December 31, 2010 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $325,000 at December 31, 2010. Service contracts still outstanding at December 31, 2010 expire as follows: During 2011 $170,000 During 2012 250,000 During 2013 110,000 What amount should be reported as Unearned Service Revenues in Denny's December 31, 2010 balance sheet? a. $775,000. b. $530,000. c. $250,000. d. $325,000. 50. Test Bank Fischer Consulting paid $18,000 on December 1, 2010 for a three-year insurance policy (December 1, 2010 to November 30, 2013) and recorded the entire amount as prepaid insurance. The December 31, 2010 adjustment should be recorded as follows: a. debit prepaid insurance and credit insurance expense $500. b. debit insurance expense and credit prepaid insurance $500. c. debit insurance expense and credit prepaid insurance $17,500. d. debit prepaid insurance and credit insurance expense $17,500. Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 14 Test Bank for Intermediate Accounting, Ninth Canadian Edition 51. On June 1, 2010, Mays Corp. loaned Farr $500,000 on a 12% note, payable in five annual instalments of $100,000 beginning January 2, 2011. In connection with this loan, Farr was required to deposit $6,000 in a non-interest-bearing escrow account. The amount held in escrow is to be returned to Farr after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2010. Farr made timely payments through November 1, 2010. On January 2, 2011, Mays received payment of the first principal instalment plus all interest due. At December 31, 2010, Mays' interest receivable on the loan to Farr should be a. $0. b. $5,000. c. $10,000. d. $15,000. 52. Moreno Inc. reviews its December 31, 2010 unadjusted trial balance and determines that a sale in the amount of $15,000 had been incorrectly recorded as a debit to sales and a credit to receivables. The adjusting entry at December 31, 2010 is: a. debit receivables and credit sales $30,000. b. credit receivables and debit sales $30,000. c. debit receivables and credit sales $15,000. d. credit receivables and debit sales $15,000. 53. Cole Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Cole accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2010 are as follows: Last payroll was paid on Dec/26/2010, for the two-week period ended Dec/26/2010. Overtime pay earned in the two-week period ended Dec/26/2010 was $5,000. Remaining work days in 2010 were December 29, 30, 31, on which days there was no overtime. The recurring biweekly salaries total $80,000. Assuming a five-day work week, Cole should record a liability at December 31, 2010 for accrued salaries of a. $24,000. b. $29,000. c. $48,000. d. $53,000. 54. Meswell Corp.'s trademark was licensed to McCall Co. for royalties of 12 percent of sales of the trademarked items. Royalties are payable semi-annually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Meswell received the following royalties from McCall: March 15 September 15 2009 $6,000 $8,000 2010 7,000 9,000 McCall estimated that sales of the trademarked items would total $75,000 for July through December 2010. In Meswells 2010 income statement, the royalty revenue should be a. $18,000. b. $16,000. c. $9,000. d. $20,000. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 55. 3 - 15 The Controller of Cavendish Financial is reviewing her payroll accruals for December 2010. Salaries for the month of December amounted to $165,000 and will be paid on January 14, 2011. Assuming year end accruals were reversed on January 1, the entry to record the January 14 payment to employees is: a. debit salaries expense and credit cash $165,000. b. debit cash and credit salaries expense $165,000. c. debit accrued payables and credit cash $165,000. d. none of the above. Multiple Choice AnswersCPA Adapted Item 48. 49. Test Bank Register to View Answerb Item 50. 51. Register to View Answerc Item 52. 53. Register to View Answerb Item 54. 55. Register to View Answera Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 16 Test Bank for Intermediate Accounting, Ninth Canadian Edition DERIVATIONS Computational No. 32. Answer b Derivation $9,000 (9,000 x 4/12) = $6,000. 33. a 34. d 2/12 9% 50,000 = $750. 35. c $10,000 $1,000= $9,000. 36. b $3,000,000 2% = $60,000. 37. b 7/12 $12,000 = $7,000. 38. b $7,500 + $75,500 $9,100 = $73,900. 39. b $4,200 + $65,000 $8,900 = $60,300. 40. d $9,600 $1,500 + $1,100 = $9,200. 41. c $12,400 + $300 = $12,700. 42. c $25,900 $2,900 + $3,700 = $26,700. 43. c $125,200 $10,600 + $12,300 = $126,900. 44. c 1/12 9% $78,000 = $585. *45. d 46. a *47. a $50,000 - $20,000 = $30,000. DERIVATIONS CPA Adapted No. 48. Answer c Derivation ($900,000 $300,000) 8% 4/12 = $16,000. 49. b $170,000 + $250,000 + $110,000 = $530,000. 50. b $18,000 x 1/36 = $500 51. c $500,000 12% 2/12 = $10,000. 52. a $15,000 + $15,000 = $30,000. 53. b $5,000 + ($80,000 10 3) = $29,000. 54. a $9,000 + ($75,000 12%) = $18,000. 55. a Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 17 EXERCISES Ex. 3-56Definitions. Define the following terms: 1. Special Journal 2. Work sheet 3. Permanent accounts 4. Temporary accounts 5. Income summary 6. General ledger Solution 3-56 1. Special journals are used to record transactions that have similar characteristics. Examples include the cash receipts journal and the cash disbursements journal. 2. Work sheets are used as informal tools to help accountants prepare financial statements. 3. Permanent accounts (also called real accounts) are assets, liability and equity accounts. Unlike temporary accounts, permanent accounts are NOT closed. 4. Temporary accounts are revenue and expense accounts. Unlike permanent accounts, they are periodically closed. 5. The income summary is an account that is used as part of the closing process. It facilitates the closing of the temporary accounts at year end. 6. A general ledger is a collection of all accounts and may include subsidiary ledgers for specific accounts Ex. 3-57 - The accounting cycle Summarize the steps in the accounting cycle Solution 3-57 The accounting cycle may be summarized in 9 steps as follows: 1. Journalization of current period's entries into journals 2. Posting of journals to the general ledger 3. Preparation of trial balance (unadjusted) 4. Preparation and posting of adjusting entries 5. Preparation of trial balance (adjusted) 6. Preparation of financial statements 7. Preparation and posting of closing entries 8. Preparation of trial balance (post-closing) 9. Preparation and posting of reversing entries Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 18 Test Bank for Intermediate Accounting, Ninth Canadian Edition Ex. 3-58 - Recordable events Before transactions are entered into a company's accounting system, the underlying event must be analyzed, to determine how (and if at all), it should be recorded. The situations below relate to Maxwell Corporation. Required: indicate whether the items below are recordable events. 1. A new mortgage contract for its new factory building is signed. 2. The first mortgage payment is made. 3. Wages for the current month are paid. 4. A new secretary is hired. 5. Property taxes are paid. 6. GST collections for the current month are forwarded to the CRA. Solution 3-58 1. Not recordable 2. Recordable 3. Recordable 4. Not recordable 5. Recordable 6. Recordable Ex. 3-59Adjusting entries. Present, in journal form, the adjustments that would be made on July 31, 2010, the end of the fiscal year, for each of the following. 1. The supplies inventory on August 1, 2009 was $8,350. Supplies costing $16,650 were acquired during the year and charged to the supplies inventory. A count on July 31, 2010 indicated supplies on hand of $6,810. 2. On April 30, a ten-month, 8 percent note for $20,000 was received from a customer. 3. On March 1, $8,400 was collected as rent for one year and a nominal account was credited. Solution 3-59 1. Supplies Expense ....................................................................... Supplies Inventory .......................................................... 18,190 2. Interest Receivable ..................................................................... Interest Revenue ............................................................. 400 3. Rent Revenue ............................................................................. Unearned Revenue ......................................................... 4,900 Test Bank 18,190 400 4,900 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 19 Ex. 3-60Adjusting entries. Yago Co. wishes to enter receipts and payments in such a manner that adjustments at the end of the period will not require reversing entries at the beginning of the next period. Instructions Record the following transactions in the desired manner and give the adjusting entry on December 31, 2010. (Two entries for each part.) 1. An insurance policy for two years was acquired on April 1, 2010 for $4,800. 2. Rent of $4,200 for six months for a portion of the building was received on November 1, 2010. Solution 3-60 1. Unexpired Insurance.................................................................... Cash................................................................................. Insurance Expense...................................................................... Unexpired Insurance........................................................ 4,800 2. Cash............................................................................................. Unearned Rent................................................................. Unearned Rent............................................................................. Rent Revenue.................................................................. 4,200 4,800 1,800 1,800 4,200 1,400 1,400 Ex. 3-61Accrual basis. Sales salaries paid during 2010 were $90,000. Advances to salesmen were $1,300 on January 1, 2010, and $800 on December 31, 2010. Sales salaries accrued were $1,300 on January 1, 2010, and $1,400 on December 31, 2010. Instructions Show the calculation of sales salaries on an accrual basis for 2010. Solution 3-61 $90,000 + $1,300 $800 $1,300 + $1,400 = $90,600. Ex. 3-62Accrual basis. The records for Jay Inc. showed the following for 2010: Accrued expenses Prepaid expenses Cash paid during the year for expenses, $55,000. Jan. 1 $2,000 900 Dec. 31 $3,600 800 Instructions Show the calculation of the amount of expense that should be reported on the income statement. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 20 Test Bank for Intermediate Accounting, Ninth Canadian Edition Solution 3-62 $55,000 $2,000 + $3,600 + $900 $800 = $56,700. Ex. 3-63Accrual basis. The records for Hanibal Company showed the following for 2010: Jan. 1 Unearned revenue $3,000 Accrued revenue 1,400 Cash collected during the year for revenue, $85,000. Dec. 31 $3,400 1,100 Instructions Show the calculation of the amount of revenue that should be reported on the income statement. Solution 3-63 $85,000 + $3,000 $3,400 $1,400 + $1,100 = $84,300 Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 21 The Accounting Information System PROBLEMS Pr. 3-64 - Adjusting entries. The information shown below relates to Flegel Corporation. At December 31, 2010 Flegel's general ledger shows the following balances: Prepaid lease $6,000 Debit Prepaid insurance $900 Debit Unearned revenue $78,000 Credit In addition, the following information is available: 1. The entire amount shown as prepaid lease has expired. 2. One third of the amount shown as prepaid insurance has expired. 3. Half of the amount shown as unearned revenue has now been earned. Instructions Prepare all adjusting entries that are required at December 31, 2010 Solution 3-64 1. Lease Expense............................................................................ Prepaid Lease...................................................................... 6,000 2. Insurance Expense...................................................................... Prepaid Insurance................................................................ ($900 x 1/3 = $300) 300 3. Unearned Revenue...................................................................... Revenue............................................................................... ($78,000 x 1/2 = $39,000) 39,000 6,000 300 39,000 Pr. 3-65 - Closing Entries Below is a selection of account balances for Hausman Ltd. at December 31, 2010: Sales $856,000 Sales returns $20,000 Cost of goods sold $456,000 Advertising expense $42,000 Salaries expense $112,000 Depreciation expense $29,000 Insurance expense $9,000 Administrative expense $10,000 Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 22 Test Bank for Intermediate Accounting, Ninth Canadian Edition Instructions Prepare all necessary closing entries at December 31, 2010 Solution 3-65 Sales................................................................................ Income summary................................................. Administrative expense........................................ Advertising .......................................... Depreciation expense expense.......................................... Cost of goods sold .............................................. Insurance expense.............................................. Salaries expense................................................. Sales returns........................................................ Income summary............................................................. Retained earnings........................................ 856,000 178,000 10,000 42,000 29,000 456,000 9,000 112,000 20,000 178,000 178,000 Pr. 3-66Adjusting entries. Part I The Maison Company has reported income of $400,000 for 2010, before considering the 5 items below. Prepare the adjusting entries needed at December 31, 2010 in order to correctly state the 2010 net income. If no entry is needed, write NONE. 1. Interest on a $19,500, 8 percent, six-year note payable was last paid on September 1, 2010. 2. On May 31, 2010, Maison entered into a contract to provide services to a customer for eighteen months beginning June 1. The customer paid the $16,000 fee in full on June 1 and Maison credited it to Service Revenue. 3. On August 1, 2010, Maison paid a years rent in advance on a warehouse, and debited the $38,000 payment to Prepaid Rent. 4. Depreciation on office equipment for 2010 is $11,000. 5. On December 18, 2010, Maison paid the local newspaper $600 for an advertisement to be run in January of 2011, charging it to Prepaid Advertising. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 23 Pr. 3-66Adjusting entries (continued) Part II Show the effect of each adjusting entry in Part I on reported net income, and indicate the correct amount of net income. Reported 2010 net income Add (deduct) Item $400,000 (1) (2) (3) (4) (5) Correct 2010 net income ________ $ Solution 3-66 Part I 1. 2. 3. 4. 5. Interest Expense.................................................................. Interest Payable......................................................... 520 Service Revenue.................................................................. Unearned Service Fees............................................. 9,778 Rent Expense....................................................................... Prepaid Rent.............................................................. 15,833 Depreciation Expense.......................................................... Accumulated Depreciation......................................... 11,000 520 9,778 15,833 11,000 None. Part II Reported 2010 net income Add (deduct) Item $400,000 (1) (520) (2) (9,778) (3) (15,833) (4) (11,000) (5) Correct 2010 net income Test Bank $362,869 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 24 Test Bank for Intermediate Accounting, Ninth Canadian Edition Pr. 3-67Adjusting entries and account classification. Selected amounts from Edgemont Company's trial balance of Dec/31/2010 appear below: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Accounts Payable Accounts Receivable Accumulated Depreciation Equipment Allowance for Doubtful Accounts Bonds Payable Cash Common Stock Equipment Insurance Expense Interest Expense Merchandise Inventory Notes Payable (due Jun/1/2011) Prepaid Rent Retained Earnings Salaries and Wages Expense $ 180,000 160,000 230,000 21,000 550,000 155,000 63,000 850,000 31,000 12,000 290,000 230,000 130,000 120,000 338,000 (All of the above accounts have their standard or normal debit or credit balance.) Part A. Prepare adjusting journal entries at the year end, December 31, 2010, based on the following supplemental information. a. The equipment has a useful life of ten years with no salvage value. (Straight-line method being used.) b. Interest accrued on the bonds payable is $16,000 as of Dec/31/2010 c. Unexpired insurance at Dec/31/2010 is $9,000. d. The rent payment of $130,000 covered the four months from November 30, 2010 through March 31, 2011. e. Salaries and wages earned but unpaid at Dec/31/2010, $24,000. Part B. Indicate the proper balance sheet classification of each of the 15 numbered accounts in the Dec/31/2010 trial balance before adjustments by placing appropriate numbers after each of the following classifications. If the account title would appear on the income statement, do not put the number in any of the classifications. a. b. c. d. e. Current assets Property, plant, and equipment Current liabilities Long-term liabilities Shareholders' equity Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 25 Solution 3-67 Part A. a. Depreciation ExpenseEquipment.................................................. Accumulated Depreciation Equipment ............................. 85,000 85,000 b. Interest Expense................................................................................ Interest Payable..................................................................... 16,000 c. Prepaid (or Unexpired) Insurance..................................................... Insurance Expense................................................................ 9,000 d. Rent Expense.................................................................................... Prepaid Rent.......................................................................... 32,500 e. Salaries and Wages Expense........................................................... Salaries and Wages Payable................................................ 24,000 16,000 9,000 32,500 24,000 Part B. a. Current assets2, 4, 6, 11, 13 b. Property, plant, and equipment3, 8 c. Current liabilities1, 12 d. Long-term liabilities5 e. Shareholders' equity7, 14 Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 26 Test Bank for Intermediate Accounting, Ninth Canadian Edition Pr. 3-68Adjusting entries. Data relating to the balances of various accounts affected by adjusting or closing entries appear below. (The entries, which caused the changes in the balances are not given.) You are asked to supply the missing journal entries, which would logically account for the changes in the account balances. 1. Interest receivable at Jan/1/2010 was $1,000. During 2010, cash received from debtors for interest on outstanding notes receivable amounted to $5,800. The 2010 income statement showed interest revenue in the amount of $4,900. You are to provide the missing adjusting entry that must have been made, assuming reversing entries are not made. 2. Unearned rent at Jan/1/2010 was $5,300 and at Dec/31/2010 was $6,000. The records indicate cash receipts from rental sources during 2010 amounted to $45,000, all of which was credited to the Unearned Rent Account. You are to prepare the missing adjusting entry. 3. Accumulated Depreciation Equipment at Jan/1/2010 was $230,000. At Dec/31/010 the balance of the account was $280,000. During 2010, one piece of equipment was sold. The equipment had an original cost of $40,000 and was 3/4 depreciated when sold. You are to prepare the missing adjusting entry. 4. Allowance for doubtful accounts on Jan/1/2010 was $50,000. The balance in the allowance account on Dec/31/2010 after making the annual adjusting entry was $65,000 and during 2010 bad debts written off amounted to $30,000. You are to provide the missing adjusting entry. 5. Prepaid rent at Jan/1/2010 was $9,000. During 2010 rent payments of $110,000 were made and charged to "rent expense." The 2010 income statement shows as a general expense the item "rent expense" in the amount of $120,000. You are to prepare the missing adjusting entry that must have been made, assuming reversing entries are not made. 6. Retained earnings at Jan/1/2010 was $150,000 and at Dec/31/2010 it was $210,000. During 2010, cash dividends of $50,000 were paid and a stock dividend of $40,000 was issued. Both dividends were properly charged to retained earnings. You are to provide the missing closing entry. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 27 Solution 3-68 1. Interest Receivable...................................................................... Interest Revenue.............................................................. Interest revenue per books $4,900 Interest revenue received related to 2010 ($5,800 $1,000) 4,800 Interest accrued $ 100 100 100 2. Unearned Rent Revenue............................................................. Rent Revenue.................................................................. Cash receipts $45,000 Beginning balance 5,300 Ending balance (6,000) Rent revenue $44,300 44,300 3. Depreciation Expense.................................................................. Accumulated Depreciation Equipment........................ Ending balance $280,000 Beginning balance 230,000 Difference 50,000 Write-off at time of sale 3/4 $40,000 30,000 $ 80,000 80,000 4. Bad Debt Expense....................................................................... Allowance for Doubtful Accounts .................................... Ending balance $65,000 Beginning balance 50,000 Difference 15,000 Written off 30,000 $45,000 45,000 5. Rent Expense.............................................................................. Prepaid Rent.................................................................... Rent expense $120,000 Less cash paid 110,000 Reduction in prepaid rent account $ 10,000 10,000 6. Income Summary......................................................................... Retained Earnings........................................................... Ending balance $210,000 Beginning balance 150,000 Difference 60,000 Cash dividends $50,000 Stock dividends 40,000 90,000 $150,000 150,000 Test Bank 44,300 80,000 45,000 10,000 150,000 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 28 Test Bank for Intermediate Accounting, Ninth Canadian Edition Pr. 3-69Adjusting and closing entries. The following trial balance was taken from the books of Caslup Corporation on December 31, 2010. Account Debit Credit Cash $ 40,000 Accounts Receivable 108,000 Note Receivable 8,000 Allowance for Doubtful Accounts $ 1,800 Merchandise Inventory 54,000 Unexpired Insurance 4,800 Furniture and Equipment 138,000 Accumulated Depreciation of F. & E. 15,000 Accounts Payable 10,800 Common Stock 44,000 Retained Earnings 65,000 Sales 410,000 Cost of Goods Sold 128,000 Salaries Expense 53,000 Rent Expense 12,800 Totals $546,600 $546,600 At year end, the following items have not yet been recorded. a. Insurance expired during the year, $3,000. b. Estimated bad debts, 1 percent of gross sales. c. Depreciation on furniture and equipment, 10% per year. d. Interest at 9 percent is receivable on the note for one full year. e. Rent paid in advance at December 31, $6,800 (originally charged to expense). f. Accrued salaries at December 31, $6,200. Instructions (a) Prepare the necessary adjusting entries. (b) Prepare the necessary closing entries. Solution 3-69 (a) Adjusting Entries a. Insurance Expense...................................................................... Unexpired Insurance........................................................ b. Bad Debt Expense....................................................................... Allowance for Doubtful Accounts..................................... c. Depreciation Expense.................................................................. Accumulated Depreciation of F. & E............................... d. Interest Receivable...................................................................... Interest Revenue.............................................................. e. Prepaid Rent................................................................................ Rent Expense.................................................................. f. Salaries Expense......................................................................... Salaries Payable.............................................................. Test Bank 3,000 3,000 4,100 4,100 13,800 13,800 720 720 6,800 6,800 6,200 6,200 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 29 Solution 3-69 (Continued) (b) Closing Entries Sales.................................................................................................. Interest Revenue................................................................................ Income Summary................................................................... 410,000 720 410,720 Income Summary............................................................................... Salaries Expense................................................................... Rent Expense........................................................................ Depreciation Expense............................................................ Bad Debt Expense................................................................. Insurance Expense................................................................ Cost of Goods Sold................................................................ 214,100 Income Summary............................................................................... Retained Earnings................................................................. 196,620 Test Bank 59,200 6,000 13,800 4,100 3,000 128,000 196,620 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 30 Test Bank for Intermediate Accounting, Ninth Canadian Edition Pr. 3-70Eight-column work sheet. The trial balance of Santos Corporation is reproduced on the following page. The information below is relevant to the preparation of adjusting entries needed to both properly match revenues and expenses for the period and reflect the proper balances in the real and nominal accounts. Instructions As the accountant for Santos Corporation, you are to prepare adjusting entries based on the following data, entering the adjustments on the work sheet and completing the additional columns with respect to the income statement and balance sheet. Carefully key your adjustments and label all items. (Due to time constraints, an adjusted trial balance is not required.) Round all calculations to the nearest dollar. (a) After an aging of accounts receivable, it was determined that t hree percent of the accounts will become uncollectible. (b) Depreciation is calculated using the straight-line method, with an eight-year life and $1,000 salvage value. (c) Salesmen are paid commissions of 11 percent of sales. Commissions on sales for the last week of December have not been paid. (d) The note was issued on October 1, bearing interest at 8 percent, due Feb. 1, 2011. (e) A physical inventory of supplies indicated $280 of supplies currently in stock. (f) Provisions of a lease contract specify payments must be made one month in advance, with monthly payments at $900/mo. This provision has been complied with as of Dec. 31, 2010. Santos Corporation Work Sheet December 31, 2010 Accounts Cash Marketable Securities Accounts Receivable Allow. for D. A. Mdse. Inventory Supplies Equipment Accum. Depr.Equip. Accounts Payable Notes Payable Common Stock Retained Earnings Cost of Goods Sold Office Salaries Sales Commissions Rent Expense Misc. Expense Sales Totals Test Bank Trial Balance Dr. Cr. 5,400 4,050 40,000 420 16,800 1,040 49,000 9,500 4,400 4,250 40,000 25,340 238,520 20,800 29,000 7,200 2,200 330,100 414,010 414,010 Adjustments Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr. Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 31 Solution 3-70 Santos Corporation Work Sheet December 31, 2010 Accounts Cash Marketable Securities Accounts Receivable Allow. for D. A. Mdse. Inventory Supplies Equipment Accum. Depr.Equip. Accounts Payable Notes Payable Common Stock Retained Earnings Cost of Goods Sold Office Salaries Sales Commissions Rent Expense Misc. Expense Sales Totals Trial Balance Dr. Cr. 5,400 4,050 40,000 420 16,800 1,040 49,000 9,500 4,400 4,250 40,000 25,340 238,520 20,800 29,000 7,200 2,200 330,100 414,010 414,010 Bad Debt Expense Depr. Expense Sales Com. Payable Interest Expense Interest Payable Supplies Expense Prepaid Rent Totals Net Income Totals Adjustments Dr. Cr. Income Statement Dr. Cr. (a) 780 (e) Balance Sheet Dr. Cr. 5,400 4,050 40,000 1,200 16,800 280 49,000 15,500 4,400 4,250 40,000 25,340 760 (b) 6,000 (c) 7,311 (f) 900 238,520 20,800 36,311 6,300 2,200 330,100 (a) 780 (b) 6,000 780 6,000 (c) 7,311 (d) 85 (e) (f) 760 900 15,836 7,311 85 (d) 85 85 760 15,836 311,756 18,344 330,100 330,100 900 116,430 330,100 116,430 98,086 18,344 116,430 Adjusting entries and explanations (a) Bad Debt Expense............................................................................. Allowance for Doubtful Accounts........................................... (3% of accounts receivable is 3% $40,000, which is $1,200. Since the allowance account has a credit balance of $420 before adjustment, $780 must be added to the allowance account.) 780 (b) Depreciation Expense........................................................................ Accumulated DepreciationEquipment................................ ($49,000 $1,000 is $48,000. One-eighth of $48,000 is $6,000.) 6,000 Test Bank 780 6,000 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 32 Test Bank for Intermediate Accounting, Ninth Canadian Edition Solution 3-70 (Continued) (c) Sales Commissions.............................................................................. Sales Commissions Payable.................................................... (11% of sales is 11% $330,100, which is $36,311. The balance in the Sales Commissions account is $29,000 before adjustment, indicating that $7,311 of commissions are accrued but unpaid.) 7,311 (d) Interest Expense................................................................................... Interest Payable........................................................................ ($4,250 .08 3/12 = $85) 85 (e) Supplies Expense................................................................................. Supplies.................................................................................... (The balance of $1,040 in the Supplies account before adjustment less the correct ending balance of $280 is $760.) 760 (f) Prepaid Rent......................................................................................... Rent Expense........................................................................... (Since the trial balance contains no account for prepaid rent, the $900 lease payment has apparently been debited to Rent Expense. An account must be set up for the Prepaid Rent.) 900 7,311 85 760 900 Pr. 3-71Cash to accrual accounting. The following information is available for Wand Corporation's first year of operations: Payment for merchandise purchases Ending merchandise inventory Accounts payable (balance at end of year) Collections from customers $300,000 105,000 60,000 270,000 The balance in accounts payable relates only to merchandise purchases. All merchandise items were marked to sell at 40 percent above cost. What should be the ending balance in accounts receivable, assuming all accounts are deemed collectible? Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 33 Solution 3-71 Since this is the first year of operations and there were $270,000 of accounts receivable collected, one must calculate total sales to determine the ending balance in accounts receivable. Cost of goods sold is $255,000 assuming the accounts payable are for inventory (the $300,000 constitutes only payments made for purchases). Since the markup is 40 percent on cost, the sales are $357,000 ($255,000 140%). Sales of $357,000 less collections of $270,000 results in an ending accounts receivable balance of $87,000 as calculated below. Cash purchases A/P balance Total purchases Ending inventory Cost of goods sold Sales Less collections Ending A/R $300,000 60,000 360,000 105,000 255,000 140% 357,000 270,000 $ 87,000 Pr. 3-72Accrual accounting. Andros Company's records provide the following information concerning certain account balances and changes in these account balances during the current year. Transaction information is missing from each item below. Instructions Prepare the entry to record the missing information for each account. (Consider each independently.) 1. Accounts Receivable: Jan. 1, balance $40,000, Dec. 31, balance $45,000, uncollectible accounts written off during the year, $6,000; accounts receivable collected during the year, $134,000. Prepare the entry to record sales. 2. Allowance for Doubtful Accounts: Jan. 1, balance $2,400, Dec. 31, balance $7,500, uncollectible accounts written off during the year, $30,000 . Prepare the entry to record bad debt expense. 3. Accounts Payable: Jan. 1, balance $20,000, Dec. 31, balance $33,000, purchases on account for the year, $110,000. Prepare the entry to record payments on account. 4. Interest Receivable: Jan. 1 accrued, $1,000, Dec. 31 accrued, $2,100, earned for the year, $20,000. Prepare the entry to record cash interest received. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 34 Test Bank for Intermediate Accounting, Ninth Canadian Edition Solution 3-72 1. Ending balance Beginning balance Difference Uncollectible accounts Receivables collected Sales for period $ 45,000 40,000 5,000 6,000 134,000 $145,000 Ending balance Plus: Rec. collected Write-offs OR Less: Beginning balance Sales for period Accounts Receivable......................................................................... Sales...................................................................................... 2. Ending balance Beginning balance Difference Write-off Adjusting entry $ 7,500 2,400 5,100 30,000 $35,100 3. Ending balance Beginning balance Difference Purchases Payments $ 33,000 20,000 13,000 110,000 $ 97,000 $20,000 (2,100) 1,000 $18,900 $ 7,500 30,000 37,500 2,400 $35,100 Beginning balance Adjusting entry 35,100 35,100 Beginning balance Plus purchases $ 20,000 110,000 130,000 33,000 $ 97,000 OR Less ending balance Payments 97,000 97,000 Beginning balance Plus revenue earned $ 1,000 20,000 21,000 2,100 $18,900 OR Less ending balance Cash received Cash ................................................................................................... Interest Receivable................................................................ (This entry assumes that the $20,000 interest earned was first recorded as a receivable.) Test Bank 145,000 OR Accounts Payable.............................................................................. Cash....................................................................................... 4. Revenue Earned Less: Dec. 31 accrual Plus: Jan. 1 accrual Cash received 145,000 Ending balance Write-off Bad Debts Expense........................................................................... Allowance for Doubtful Accounts........................................... $ 45,000 134,000 6,000 185,000 40,000 $145,000 18,900 18,900 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System Pr. 3-73 3 - 35 Multi-step Income Statement Use the following information to prepare a Multi-step Income Statement, a statement of retained earnings and a classified balance sheet as of December 31, 2010. Adjusted Trial Balance Trimaine Charles Corporation Adjusted Trial Balance December 31st, 2010 Debit Cash Accounts Receivable Merchandise Inventory Store Supplies Store Equipment Accumulated Depreciation Store Equipment Delivery Equipment Accumulated Depreciation -Delivery Equipment Notes Payable Accounts Payable Common Shares Retained Earnings Sales Sales Return and Allowances Cost of Goods Sold Salaries Expense Advertising Expense Utilities Expense Repair Expense Delivery Expense Rent Expense Store Supplies Expense Depreciation Expense Store Equipment Depreciation Expense Delivery Equipment Interest Expense Interest Payable Totals Credit $ 33,400 87,400 90,000 7,000 170,000 54,000 96,000 26,000 82,000 117,000 200,000 16,000 1,494,400 8,400 994,800 280,000 52,800 28,000 24,200 33,400 48,000 4,000 18,000 14,000 22,000 ______ 2,011,400 22,000 2,011,400 Other Data: 1. Salaries expense is 70% selling and 30% administrative. 2. Rent expense and utilities expense are 80% selling and 20% administrative. 3. $60,000 of notes payable are due for payment next year. 4. Repair expense is 100% administrative. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 36 Test Bank for Intermediate Accounting, Ninth Canadian Edition Solutions 3-73 TRIMAINE CHARLES CORPORATION. Income Statement For the Year Ended December 31, 2010 Sales revenue Sales Less: Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Selling expenses Salaries expense ($280,000 x 70%) Advertising expense Rent expense ($48,000 x 80%) Delivery expense Utilities expense ($28,000 x 80%) Depr. exp.store equipment Depr. exp.delivery equipment Stores supplies expense Total selling expenses Administrative expenses Salaries expense ($280,000 x 30%) Repair expense Rent expense ($48,000 x 20%) Utilities expense ($28,000 x 20%) Total admin. expenses Total operating. expenses Loss from operations Other expenses and losses Interest expense Net loss.............................................................. ............................................................................ Test Bank $1,494,400 8,400 1,486,000 994,800 491,200 $196,000 52,800 38,400 33,400 22,400 18,000 14,000 4,000 $379,000 84,000 24,200 9,600 5,600 123,400 502,400 11,200 22,000 $33,200 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 37 Solution 3-73 (Continued) TRIMAINE CHARLES CORPORATION. Retained Earnings Statement For the Year Ended December 31, 2010 Retained Earnings, January 1, 2010 Less: Net loss Deficit, December 31, 2010 $16,000 33,200 ($17,200) TRIMAINE CHARLES CORPORATION. Balance Sheet December 31, 2010 Assets Current assets Cash Accounts receivable Merchandise inventory Store supplies Total current assets Property, plant, and equipment Store equipment Accumulated depreciationstore equipment Delivery equipment Accumulated depreciationdelivery equipment Total assets $ 33,400 87,400 90,000 7,000 217,800 $170,000 54,000 96,000 26,000 $116,00 0 70,000 186,00 0 $403,800 Liabilities and Shareholders Equity Current liabilities Current portion of notes payable................................... Accounts payable........................................................... Interest payable.............................................................. Total current liabilities........................................ Long-term liabilities Notes payable................................................................ Total liabilities..................................................... $ 60,000 117,000 22,000 199,000 22,000 221,000 Shareholders equity Common Shares............................................................ Deficit Total liabilities and shareholders equity........................ Test Bank $200,000 (17,200) 182,800 $403,800 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 38 Test Bank for Intermediate Accounting, Ninth Canadian Edition Pr. 3-74 Adjusting and Closing Entries (i) Using the adjusted Trial Balance of Trimaine Charles Corporation above, journalize the adjustments that were made. (ii) Using the adjusted Trial Balance of Trimaine Charles Corporation above, journalize the closing entries that are necessary. Solutions 3-74 (i) Store Supplies Expense Store Supplies 4,000 4,000 Depr. ExpenseStore Equipment Accumulated Depreciation Store Equipment Depr. ExpenseDelivery Equipment Accumulated Depreciation Delivery Equipment 14,000 Interest Expense Interest Payable (ii) 18,000 22,000 Sales 18,000 14,000 22,000 1,494,400 Income Summary Income Summary Sales Returns and Allowances Cost of Goods Sold Salaries Expense Advertising Expense Utilities Expense Repair Expense Delivery Expense Rent Expense Store Supplies Expense Depreciation ExpenseStore Equipment Depreciation ExpenseDelivery Equipment Interest Expense Retained Earnings Income Summary Test Bank 1,494,400 1,527,600 8,400 994,800 280,000 52,800 28,000 24,200 33,400 48,000 4,000 18,000 14,000 22,000 33,200 33,200 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 39 Pr. 3-75 Journal Entries Jonathan Green owns Green Palms, a gardening centre (as a sole proprietorship). His first year of operations included the following selected events and transactions: January: 1. He invested $400,000 in his business. 2. He buys a greenhouse for $200,000 cash. May: 3. He hires a greenhouse supervisor at an annual salary of $40,000. June: 4. He orders and pays for a shipment of plants in the amount of $110,000. 5. He sells plants in the amount of $50,000. Half of these sales are made on account. August: 6. He receives a deposit in the amount of $7,000 from a customer to put merchandise "on hold". 7. He pays current month's salaries in the amount of $4,000. Instructions Prepare all required journal entries. Solution 3-75 1. Cash........................................................................... Jonathan Green, Capital.............................. 400,000 2. Building ...................................................................... Cash............................................................. 200,000 400,000 200,000 3. No entry required. 4. Inventories................................................................. Cash............................................................. 110,000 5. Cash ...................................................................... Accounts Receivable................................................. Sales............................................................. 25,000 25,000 6. Cash 110,000 50,000 ...................................................................... Unearned Revenue...................................... 7,000 7. Salaries Expense....................................................... Cash............................................................. 4,000 Test Bank 7,000 4,000 Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 40 Test Bank for Intermediate Accounting, Ninth Canadian Edition Pr. 3-76 - Trial balance correction James, the Controller of SHD Corporation, asks his assistant to correct the company's December 31, 2010 trial balance. The preliminary trial balance, which does not balance, is reproduced below: SHD Corporation Trial Balance December 31, 2010 Debit Credit ___________________________________________________ Cash 10,000 Accounts Receivable 15,000 Prepaid Insurance 600 Equipment 40,000 Inventories 9,000 Accounts Payable 11,590 Common Shares 110,000 Sales 17,100 Salaries 64,000 Office Supplies 2,150 Depreciation Expense 2,550 ________ _______ 143,300 138,690 The assistant's review uncovered the following errors: 1. The accounts payable for the purchase of inventories in the amount of $6,560 was recorded as $5,650 in error. 2. Depreciation expense was understated by $450 3. Office supplies were overstated by $150 4. A collection from a customer in the amount of $4,000 was not posted to the receivable ledger Instructions Prepare a corrected trial balance: Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 41 Solution 3-76 SHD Corporation Trial Balance December 31, 2010 Debit Credit ___________________________________________________ Cash 10,000 Accounts Receivable ($15,000 - $4,000) 11,000 Prepaid Insurance 600 Equipment 40,000 Inventories 9,000 Accounts Payable 12,500 Common Shares ($11,590 + $6,560 - $5,650) 110,000 Sales 17,100 Salaries 64,000 Office Supplies ($2,150 - $150) 2,000 Depreciation Expense ($2,550 + $450) 3,000 ________ _______ 139,600 139,600 Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 42 Test Bank for Intermediate Accounting, Ninth Canadian Edition LEGAL NOTICE Copyright 2010 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved. The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence. The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd. Test Bank Chapter 3 Copyright 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
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