Chapter 3
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Adjusting the Accounts
DO IT!
Timing Concepts
Several timing concepts are discussed in the section Timing Issues. A list of concepts is
provided in the left column below, with a description of the concept in the right column
below. There are more descriptions provided than concepts. Match the description of the
concept to the concept.
1. ____Accrual-basis accounting.
2. ____Calendar year.
3. ____Time period assumption.
4. ____Expense recognition principle.
Action Plan
✔ Review the glossary
terms.
✔ Study carefully the
revenue recognition
principle, the expense
recognition principle,
and the time period
assumption.
(a) Monthly and quarterly time periods.
(b) Efforts (expenses) should be matched
with results (revenues).
(c) Accountants divide the economic life of
a business into artificial time periods.
(d) Companies record revenues when they
receive cash and record expenses when
they pay out cash.
(e) An accounting time period that starts on
January 1 and ends on December 31.
(f) Companies record transactions in the
period in which the events occur.
Solution
1. f
2. e
3. c
4. b
Related exercise material: E3-1, E3-2, E3-3, and DO IT! 3-1.
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DO IT!
Adjusting Entries
for Deferrals
The ledger of Hammond Company, on March 31, 2014, includes these selected accounts
before adjusting entries are prepared.
Debit
Prepaid Insurance
Supplies
Equipment
Accumulated Depreciation—Equipment
Unearned Service Revenue
Credit
$ 3,600
2,800
25,000
$5,000
9,200
An analysis of the accounts shows the following.
1. Insurance expires at the rate of $100 per month.
2. Supplies on hand total $800.
3. The equipment depreciates $200 a month.
4. During March, services were performed for one-half of the unearned service revenue.
Prepare the adjusting entries for the month of March.
D-12
DO IT!
D-13
Solution
Action Plan
✔ Make adjusting entries
at the end of the period
for revenues recognized
and expenses incurred in
the period.
✔ Don’t forget to
make adjusting entries
for deferrals. Failure
to adjust for deferrals
leads to overstatement
of the asset or liability
and understatement of
the related expense or
revenue.
1. Insurance Expense
Prepaid Insurance
(To record insurance expired)
2. Supplies Expense
Supplies
(To record supplies used)
3. Depreciation Expense
Accumulated Depreciation—Equipment
(To record monthly depreciation)
4. Unearned Service Revenue
Service Revenue
(To record revenue for services performed)
100
100
2,000
2,000
200
200
4,600
4,600
Related exercise material: BE3-3, BE3-4, BE3-5, BE3-6, and DO IT! 3-2.
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DO IT!
Adjusting Entries
for Accruals
Micro Computer Services began operations on August 1, 2014. At the end of August 2014,
management prepares monthly financial statements. The following information relates to
August.
1. At August 31, the company owed its employees $800 in salaries and wages that will be
paid on September 1.
2. On August 1, the company borrowed $30,000 from a local bank on a 15-year mortgage.
The annual interest rate is 10%.
3. Revenue for services performed but unrecorded for August totaled $1,100.
Prepare the adjusting entries needed at August 31, 2014.
Solution
Action Plan
✔ Make adjusting entries
at the end of the period
to recognize revenues for
services performed and
for expenses incurred.
✔ Don’t forget to make
adjusting entries for
accruals. Adjusting entries
for accruals will increase
both a balance sheet and
an income statement
account.
1. Salaries and Wages Expense
Salaries and Wages Payable
(To record accrued salaries)
800
2. Interest Expense
Interest Payable
(To record accrued interest:
$30,000 3 10% 3 121 5 $250)
250
3. Accounts Receivable
Service Revenue
(To record revenue for services performed)
800
250
1,100
Related exercise material: BE3-2, BE3-7, E3-5, E3-6, E3-7, E3-8, E3-9, and DO IT! 3-3.
1,100
D-14
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3 Adjusting the Accounts
DO IT!
Trial Balance
Skolnick Co. was organized on April 1, 2014. The company prepares quarterly financial
statements. The adjusted trial balance amounts at June 30 are shown below.
Debit
Cash
Accounts Receivable
Prepaid Rent
Supplies
Equipment
Owner’s Drawings
Salaries and Wages Expense
Rent Expense
Depreciation Expense
Supplies Expense
Utilities Expense
Interest Expense
$ 6,700
600
900
1,000
15,000
600
9,400
1,500
850
200
510
50
Credit
Accumulated Depreciation—
Equipment
Notes Payable
Accounts Payable
Salaries and Wages Payable
Interest Payable
Unearned Rent Revenue
Owner’s Capital
Service Revenue
Rent Revenue
$37,310
$
850
5,000
1,510
400
50
500
14,000
14,200
800
$37,310
(a) Determine the net income for the quarter April 1 to June 30.
(b) Determine the total assets and total liabilities at June 30, 2014, for Skolnick Co.
(c) Determine the amount of Owner’s Capital at June 30, 2014.
Solution
Action Plan
✔ In an adjusted trial
balance, all asset, liability,
revenue, and expense
accounts are properly
stated.
✔ To determine the
ending balance in Owner’s
Capital, add net income
and subtract dividends.
(a) The net income is determined by adding revenues and subtracting expenses. The
net income is computed as follows.
Revenues
Service revenue
Rent revenue
Total revenues
Expenses
Salaries and wages expense
Rent expense
Depreciation expense
Utilities expense
Supplies expense
Interest expense
Total expenses
Net income
$14,200
800
$15,000
9,400
1,500
850
510
200
50
12,510
$ 2,490
DO IT!
D-15
(b) Total assets and liabilities are computed as follows.
Assets
Cash
Accounts receivable
Supplies
Prepaid rent
Equipment
Less: Accumulated
depreciation—
equipment
Total assets
Liabilities
$ 6,700
600
1,000
900
$15,000
850
Owner’s capital, June 30
$5,000
1,510
Total liabilities
$7,460
500
400
50
14,150
$23,350
(c) Owner’s capital, April 1
Add: Investments
Net income
Less: Owner’s drawings
Notes payable
Accounts payable
Unearned rent
revenue
Salaries and wages
payable
Interest payable
$
0
14,000
2,490
600
$15,890
Related exercise material: BE3-9, BE3-10, E3-11, E3-12, E3-13, and DO IT! 3-4.
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Comprehensive DO IT!
The Green Thumb Lawn Care Company began operations on April 1. At April 30, the trial
balance shows the following balances for selected accounts.
Prepaid Insurance
Equipment
Notes Payable
Unearned Service Revenue
Service Revenue
$ 3,600
28,000
20,000
4,200
1,800
Analysis reveals the following additional data.
1. Prepaid insurance is the cost of a 2-year insurance policy, effective April 1.
2. Depreciation on the equipment is $500 per month.
3. The note payable is dated April 1. It is a 6-month, 12% note.
4. Seven customers paid for the company’s 6-month lawn service package of $600
beginning in April. The company performed services for these customers in April.
5. Lawn services performed for other customers but not recorded at April 30 totaled
$1,500.
Instructions
Prepare the adjusting entries for the month of April. Show computations.
D-16
3 Adjusting the Accounts
Solution to Comprehensive
Action Plan
✔ Note that adjustments
are being made for one
month.
✔ Make computations
carefully.
✔ Select account titles
carefully.
✔ Make sure debits are
made first and credits are
indented.
✔ Check that debits
equal credits for each
entry.
GENERAL JOURNAL
Date
Account Titles and Explanation
J1
Ref.
Debit
Credit
Adjusting Entries
Apr. 30
30
30
30
30
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DO IT!
Insurance Expense
Prepaid Insurance
(To record insurance expired:
$3,600 4 24 5 $150 per month)
150
Depreciation Expense
Accumulated Depreciation—Equipment
(To record monthly depreciation)
500
Interest Expense
Interest Payable
(To record interest on notes payable:
$20,000 3 12% 3 1/12 5 $200)
200
Unearned Service Revenue
Service Revenue
(To record revenue for services
performed: $600 4 6 5 $100;
$100 per month 3 7 5 $700)
700
Accounts Receivable
Service Revenue
(To record revenue for services
performed)
1,500
150
500
200
700
1,500
DO IT! Review
Identify timing concepts.
(LO 1, 2), K
DO IT! 3-1 Several timing concepts are discussed in the Timing Issues section. A list of
concepts is provided below in the left column, with a description of the concept in the
right column. There are more descriptions provided than concepts. Match the description
of the concept to the concept.
1. ____ Cash-basis accounting.
2. ____ Fiscal year.
3. ____ Revenue recognition principle.
4. ____ Expense recognition principle.
(a) Monthly and quarterly time periods.
(b) Accountants divide the economic life of a
business into artificial time periods.
(c) Efforts (expenses) should be matched with
accomplishments (revenues).
(d) Companies record revenues when they
receive cash and record expenses when they
pay out cash.
(e) An accounting time period that is one year
in length.
(f) An accounting time period that starts on
January 1 and ends on December 31.
(g) Companies record transactions in the period
in which the events occur.
(h) Recognize revenue in the accounting period
in which a performance obligation is satisfied.
D-17
DO IT!
Prepare adjusting entries
for deferrals.
DO IT! 3-2 The ledger of Herrera, Inc. on March 31, 2014, includes the following
selected accounts before adjusting entries.
(LO 4), AN
Debit
Prepaid Insurance
Supplies
Equipment
Unearned Service Revenue
Credit
2,400
2,500
30,000
9,000
An analysis of the accounts shows the following.
1. Insurance expires at the rate of $300 per month.
2. Supplies on hand total $1,100.
3. The equipment depreciates $500 per month.
4. During March, services were performed for two-fifths of the unearned service revenue.
Prepare the adjusting entries for the month of March.
Prepare adjusting entries for
accruals.
(LO 5), AN
DO IT! 3-3 Javier Computer Services began operations in July 2014. At the end of the
month, the company prepares monthly financial statements. It has the following information for the month.
1. At July 31, the company owed employees $1,300 in salaries that the company will pay
in August.
2. On July 1, the company borrowed $20,000 from a local bank on a 10-year note. The
annual interest rate is 12%.
3. Service revenue unrecorded in July totaled $2,400.
Prepare the adjusting entries needed at July 31, 2014.
Calculate amounts from
trial balance.
DO IT! 3-4 Lumina Co. was organized on April 1, 2014. The company prepares quarterly
financial statements. The adjusted trial balance amounts at June 30 are shown below.
(LO 6), AN
Credit
Debit
Cash
Accounts Receivable
Prepaid Rent
Supplies
Equipment
Owner’s Drawings
Salaries and Wages Expense
Rent Expense
Depreciation Expense
Supplies Expense
Utilities Expense
Interest Expense
$ 5,360
480
720
920
12,000
500
7,400
1,200
700
160
410
40
Accumulated Depreciation—
Equipment
Notes Payable
Accounts Payable
Salaries and Wages Payable
Interest Payable
Unearned Rent Revenue
Owner’s Capital
Service Revenue
Rent Revenue
$
700
4,000
790
300
40
400
11,200
11,360
1,100
$29,890
$29,890
(a) Determine the net income for the quarter April 1 to June 30.
(b) Determine the total assets and total liabilities at June 30, 2014 for Lumina Company.
(c) Determine the amount that appears for Owner’s Capital at June 30, 2014.