Kap 1 5th workbook te ch 5 PDF

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Chapter 5 The ACCounTing CyCle: AdjusTmenTs leArning oBjeCTiVes LO 1

Describe the purpose of adjustments

LO 5

Prepare adjusting entries for prepaid expenses

LO 2

Prepare adjusting entries for accrued revenue

LO 6

Prepare adjusting entries for depreciation

LO 3

Prepare adjusting entries for accrued expenses

LO 7

Prepare an adjusted trial balance

LO 4

Prepare adjusting entries for unearned revenue

LO 8

Describe ethics and internal controls relating to adjusting entries

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Assessment Questions As-1 LO 1 What is an accounting period? An accounting period is the period of time covered by the financial statements.

As-2 LO 1 Is a fiscal year always the same as a calendar year? Explain how a natural business year is related to a fiscal year. No, a fiscal year and a calendar year are not always the same. A calendar year always starts on January 1 and ends on December 31. A fiscal year can be any consecutive 12-month period chosen by a company. Some companies choose the calendar year as their fiscal year. Some companies choose their fiscal year based on their natural business year, meaning that they end their fiscal year at a slow time of the year. For example, retail companies tend to end their fiscal year on January 31, after the holiday rush. As-3 LO 1 Why must adjustments be made at the end of the accounting period? Adjustments are made at the end of the accounting period to ensure all income statement and balance sheet accounts accurately reflect the transactions that took place during the period being reported on.

As-4 LO 1 What does accrual-based accounting state regarding revenue and expenses? Accrual-based accounting states that revenue and expenses should be recognized in the accounting period when they occur, regardless of when the cash payment is received or made.

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As-5 LO 1 What are the five broad categories of adjusting entries? The five categories of adjusting entries include recognition of unearned revenue, recognition of prepaid expenses, accrual of expenses, accrual of revenue and depreciation. As-6 LO 2 Define accrued revenue. Accrued revenue is revenue that has been earned but not yet recorded.

As-7 LO 2 When making an adjustment to record accrued revenue, which accounts are used and how are they affected? Accounts receivable (an asset account) increases with a debit and service revenue (a revenue account) increases with a credit. As-8 LO 3 Define accrued expenses. Expenses incurred in one accounting period but not paid until a later accounting period are called accrued expenses. As-9 LO 3 When making an adjustment to record accrued interest on a bank loan, which accounts are used and how are they affected? Interest expense (an expense) increases with a debit and interest payable (a liability) increases with a credit.

As-10 LO 4 When making an adjustment to record unearned revenue that is now earned, which accounts are used and how are they affected? Unearned revenue (a liability) decreases with a debit and service revenue (a revenue account) increases with a credit. As-11 LO 5 When making an adjustment to record the used portion of prepaid insurance, which accounts are used and how are they affected? Insurance expense (an expense) increases with a debit and prepaid expenses (an asset) decreases with a credit.

As-12 LO 6 When making an adjustment to record depreciation on equipment, which accounts are used and how are they affected? Depreciation expense (an expense) increases with a debit and accumulated depreciation—equipment (a contra asset account) increases with a credit.

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As-13 LO 6 What is the purpose of a contra account? A contra account is linked to another account and records decreases in the value of the account without changing the original value shown.

As-14 LO 6 True or False: All assets that are part of property, plant and equipment depreciate. False. Land does not depreciate because it does not get used up or have a limited useful life.

As-15 LO 6 How does accumulated depreciation affect the value of property, plant and equipment? Accumulated depreciation is subtracted from the corresponding property, plant and equipment account and reduces the net book value.

As-16 LO 7 What is an adjusted trial balance? An adjusted trial balance is a trial balance that is prepared after all the adjustments to the accounts are completed.

As-17 LO 7 What is the purpose of a worksheet? The worksheet is optional, but it can be used to see the impact of the adjustments to the account balances before creating the journal entries and posting to the general ledger.

As-18 LO 8 Provide an example of an internal control procedure that can ensure that all necessary adjustments are accounted for. The current period’s adjusting entries should be compared with the previous period’s adjusting entries to check whether any adjusting entries are missing. Any significant deviance from the last period’s adjusting entries should be investigated. Another example of internal control is reviewing the terms of the debt contracts in calculating accrued interest.

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Application Questions group A AP-1A LO 2 Metropolitan Tailors finished tailoring clothes for a client on December 31, 2019. The client picked up the clothes and paid the invoice of $180 on January 3, 2020. Record any necessary adjusting entries for Metropolitan Tailors in 2019 and the cash receipt transaction in 2020. Metropolitan Tailors has a December 31 year end. date 2019

Account Title and explanation 

Dec 31



Pr 

debit 

Credit 



180



Accounts Receivable





Service Revenue





180



To accrue service revenue







 

 

 

 

180

 2020 Jan 3

 

Cash













To record collection from client

















Accounts Receivable 

 180

AP-2A LO 3 Lexcon Farm employs one worker. The employee works Monday to Friday and is paid a weekly salary of $560 every Friday. As of April 30, 2019, all of April’s weekly salaries have been paid except the amounts for Monday, April 29, and Tuesday, April 30. The last two days of April’s salary are paid on Friday, May 3, along with the first three days of May’s salary. Lexcon Farm records all adjusting entries on a monthly basis. required a)

Prepare an adjusting entry on April 30, 2019, to accrue the employee’s salary for Monday, April 29, and Tuesday, April 30. date 2019 April 30 

Account Title and explanation 

Pr 



debit 

Credit 

Salaries Expense  Salaries Payable

 

224 

 224



To accrue salary owing









[($560 ÷ 5) x 2]

















debit

Credit



b) Record the payment of salary on May 3, 2019. date

178

Account Title and explanation 

Pr

2019



May 3

Salaries Expense



336 



Salaries Payable



224 











To record payment of salary

















Cash









560

The Accounting Cycle: Adjustments

Chapter 5

AP-3A LO 4 On December 15, 2019, Peaceful Living Inc. received $200 cash from a customer in advance for two rounds of bug spraying services, which took place on December 31, 2019, and January 31, 2020. required a)

Record the cash receipt transaction on December 15, 2019. date

Account Title and explanation

2019 Dec 15

Pr

debit

Credit

  Cash

 













To record cash receipt

















Unearned Revenue



 200  200

b) Record any necessary adjusting entries on December 31, 2019. date

Account Title and explanation

2019



Dec 31



Pr

debit

Credit







Unearned Revenue



100











100



To adjust for one round of service

















Service Revenue



AP-4A LO 5 At the beginning of the fiscal year 2019, Samat Company negotiated a new one-year lease. On January 2, 2019, Samat paid a total of $1,600 representing first and last month’s rent. Prepare all journal entries related to Samat Company’s rental space for the month of January 2019. date 2019

Account Title and explanation 

Jan 2

Prepaid Rent



1,600



 

 Cash To record payment of first and last months’ rent

 

 

1,600 







debit 

Credit 







Rent Expense



800











800



To expense January rent







Jan 31



Pr 

Prepaid Rent

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AP-5A LO 6 On January 1, 2019, Precision Machinery purchased a new piece of equipment for $100,000. The equipment is expected to last five years and will have no residual value. Precision Machinery has a December 31 year end. Prepare the table below showing the yearly depreciation, accumulated depreciation and net book value of the equipment. year

original Cost of depreciation equipment expense

Accumulated depreciation

net Book Value

2019

$100,000

$20,000

$20,000

$80,000

2020 2021 2022

100,000 100,000 100,000

20,000 20,000 20,000

40,000 60,000 80,000

60,000 40,000 20,000

2023

100,000

20,000

100,000

0

AP-6A LO 6 On March 1, 2019, Jefferson Consulting purchased new computers for $19,000. The computers are expected to last three years and have an estimated residual value of $1,000. Jefferson has a December 31 year end. Prepare the table below showing the yearly depreciation, accumulated depreciation and net book value of the computers. year 2019

original Cost of depreciation Computers expense

Accumulated depreciation

net Book Value

2020 2021

$19,000 19,000 19,000

$5,000 6,000 6,000

$5,000 11,000 17,000

$14,000 8,000 2,000

2022

19,000

1,000

18,000

1,000

AP-7A LO 8 Gwen MacDonals works as an accountant for Sky High Condos, which is owned by Sam Huang. The business currently owns two buildings with 100 units in each. Sky High is in the process of expanding by building new condo buildings in other provinces. In order to finance the expansion, Sam needs to borrow from the bank. His concern is that the bank may not approve his current financial statements. In December 2019, Sam suggests that Gwen reclassify all of the unearned revenue to the income statement. The unearned revenue includes deposits on hand from tenants: 60% are last month’s rent, and 40% are security deposits. Sam’s argument is that at least 40% of the balance can be recognized as he has never seen damage to any of the units and therefore believes it isn’t a liability. Gwen is in an awkward position as she doesn’t want to offend her boss, but she thinks that recording the reclassification would be wrong. What course of action would you suggest for Gwen? In your answer, include the impact the reclassification would have on the financial statements and how the bank might interpret them. It would not be ethical for Gwen to prepare the adjusting entry requested by Sam. Gwen should explain that the adjusting entry he suggested violates the revenue recognition principle. Revenue should only be recorded when it is earned. The portion of the unearned revenue representing security deposits is not Sky High Condos’ money, provided each tenant leaves their units as they found it free of damage. Sky High Condos leases would require them to return that money to tenants at the end of their lease term. It would also be at that time that the last month’s rent would be included in income. Recording any of the unearned revenue in December 2019 would overstate revenue and net income and understate liabilities. For the bank, Sky High Condos would observe higher profitability and equity and lower liabilities. This would be wrong. Manipulating financials to convince the bank to lend money to the Sky High condos business is not an ethical action.

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AP-8A LO 2 3 4 5 Susan Richards opened up a consulting business in late August 2019, called North Star Inc. The following transactions took place in September 2019, her first month of operations. Sep 1

Susan signed a one-year lease for her space and prepaid the first and last months’ rent. The payment was recorded as $3,000 in the prepaid rent account on that date. Rent is $1,500/month and paid on the last day of each month.

Sep 16

Susan hired an administrative assistant. The assistant worked 20 hours per week for the last two weeks of September at an hourly rate of $15/hour. Susan intends to pay her on October 1.

Sep 24

Susan agreed to offer consulting work for a customer in early October. The customer paid $1,000 in advance to secure the contract.

Sep 27

Susan performed consulting work for a client in the amount of $2,000, which will be paid at a later date.

Record the adjusting entries Susan must record on September 30, 2019. date 2019 Sep 30

Account Title and explanation Rent Expense Prepaid Rent

Pr

debit

Credit

1,500 1,500

To adjust for one month of rent used Sep 30

Salaries Expense Salaries Payable

600 600

To accrue salaries owing Sep 30

Cash

1,000

Unearned Revenue

1,000

Received cash for services at a later date Sep 30

Accounts Receivable

2,000

Service Revenue

2,000

To record accrued revenue

AP-9A LO 2 3 5 6 Allan Poe operates an advertising business called A-Plus Advertising. The company had the following adjustments for the month of December 2019. Dec 31 Dec 31

Recognized $1,250 rent expense used for the month A monthly magazine subscription was prepaid for one year on December 1, 2019 for $600; by December 31, one issue had been received

Dec 31

Computer depreciation for the month is $400

Dec 31

Salaries for employees accrued by $1,300 by the end of the month

Dec 31

A 30-day contract was started on December 16; the customer will pay $5,000 at the end of the contract in January; accrue the revenue earned by the end of December

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Prepare the journal entries for the adjustments. date

Account Title and explanation

Pr

debit

Credit

2019 Dec 31

Rent Expense

1,250

Prepaid Rent

1,250

To adjust for one month of rent used Dec 31

Subscription Expense

50

Prepaid Subscription

50

Received one month of subscriptions Dec 31

Depreciation Expense

400

Accumulated Depreciation—Computers

400

Depreciated computers Dec 31

Salaries Expense

1,300

Salaries Payable

1,300

Accrued salaries Dec 31

Accounts Receivable Service Revenue

2,500 2,500

Accrued revenue earned

AP-10A LO 2 3 4 5 6 MJ Sandblasting is in its second year of operations. At the end of April 2019, it had the following adjustments. Apr 30

Recognized $300 of prepaid insurance expense for the month

Apr 30

Depreciation on equipment for the month was $200

Apr 30

Work worth $650 was done for a client; the client will pay in May

Apr 30

Accrued interest on a bank loan was $30

Apr 30

Outstanding work for a client worth $800 was completed during the month; the client had paid for the work in March

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Prepare the journal entries for the adjustments. date

Account Title and explanation

Pr

debit

Credit

2019 Apr 30

Insurance Expense

300

Prepaid Insurance

300

Expensed one month of insurance Apr 30

Depreciation Expense

200

Accumulated Depreciation—Equipment

200

Depreciated equipment

Apr 30

Accounts Receivable

650

Service Revenue

650

Record work done but not billed nor paid for Apr 30

Interest Expense

30

Interest Payable

30

Accrued interest on loan Apr 30

Unearned Revenue Service Revenue

800 800

Recognize unearned revenue as earned

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The Accounting Cycle: Adjustments