EXERCISES
Explain the time period assumption.
(LO 1)
E3-1 Chloe Davis has prepared the following list of statements
about the time period assumption.
Adjusting entries would not be necessary if a company's life
were not divided into artificial time periods.
The IRS requires companies to file annual tax returns.
Accountants divide the economic life of a business into
artificial time periods, but each transaction affects only one of
these periods.
Accounting time periods are generally a month, a quarter, or a
year.
A time period lasting one year is called an interim
period.
All fiscal years are calendar years, but not all calendar
years are fiscal years.
Instructions
Identify each statement as true or false. If false, indicate
how to correct the statement.
Distinguish between cash and accrual basis of
accounting.
(LO 1)
E3-2 On numerous occasions, proposals have surfaced to put the
federal government on the accrual basis of accounting. This is no
small issue. If this basis were used, it would mean that billions
in unrecorded liabilities would have to be booked, and the federal
deficit would increase substantially.
Instructions Image Missing
(a) What is the difference between accrual-basis accounting
and cash-basis accounting?
(b) Why would politicians prefer the cash basis over the
accrual basis?
(c) Write a letter to your senator explaining why the federal
government should adopt the accrual basis of accounting.
Compute cash and accrual accounting income.
(LO 1)
E3-3 Carillo Industries collected $108,000 from customers in
2017. Of the amount collected, $25,000 was for services performed
in 2016. In addition, Carillo performed services worth $36,000 in
2017, which will not be collected until 2018.
Carillo Industries also paid $72,000 for expenses in 2017. Of
the amount paid, $30,000 was for expenses incurred on account in
2016. In addition, Carillo incurred $42,000 of expenses in 2017,
which will not be paid until 2018.
Instructions
(a) Compute 2017 cash-basis net income.
(b) Compute 2017 accrual-basis net income.
Identify the type of adjusting entry needed.
(LO 1, 2, 3)
E3-4 Hong Corporation encounters the following
situations:
Hong collects $1,300 from a customer in 2017 for services to
be performed in 2018.
Hong incurs utility expense which is not yet paid in cash or
recorded.
Hong's employees worked 3 days in 2017 but will not be paid
until 2018.
Hong performs services for customers but has not yet received
cash or recorded the transaction.
Hong paid $2,400 rent on December 1 for the 4 months starting
December 1.
Hong received cash for future services and recorded a
liability until the service was performed.
Hong performed consulting services for a client in December
2017. On December 31, it had not billed the client for services
provided of $1,200.
Hong paid cash for an expense and recorded an asset until the
item was used up.
Hong purchased $900 of supplies in 2017; at year-end, $400 of
supplies remain unused.
Hong purchased equipment on January 1, 2017; the equipment
will be used for 5 years.
Hong borrowed $10,000 on October 1, 2017, signing an 8%
one-year note payable.
Instructions
Identify what type of adjusting entry (prepaid expense,
unearned revenue, accrued expense, or accrued revenue) is needed in
each situation at December 31, 2017.
Prepare adjusting entries from selected data.
(LO 2, 3)
E3-5 Devin Wolf Company has the following balances in selected
accounts on December 31, 2017.
Accounts Receivable $ –0–
Accumulated Depreciation—Equipment –0–
Equipment 7,000
Interest Payable –0–
Notes Payable 10,000
Prepaid Insurance 2,100
Salaries and Wages Payable –0–
Supplies 2,450
Unearned Service Revenue 30,000
All the accounts have normal balances. The information below
has been gathered at December 31, 2017.
Devin Wolf Company borrowed $10,000 by signing a 9%, one-year
note on September 1, 2017.
A count of supplies on December 31, 2017, indicates that
supplies of $900 are on hand.
Depreciation on the equipment for 2017 is $1,000.
Devin Wolf Company paid $2,100 for 12 months of insurance
coverage on June 1, 2017.
On December 1, 2017, Devin Wolf collected $32,000 for
consulting services to be performed from December 1, 2017, through
March 31, 2018.
Devin Wolf performed consulting services for a client in
December 2017. The client will be billed $4,200.
Devin Wolf Company pays its employees total salaries of $9,000
every Monday for the preceding 5-day week (Monday through Friday).
On Monday, December 29, employees were paid for the week ending
December 26. All employees worked the last 3 days of 2017.
Instructions
Prepare adjusting entries for the seven items described
above.
Identify types of adjustments and account relationships.
(LO 2, 3, 4)