# 3.13: Exercises

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Exercise A Select the correct response for each of the following multiple-choice questions:

The cash basis of accounting:

(a) Recognizes revenues when sales are made or services are rendered.

(b) Recognizes expenses as incurred.

(c) Is typically used by some relatively small businesses and professional persons.

(d) Recognizes revenues when cash is received and recognizes expenses when incurred.

The accrual basis of accounting:

(a) Recognizes revenues only when cash is received.

(b) Is used by almost all companies.

(c) Recognizes expenses only when cash is paid out.

(d) Recognizes revenues when sales are made or services are performed and recognizes expenses only when cash is paid out.

Exercise B Select the correct response for each of the following multiple-choice questions:

The least common accounting period among the following is:

(a) One month.

(b) Two months.

(c) Three months.

(d) Twelve months.

The need for adjusting entries is based on:

(a) The matching principle.

(b) Source documents.

(c) The cash basis of accounting.

(d) Activity that has already been recorded in the proper accounts.

Exercise C Select the correct response for each of the following multiple-choice questions:

Which of the following types of adjustments belongs to the deferred items class?

Which of the following types of adjustments belongs to the accrued items class?

Exercise D A one-year insurance policy was purchased on August 1 for USD 2,400, and the following entry was made at that time:

 Prepaid Insurance 2,400 Cash 2,400

What adjusting entry is necessary at December 31, the end of the accounting year?

Show how the T-accounts for Prepaid Insurance and Insurance Expense would appear after the entries are posted.

Exercise E Assume that rent of USD 12,000 was paid on 2010 September 1, to cover a one-year period from that date. Prepaid Rent was debited. If financial statements are prepared only on December 31 of each year, what adjusting entry is necessary on 2010 December 31, to bring the accounts involved to their proper balances?

Exercise F At 2010 December 31, an adjusting entry was made as follows:

 Rent Expense 1,500 Prepaid Rent 1,500

You know that the gross amount of rent paid was USD 4,500, which was to cover a one-year period. Determine:

a. The opening date of the year to which the USD 4,500 of rent applies.

b. The entry that was made on the date the rent was paid.

Exercise G Supplies were purchased for cash on 2010 May 2, for USD 8,000. Show how this purchase would be recorded. Then show the adjusting entry that would be necessary, assuming that USD 2,500 of the supplies remained at the end of the year.

Exercise H Assume that a company acquired a building on 2010 January 1, at a cost of USD 1,000,000. The building has an estimated useful life of 40 years and an estimated residual value of USD 200,000. What adjusting entry is needed on 2010 December 31, to record the depreciation for the entire year 2010?

Exercise I On 2010 September 1, Professional Golfer Journal, Inc., received a total of USD 120,000 as payment in advance for one-year subscriptions to a monthly magazine. A liability account was credited to record this cash receipt. By the end of the year, one-third of the magazines paid for in advance had been delivered. Give the entries to record the receipt of the subscription fees and to adjust the accounts at December 31, assuming annual financial statements are prepared at year-end.

Exercise J On 2010 April 15, Rialto Theater sold USD 90,000 in tickets for the summer musicals to be performed (one per month) during June, July, and August. On 2010 July 15, Rialto Theater discovered that the group that was to perform the July and August musicals could not do so. It was too late to find another group qualified to perform the musicals. A decision was made to refund the remaining unearned ticket revenue to its ticket holders, and this was done on July 20. Show the appropriate journal entries to be made on April 15, June 30, and July 20. Rialto has a June 30th year-end.

Exercise K Guilty & Innocent, a law firm, performed legal services in late December 2010 for clients. The USD 30,000 of services would be billed to the clients in January 2011. Give the adjusting entry that is necessary on 2010 December 31, if financial statements are prepared at the end of each month.

Exercise L A firm borrowed USD 30,000 on November 1. By December 31, USD 300 of interest had been incurred. Prepare the adjusting entry required on December 31.

Exercise M Convenient Mailing Services, Inc., incurs salaries at the rate of USD 3,000 per day. The last payday in January is Friday, January 27. Salaries for Monday and Tuesday of the next week have not been recorded or paid as of January 31. Financial statements are prepared monthly. Give the necessary adjusting entry on January 31.

Exercise N State the effect that each of the following independent situations would have on the amount of annual net income reported for 2010 and 2011.

a, No adjustment was made for accrued salaries of USD 8,000 as of 2010 December 31.

b. The collection of USD 5,000 for services yet unperformed as of 2010 December 31, was credited to a revenue account and not adjusted. The services are performed in 2011.

Exercise O In the following table, indicate the effects of failing to recognize each of the indicated adjustments by writing “O” for overstated and “U” for understated.

 Effect on Balance Sheet Items Effect on Stockholders' Failure to Recognize Net Income Assets         Liabilities      Equity 1. Depreciation on a building 2. Consumption of supplies on hand 3. The earning of ticket revenue received in advance 4. The earning of interest on a bank account 5. Salaries incurred by unpaid

Exercise P The following data regarding net income (loss) are for Perkins Parts, a medium-sized automotive supplier, for the period 2004–2009.

 Net Income Net Income (Earnings) (Earnings) ($millions) ($ millions)
 1989 ...... ........... $860 1995 ........ ..............$ 4,139 1990 ...... ........... 3,835 1996 ........ ..............   4,446 1991 ...... ........... (2,258) 1997 ........ ..............  6,920 1992 ...... ........... (7,385) 1998 ........ .............. 22,071 1993 ...... ........... 2,529 1999 ........ ..............   7,237 1994 ...... ........... 5,308 2000 ........ .............. 3,467

Using 1989 as the base year, calculate the trend percentages, and comment on the results.

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