Short problem listed below are selected accounts from

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Short Problem:Listed below are selected accounts from the financial statements of a company for the year ended December 31, 2007. In the blank space provided for each account, indicate what type of account it is, its normal balance, and the debit/credit rules for increasing and decreasing it. Use the following abbreviations for your answers:Rules to Increase or DecreaseType of AccountNormal Account Balancethe AccountA = AssetDr = DebitDr = DebitL = LiabilityCr = CreditCr = CreditOE = Owner’s EquityR = RevenueE = ExpenseType of Normal Rule toRule toAccountBalanceIncreaseDecreasea) Cash_____________________________b) Income Tax Expense_____________________________c) Accounts Payable_____________________________d) Retained Earnings_____________________________e) Inventories_____________________________f) Prepaid Expenses_____________________________g) Sales Revenues_____________________________h) Long term Debt_____________________________i) Intangibles_____________________________j) Common Stock_____________________________k) Unearned Revenue_____________________________17
STEP 6: Record adjusting entries and post to the general ledger accounts.Because Accrual Accounting is based on timingand not when cash is received or paid, it will require Adjusting Entriesat the end of every accounting period in order to update all revenues (if now earned) and all expenses (if now “used up”). Necessary entries that update all unrecordedRevenues and Expenses due to the passage of timeFour types of adjusting entries:Deferrals (prepayments)= CASH COMES FIRST1.Prepaid Expense– Cash is paid beforethe expense is incurreda.Ex: Rent, Insurance, Supplies, Advertising, Depreciation2.Unearned Revenue– Cash is received beforethe revenue is earneda.Ex: Magazine subscriptions, Airline tickets, Rent, Customer deposits for future serviceAccruals = CASH COMES LATER3.Accrued Revenue– Revenue is earned beforecash is received; both revenue and assetaccounts are increaseda.Ex: Interest, Services performed but not collected18
4.Accrued Expense– Expense is incurred beforecash is paid; both expense and liabilityaccounts are increaseda.Ex: Wages/Salaries, Utilities, Interest, TaxesHINTS for ADJUSTING ENTRIES: 1) 2) 3) Adjusting Entry Examples:1.On Nov 1, $6,000 was paid for 3 months of rent. Record the adjusting entry for Dec. 31What type of adjusting entry? ______________________2.On May 1, $300 is received from a customer for 3 lawns to be cut during the month at $100 each. By May 31, two of the three have been done. What type of adjusting entry? _____________________. 19
3.An attorney works on a client’s legal brief for 8 hours on the last day of the month. The attorney’s fee is $200/hour. Client invoices will not be mailed until the 3rdof the following month. What type of adjusting entry? ______________________4.Employees earn wages of $1,000/week ($200/day) and are paid on Friday. Dec. 31 (the company’s year-end) falls on a Wednesday. What type of adjusting entry? _______________________5.On Jan. 1, purchase $500 of supplies using cash. Supplies on hand at Jan. 31are $200.What type of adjusting entry? ____________________6.Comet Pride, Inc. signed a five-month, 12% note payable in the amount of $10,000 on Oct. 1. Comet’s year end is Dec. 31What type of adjusting entry? _____________________. 20

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