Cost Constraint
14. Which of the following statements is incorrect con- cerning the adjusted trial balance?
(a) An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
(b) The adjusted trial balance provides the primary basis for the preparation of fi nancial statements.
(c) The adjusted trial balance lists the account bal- ances segregated by assets and liabilities.
(d) The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
*15. The trial balance shows Supplies €0 and Supplies Expense €1,500. If €800 of supplies are on hand at the end of the period, the adjusting entry is:
(a) debit Supplies 800 and credit Supplies Expense 800.
(b) debit Supplies Expense 800 and credit Supplies 800.
(c) debit Supplies 700 and credit Supplies Expense 700.
(d) debit Supplies Expense 700 and credit Supplies 700.
*16. Neutrality is an ingredient of:
Faithful Representation Relevance
(a) Yes Yes
(b) No No
(c) Yes No
(d) No Yes
*17. Which item is a constraint in fi nancial accounting?
(a) Comparability. (c) Cost.
(b) Materiality. (d) Consistency.
(LO 7)
(LO 8)
(LO 9)
(LO 9)
1. (c) The economic life of a business can be divided into artifi cial time periods. The other choices are incorrect because (a) com- panies report their activities on a more frequent basis and not necessarily based on a calendar year; (b) companies report fi nancial information more frequently than annually, such as monthly or quarterly, in order to evaluate results of operations; and (d) this statement describes accrual-basis accounting.
2. (a) Revenue should be recognized in the accounting period in which a performance obligation is satisfi ed. The other choices are incorrect because (b) defi nes the expense recognition principle, (c) describes the time period assumption, and (d) a company’s fi scal year does not need to correspond with the calendar year.
3. (d) Under the accrual basis of accounting, revenue is recognized when the performance obligation is satisfi ed, not when cash is received, and expense is recognized when incurred, not when cash is paid. The other choices are true statements.
4. (a) The expense recognition principle dictates that expenses be matched with revenues. The other choices are incorrect because (b) there is no cost assumption, but the historical cost principle states that assets should be recorded at their cost; (c) the time period assumption states that the economic life of a business can be divided into artifi cial time periods; and (d) the revenue rec- ognition principle indicates that revenue should be recognized in the accounting period in which a performance obligation is satisfi ed.
5. (d) Adjusting entries are made for the reasons noted in choices (a), (b), and (c). The other choices are true statements, but (d) is the better answer.
6. (d) Unearned revenues, not recognized revenues, is one of the major categories of adjusting entries. The other choices all list one of the major categories of adjusting entries.
7. (c) Debiting Supplies Expense for NT$7,500 and crediting Supplies for NT$7,500 will decrease Supplies and increase Supplies Expense. The other choices are incorrect because (a) will increase Supplies and decrease Supplies Expense and also for the wrong amounts, (b) will increase Supplies and decrease Supplies Expense, and (d) will cause Supplies to have an incorrect balance of NT$7,500 (NT$13,500 − NT$6,000) and Supplies Expense to have an incorrect balance of NT$6,000 (NT$0 + NT$6,000).
Solutions
8. (c) Adjustments for prepaid expenses decrease assets and increase expenses. The other choices are incorrect because an adjust- ing entry for prepaid expenses (a) increases expenses, not revenues; (b) increases, not decreases, expenses and decreases, not increases, assets; and (d) increases, not decreases, revenues and decreases, not increases, assets.
9. (a) Accumulated Depreciation is a contra asset account; it is offset against an asset account on the statement of fi nancial posi- tion. The other choices are incorrect because Accumulated Depreciation is not (b) an expense account nor located on the income statement, (c) an equity account, or (d) a liability account.
10. (c) The adjusting entry is to debit Depreciation Expense and credit Accumulated Depreciation—Equipment. The other choices are incorrect because (a) the contra asset account title includes the asset being depreciated, not the company name; (b) the credit should be to the contra asset account, not directly to the asset; and (d) the debit for this entry should be Depreciation Expense, not Equipment Expense.
11. (a) Adjustments for unearned revenues will consist of a debit (decrease) to unearned revenues (a liability) and a credit (increase) to a revenue account. Choices (b), (c), and (d) are incorrect because adjustments for unearned revenues will increase revenues but will have no effect on assets.
12. (b) Adjustments for accrued revenues will have an assets-and-revenues-account relationship. Choices (a) and (d) are incorrect because adjustments for accrued revenues have no effect on liabilities. Choice (c) is incorrect because these adjustments will increase, not decrease, both assets and revenues.
13. (b) The adjusting entry should be to debit Salaries and Wages Expense for R$400 and credit Salaries and Wages Payable for R$400. The other choices are incorrect because (a) if an adjusting entry is not made, the amount of money owed (liability) that is shown on the statement of fi nancial position will be understated and the amount of salaries and wages expense will also be under- stated; (c) the credit account is incorrect as adjusting entries never affect cash; and (d) the debit account should be Salaries and Wages Expense and the credit account should be Salaries and Wages Payable. Adjusting entries never affect cash.
14. (c) The accounts on the trial balance can be segregated by the balance in the account—either debit or credit—not whether they are assets or liabilities. All accounts in the ledger are included in the adjusted trial balance, not just assets and liabilities. The other choices are true statements.
*15. (a) This adjusting entry correctly states the Supplies account at €800 (€0 +€800) and the Supplies Expense account at €700 (€1,500 −€800). The other choices are incorrect because (b) will cause the Supplies account to have a credit balance (assets have a normal debit balance) and the Supplies Expense account to be stated at €2,300, which is too high; (c) will result in a €700 balance in the Supplies account (€100 too low) and an €800 balance in the Supplies Expense account (€100 too high); and (d) will cause the Supplies account to have a credit balance (assets have a normal debit balance) and the Supplies Expense account to be stated at €2,200, which is too high.
*16. (c) Neutrality is one of the enhancing qualities that makes information more representationally faithful, not relevant. There- fore, choices (a), (b), and (d) are incorrect.
*17. (c) Cost is a constraint in fi nancial accounting. The other choices are all enhancing qualities of useful information.
1. Chen’s Dental Practice opened on January 1, 2017. During the fi rst month of opera- tions, the following transactions occurred.
1. Performed services for patients totaling HK$7,850, which has not yet been recorded.
2. Utility expenses incurred but not paid prior to January 31 totaled HK$2,500.
3. Purchased dental equipment on January 1 for HK$900,000, paying HK$250,000 in cash and signing a HK$650,000 3-year note payable. The equipment depreciates HK$5,000 per month. Interest is HK$5,500 per month.
4. Purchased a 1-year malpractice insurance policy on January 1 for HK$150,000.
5. Purchased HK$17,000 of dental supplies. On January 31, determined that HK$3,000 of supplies were on hand.
Instructions
Prepare the adjusting entries on January 31. Account titles are Accumulated Depreciation—
Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.
Prepare adjusting entries.
(LO 3, 4, 5, 6)
PRACTICE EXERCISES
1. Jan. 31 Accounts Receivable 7,850
Service Revenue 7,850
Solution
Review and Practice 135
2. The income statement of Zhou Ltd. for the month of July shows net income of NT$140,000 based on Service Revenue NT$550,000, Salaries and Wages Expense NT$230,000, Supplies Expense NT$120,000, and Utilities Expense NT$60,000. In reviewing the statement, you discover the following.
1. Insurance expired during July of NT$45,000 was omitted.
2. Supplies expense includes NT$30,000 of supplies that are still on hand at July 31.
3. Depreciation on equipment of NT$18,000 was omitted.
4. Accrued but unpaid salaries and wages at July 31 of NT$40,000 were not included.
5. Services performed but unrecorded totaled NT$60,000.
Instructions
Prepare a correct income statement for July 2017.
Prepare correct income statement.
(LO 2, 3, 4, 5, 6)
31 Utilities Expense 2,500
Accounts Payable 2,500
31 Depreciation Expense 5,000
Accumulated Depreciation—Equipment 5,000
31 Interest Expense 5,500
Interest Payable 5,500
31 Insurance Expense (HK$150,000 ÷ 12) 12,500
Prepaid Insurance 12,500
31 Supplies Expense (HK$17,000 − HK$3,000) 14,000
Supplies 14,000
2.
Solution
Revenues
Service revenue (NT$550,000 + NT$60,000) NT$610,000 Expenses
Salaries and wages expense (NT$230,000 + NT$40,000) NT$270,000 Supplies expense (NT$120,000 − NT$30,000) 90,000
Utilities expense 60,000
Insurance expense 45,000
Depreciation expense 18,000
Total expenses 483,000
Net income NT$127,000
The Green Thumb Lawn Care Ltd. began on April 1. At April 30, the trial balance shows the following balances for selected accounts. (Amounts are in Chinese yuan.)
Prepaid Insurance ¥ 36,000
Equipment 280,000
Notes Payable 200,000
Unearned Service Revenue 42,000
Service Revenue 18,000
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 ¥5,000 per month.
3. The note payable is dated April 1. It is a 6-month, 12% note.
Prepare adjusting entries.
(LO 4, 5, 6)
PRACTICE PROBLEM
ZHOU LTD.
Income Statement For the Month Ended July 31, 2017
4. Seven customers paid for the company’s 6-month lawn service package of ¥6,000 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 ¥15,000.
Instructions
Prepare the adjusting entries for the month of April. Show computations.
Solution
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
Adjusting Entries
Apr. 30 Insurance Expense 1,500
Prepaid Insurance 1,500
(To record insurance expired:
¥36,000 ÷ 24 = ¥1,500 per month)
30 Depreciation Expense 5,000
Accumulated Depreciation—Equipment 5,000
(To record monthly depreciation)
30 Interest Expense 2,000
Interest Payable 2,000
(To record interest on notes payable:
¥200,000 × 12% × 1/12 = ¥2,000)
30 Unearned Service Revenue 7,000
Service Revenue 7,000
(To record revenue for services performed:
¥6,000 ÷ 6 = ¥1,000;
¥1,000 per month × 7 = ¥7,000)
30 Accounts Receivable 15,000
Service Revenue 15,000
(To record revenue for services performed)
1. (a) How does the time period assumption affect an accountant’s analysis of business transactions?
(b) Explain the terms fi scal year, calendar year, and interim periods.
2. Defi ne two IFRS principles that relate to adjusting