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166 Chapter 4 The Accounting Cycle: Accruals and Deferrals

B
BRIEF On February 1, Watson Storage agreed to rent Hillbourne Manufacturing warehouse space for
LO3
EXERCISE 4.2
E $175 per month. Hillbourne Manufacturing paid the first three months’ rent in advance.
Prepaid Expenses and
P a. Prepare the necessary adjusting entry for Hillbourne Manufacturing on February 28, assuming
LO4 Unearned Revenue
U it recorded the expenditure on February 1 as Prepaid Rent.
b. Prepare the necessary adjusting entry for Watson Storage on February 28, assuming it
recorded Hillbourne Manufacturing’s payment as Unearned Rent Revenue.
LO3 B
BRIEF On March 1, Dillmore Corporation had office supplies on hand of $900. During the month, Dill-
EXERCISE 4.3
E more purchased additional supplies costing $600. Approximately $400 of unused office supplies
Accounting for remain on hand at the end of the month.
Supplies
S Prepare the necessary adjusting entry on March 31 to account for office supplies.
LO3 B
BRIEF On January 2, 2006, Hagen Corporation purchased equipment costing $72,000. Hagen performs
EXERCISE 4.4
E adjusting entries monthly.
Accounting for a. Record this equipment’s depreciation expense on December 31, 2011, assuming its estimated
Depreciation life was eight years on January 2, 2006.
b. Determine the amount of the equipment’s accumulated depreciation reported in the balance
sheet dated December 31, 2011.
LO6 B
BRIEF Marvin’s Tax Service had earned—but not yet recorded—the following client service revenue at
EXERCISE 4.5
E the end of the current accounting period:
Accruing Uncollected
Revenue Billable Hourly
Account Number Hours Billing Rate
Account #4067 10 $85
Account #3940 14 $75
Account #1852 16 $90

Prepare the necessary adjusting entry to record Marvin’s unbilled client service revenue
LO4 B
BRIEF Jasper’s unadjusted trial balance reports Unearned Client Revenue of $3,200 and Client Revenue
EXERCISE 4.6
E Earned of $29,000. An examination of client records reveals that $2,800 of previously unearned
Unearned Revenue revenue has now been earned.
a. Prepare the necessary adjusting entry pertaining to these accounts.
b. At what amount will Client Revenue Earned be reported in Jasper’s income statement?
LO5 B
BRIEF Milford Corporation pays its employees on the fifteenth of each month. Accrued, but unpaid,
EXERCISE 4.7
E salaries on December 31, 2011, totaled $175,000. Salaries earned by Milford’s employees from
Accruing Unpaid January 1 through January 15, 2012, totaled $180,000.
Salaries a. Prepare the necessary adjusting entry for salaries expense on December 31, 2011.
b. Record the company’s payment of salaries on January 15, 2012.
LO5 B
BRIEF Norbert Corporation borrowed $24,000 on December 1, 2011, by issuing a two-month, 8 percent
EXERCISE 4.8
E note payable to Service One Credit Union. The entire amount of the loan, plus interest, is due
Accruing Unpaid February 1, 2012.
Interest a. Prepare the necessary adjusting entry for interest expense on December 31, 2011.
b. Record the repayment of the loan plus interest on February 1, 2012.
LO5 B
BRIEF Normington’s unadjusted trial balance dated December 31, 2011, reports Income Taxes Expense of
EXERCISE 4.9
E $57,200, and Income Taxes Payable of $14,300. The company’s accountant estimates that income
Accruing Unpaid taxes expense for the entire year ended December 31, 2011, is $62,800.
Income Taxes a. Prepare the necessary adjusting entry for income taxes expense on December 31, 2011.
b. Determine the amount of income taxes payable reported in the balance sheet dated December
31, 2011.
LO8 B
BRIEF The concept of materiality is an underlying principle of financial reporting.
EXERCISE 4.10
E a. Briefly explain the concept of materiality.
Concept of Materiality b. Is $2,500 a “material” dollar amount? Explain.
c. Describe two ways in which the concept of materiality may save accountants’ time and effort
in making adjusting entries.

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Exercises 167

Exercises accounting

LO1 EXERCISE 4.1

E Listed below are nine technical accounting terms used in this chapter:
A
Accounting
through Unrecorded revenue Adjusting entries Accrued expenses
Terminology
T
Book value Matching principle Accumulated depreciation
LO9
Unearned revenue Materiality Prepaid expenses

Each of the following statements may (or may not) describe one of these technical terms. For each
statement, indicate the accounting term described, or answer “None” if the statement does not cor-
rectly describe any of the terms.
a. The net amount at which an asset is carried in the accounting records as distinguished from its
market value.
b. An accounting concept that may justify departure from other accounting principles for pur-
poses of convenience and economy.
c. The offsetting of revenue with expenses incurred in generating that revenue.
d. Revenue earned during the current accounting period but not yet recorded or billed, which
requires an adjusting entry at the end of the period.
e. Entries made at the end of the period to achieve the goals of accrual accounting by recording
revenue when it is earned and by recording expenses when the related goods and services
are used.
f. A type of account credited when customers pay in advance for services to be rendered in
the future.
g. A balance sheet category used for reporting advance payments of such items as insurance,
rent, and office supplies.
h. An expense representing the systematic allocation of an asset’s cost over its useful life.

LO1 EXERCISE 4.2

E Security Service Company adjusts its accounts at the end of the month. On November 30, adjusting
E
Effects of Adjusting entries are prepared to record:
through
Entries
E a. Depreciation expense for November.
LO6 b. Interest expense that has accrued during November.
c. Revenue earned during November that has not yet been billed to customers.
LO9 d. Salaries, payable to company employees, that have accrued since the last payday in November.
e. The portion of the company’s prepaid insurance that has expired during November.
f. Earning a portion of the amount collected in advance from a customer, Harbor Restaurant.
Indicate the effect of each of these adjusting entries on the major elements of the company’s
income statement and balance sheet—that is, on revenue, expenses, net income, assets, liabilities,
and owners’ equity. Organize your answer in tabular form, using the column headings shown and
the symbols I for increase, D for decrease, and NE for no effect. The answer for adjusting entry a
is provided as an example.

Income Statement Balance Sheet

Adjusting Net Owners’
Entry Revenue ⫺ Expenses ⫽ Income Assets ⫽ Liabilities ⫹ Equity
a NE I D D NE D

LO1 EXERCISE 4.3

E The Golden Goals, a professional soccer team, prepares financial statements on a monthly basis.
P
Preparing Adjusting The soccer season begins in May, but in April the team engaged in the following transactions:
through
Entries to Convert an
E 1. Paid $1,200,000 to the municipal stadium as advance rent for use of the facilities for the
LO7 Asset to an Expense
A five-month period from May 1 through September 30. This payment was initially recorded as
and to Convert a
a Prepaid Rent.
Liability to Revenue
L 2. Collected $4,500,000 cash from the sale of season tickets for the team’s home games. The
entire amount was initially recorded as Unearned Ticket Revenue. During the month of May,

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168 Chapter 4 The Accounting Cycle: Accruals and Deferrals

the Golden Goals played several home games at which $148,800 of the season tickets sold in
April were used by fans.
Prepare the two adjusting entries required on May 31.
LO1 EXERCISE 4.4
E Carnival Corporation is the world’s largest cruise line company. Its printing costs for brochures
P
Preparing Adjusting are initially recorded as Prepaid Advertising and are later charged to Advertising Expense when
through
Entries to Convert an
E they are mailed. Passenger deposits for upcoming cruises are considered unearned revenue and
LO7 Asset to an Expense
A are recorded as Customer Deposits as cash is received. Deposited amounts are later converted to
and to Convert a
a Cruise Revenue as voyages are completed.
Liability to Revenue
L a. Where in its financial statements does Carnival Corporation report Prepaid Advertising?
Where in its financial statements does it report Customer Deposits?
b. Prepare the adjusting entry necessary when brochures costing $18 million are mailed.
c. In its most recent annual report, Carnival Corporation reported Customer Deposits in excess
of $2.8 billion. Prepare the adjusting entry necessary in the following year as $90 million of
this amount is earned.
d. Consider the entire adjusting process at Carnival Corporation. Which adjusting entry
do you think results in the most significant expense reported in the company’s income
statement?
LO1 EXERCISE 4.5
E The geological consulting firm of Gilbert, Marsh, & Kester prepares adjusting entries on a monthly
Preparing Adjusting
P basis. Among the items requiring adjustment on December 31, 2011, are the following:
through
Entries to Accrue
E 1. The company has outstanding a $50,000, 9 percent, two-year note payable issued on July 1,
LO7 Revenue and
R 2010. Payment of the $50,000 note, plus all accrued interest for the two-year loan period, is
Expenses for Which
E due in full on June 30, 2012.
No Cash Has Been
N 2. The firm is providing consulting services to Texas Oil Company at an agreed-upon rate of
Received $1,000 per day. At December 31, 10 days of unbilled consulting services have been provided.
a. Prepare the two adjusting entries required on December 31 to record the accrued interest
expense and the accrued consulting revenue earned.
b. Assume that the $50,000 note payable plus all accrued interest are paid in full on June 30,
2012. What portion of the total interest expense associated with this note will be reported in
the firm’s 2012 income statement?
c. Assume that on January 30, 2012, Gilbert, Marsh, & Kester receive $25,000 from Texas Oil
Company in full payment of the consulting services provided in December and January. What
portion of this amount constitutes revenue earned in January?
LO1 EXERCISE 4.6
E When American Airlines sells tickets for future flights, it debits Cash and credits an account
Deferred Revenue
D entitled Air Traffic Liability (as opposed to crediting Passenger Revenue Earned). This account,
reported recently at $4.5 billion, is among the largest liabilities appearing in the company’s balance
LO2 sheet.
a. Explain why this liability is often referred to as a deferred revenue account.
LO4 b. What activity normally reduces this liability? Can you think of any other transaction that
would also reduce this account?
c. Assume that, in a recent flight, passengers of the airline used tickets that they had purchased
in advance for $200,000. Record the entry American Airlines would make upon completion
of this flight.
LO1 EXERCISE 4.7
E Sweeney & Associates, a large marketing firm, adjusts its accounts at the end of each month. The
P
Preparing Various following information is available for the year ending December 31, 2011:
through
Adjusting Entries
A 1. A bank loan had been obtained on December 1. Accrued interest on the loan at December 31
LO6 amounts to $1,200. No interest expense has yet been recorded.
2. Depreciation of the firm’s office building is based on an estimated life of 25 years. The build-
ing was purchased in 2007 for $330,000.
LO9
3. Accrued, but unbilled, revenue during December amounts to $64,000.
4. On March 1, the firm paid $1,800 to renew a 12-month insurance policy. The entire amount
was recorded as Prepaid Insurance.
5. The firm received $14,000 from King Biscuit Company in advance of developing a six-month
marketing campaign. The entire amount was initially recorded as Unearned Revenue. At
December 31, $3,500 had actually been earned by the firm.

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Exercises 169

6. The company’s policy is to pay its employees every Friday. Since December 31 fell on a
Wednesday, there was an accrued liability for salaries amounting to $2,400.
a. Record the necessary adjusting journal entries on December 31, 2011.
b. By how much did Sweeney & Associates’s net income increase or decrease as a result of the
adjusting entries performed in part a? (Ignore income taxes.)
LO1 EXERCISE 4.8
E Ventura Company adjusts its accounts monthly and closes its accounts on December 31. On
N
Notes Payable and October 31, 2011, Ventura Company signed a note payable and borrowed $120,000 from a bank
Interest
In for a period of six months at an annual interest rate of 9 percent.
LO2
a. How much is the total interest expense over the life of the note? How much is the monthly
interest expense? (Assume equal amounts of interest expense each month.)
LO5 b. In the company’s annual balance sheet at December 31, 2011, what is the amount of the liabil-
ity to the bank?
c. Prepare the journal entry to record issuance of the note payable on October 31, 2011.
d. Prepare the adjusting entry to accrue interest on the note at December 31, 2011.
e. Assume the company prepared a balance sheet at March 31, 2012. State the amount of the
liability to the bank at this date.
LO1 EXERCISE 4.9
E Among the ledger accounts used by Glenwood Speedway are the following: Prepaid Rent, Rent
Relationship of
R Expense, Unearned Admissions Revenue, Admissions Revenue, Prepaid Printing, Printing
through
Adjusting Entries to
A Expense, Concessions Receivable, and Concessions Revenue. For each of the following items,
LO7 Business Transactions
B provide the journal entry (if one is needed) to record the initial transaction and provide the adjust-
ing entry, if any, required on May 31, the end of the fiscal year.
a. On May 1, borrowed $300,000 cash from National Bank by issuing a 12 percent note payable
LO9
due in three months.
b. On May 1, paid rent for six months beginning May 1 at $30,000 per month.
c. On May 2, sold season tickets for a total of $910,000 cash. The season includes 70 racing
days: 20 in May, 25 in June, and 25 in July.
d. On May 4, an agreement was reached with Snack-Bars, Inc., allowing that company to sell
refreshments at the track in return for 10 percent of the gross receipts from refreshment sales.
LO1 EXERCISE 4.10
E The following information was reported in a recent balance sheet issued by Microsoft Corporation:
Adjusting Entries and
A 1. The book value of property and equipment is listed at $3.35 billion (net of depreciation).
LO3 the Balance Sheet
th Related notes to the financial statements reveal that accumulated depreciation on property and
equipment totals $5.02 billion.
2. Accrued compensation of $2.33 billion is listed as a liability.
LO4
3. Short-term unearned revenue is reported at $10.78 billion, whereas long-term unearned
revenue is reported at $1.87 billion. The short-term figure will be converted to revenue within
LO5 a year. The long-term figure will be converted to revenue over several years. Related notes to
the financial statements reveal that the company engages in multiyear leasing of its software
products.
LO7
a. Determine the original historical cost of the property and equipment reported in Microsoft
Corporation’s balance sheet.
b. Four types of adjusting entries are illustrated in Exhibit 4–1 (page 142). Explain which type of
adjusting entry resulted in the company’s accrued compensation figure.
c. Explain why Microsoft Corporation reports unearned revenue in its balance sheet. Why
might the company report short-term unearned revenue separately from long-term unearned
revenue?
LO1 EXERCISE 4.11
E Listed below are seven corporations that receive cash from customers prior to earning revenue:
R
Reporting of Unearned America West Corporation (airline)
LO4 Revenue
R The New York Times Company (newspaper)
Carnival Corporation (cruise company)
LO7 Devry, Inc. (for-profit technical college)
Clear Channel Communications, Inc. (radio broadcasting)
AFLAC Incorporated (health insurance)
Bally Total Fitness Corporation (fitness club)

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170 Chapter 4 The Accounting Cycle: Accruals and Deferrals

a. Listed below are the accounts used by these corporations to report unearned revenue:
Deferred Advertising Income Unearned Premiums
Air Traffic Liability Unexpired Subscriptions
Deferred Member Revenues Deferred Tuition Revenue
Customer Deposits
Match each corporation with the account title it uses to report unearned revenue.
b. Apply the realization principle to explain when each of these corporations converts unearned
revenue to earned revenue.

LO1 EXERCISE
E 4.12 The unadjusted and adjusted trial balances for Tinker Corporation on December 31, 2011, are
through Preparing
P Adjusting shown below:
Entries
E from a Trial
LO7 Balance
B
TINKER CORPORATION
TRIAL BALANCES
LO9 DECEMBER 31, 2011
Unadjusted Adjusted
Debit Credit Debit Credit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,200 $ 35,200
Accounts receivable . . . . . . . . . . . . . . . . . . 29,120 34,120
Unexpired insurance . . . . . . . . . . . . . . . . . . 1,200 600
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . 5,400 3,600
Office supplies . . . . . . . . . . . . . . . . . . . . . . . 680 380
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 60,000
Accumulated depreciation: equipment . . . . $ 49,000 $ 50,000
Accounts payable . . . . . . . . . . . . . . . . . . . . 900 900
Notes payable . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . 200 250
Salaries payable . . . . . . . . . . . . . . . . . . . . . — 2,100
Income taxes payable . . . . . . . . . . . . . . . . . 1,570 2,170
Unearned revenue . . . . . . . . . . . . . . . . . . . . 6,800 3,800
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
Retained earnings . . . . . . . . . . . . . . . . . . . . 30,000 30,000
Fees earned. . . . . . . . . . . . . . . . . . . . . . . . . 91,530 99,530
Advertising expense . . . . . . . . . . . . . . . . . . 1,500 1,500
Insurance expense . . . . . . . . . . . . . . . . . . . 6,600 7,200
Rent expense. . . . . . . . . . . . . . . . . . . . . . . . 19,800 21,600
Office supplies expense . . . . . . . . . . . . . . . 1,200 1,500
Repairs expense . . . . . . . . . . . . . . . . . . . . . 4,800 4,800
Depreciation expense: equipment . . . . . . . . 11,000 12,000
Salaries expense . . . . . . . . . . . . . . . . . . . . . 26,300 28,400
Interest expense . . . . . . . . . . . . . . . . . . . . . 200 250
Income taxes expense . . . . . . . . . . . . . . . . . 7,000 7,600
$210,000 $210,000 $218,750 $218,750

Journalize the nine adjusting entries that the company made on December 31, 2011.

LO1 EXERCISE 4.13

E Four types of adjusting entries were identified in this chapter:
through
E
Effects of Adjusting Type I Converting Assets to Expenses
E
Entries Type II Converting Liabilities to Revenue
LO6 Type III Accruing Unpaid Expenses
Type IV Accruing Uncollected Revenue

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Problem Set A 171

Complete the following table by indicating the effect of each adjusting entry type on the major ele-
ments of the income statement and balance sheet. Use the symbols I for increase, D for decrease,
and NE for no effect.

Income Statement Balance Sheet

Adjustment Net Owners’
Type Revenue Expenses Income Assets Liabilities Equity
Type I
Type II
Type III
Type IV

LO1 EXERCISE 4.14

E For each of the situations described below, indicate the underlying accounting principle that is
Accounting Principles
A being violated. Choose from the following principles:
through
Matching Materiality
LO8 Cost Realization
Objectivity
If you do not believe that the practice violates any of these principles, answer “None” and explain.
a. The bookkeeper of a large metropolitan auto dealership depreciates the $7.20 cost of metal
wastebaskets over a period of 10 years.
b. A small commuter airline recognizes no depreciation expense on its aircraft because the
planes are maintained in “as good as new” condition.
c. Palm Beach Hotel recognizes room rental revenue on the date that a reservation is received.
For the winter season, many guests make reservations as much as a year in advance.
LO1 EXERCISE 4.15
E The financial statements of Home Depot, Inc., appear in Appendix A at the end of this textbook.
Using the Financial
U Examine the company’s consolidated balance sheet and identify specific accounts that may have
Statements of Home
S required adjusting entries at the end of the year.
LO2
Depot, Inc.
D

Problem Set A accounting

LO1 PROBLEM 4.1A

P Florida Palms Country Club adjusts its accounts monthly. Club members pay their annual dues
in advance by January 4. The entire amount is initially credited to Unearned Membership Dues.
through P
Preparing Adjusting
At the end of each month, an appropriate portion of this amount is credited to Membership Dues
Entries
E
Earned. Guests of the club normally pay green fees before being allowed on the course. The
LO7 amounts collected are credited to Green Fee Revenue at the time of receipt. Certain guests, how-
ever, are billed for green fees at the end of the month. The following information is available as a
source for preparing adjusting entries at December 31:

1. Salaries earned by golf course employees that have not yet been recorded or paid amount to
$9,600.
2. The Tampa University golf team used Florida Palms for a tournament played on December 30
of the current year. At December 31, the $1,800 owed by the team for green fees had not yet
been recorded or billed.
3. Membership dues earned in December, for collections received in January, amount to
$106,000.

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172 Chapter 4 The Accounting Cycle: Accruals and Deferrals

4. Depreciation of the country club’s golf carts is based on an estimated life of 15 years. The
carts had originally been purchased for $180,000. The straight-line method is used.
(Note: The clubhouse building was constructed in 1925 and is fully depreciated.)
5. A 12-month bank loan in the amount of $45,000 had been obtained by the country club on
November 1. Interest is computed at an annual rate of 8 percent. The entire $45,000, plus all
of the interest accrued over the 12-month life of the loan, is due in full on October 31 of the
upcoming year. The necessary adjusting entry was made on November 30 to record the first
month of accrued interest expense. However, no adjustment has been made to record interest
expense accrued in December.
6. A one-year property insurance policy had been purchased on March 1. The entire premium of
$7,800 was initially recorded as Unexpired Insurance.
7. In December, Florida Palms Country Club entered into an agreement to host the annual tour-
nament of the Florida Seniors Golf Association. The country club expects to generate green
fees of $4,500 from this event.
8. Unrecorded Income Taxes Expense accrued in December amounts to $19,000. This amount
will not be paid until January 15.

Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation). If no adjusting entry is required, explain why.
b. Four types of adjusting entries are described at the beginning of the chapter. Using these
descriptions, identify the type of each adjusting entry prepared in part a above.
c. Although Florida Palms’s clubhouse building is fully depreciated, it is in excellent physical
condition. Explain how this can be.

LO1 PROBLEM 4.2A

P Enchanted Forest, a large campground in South Carolina, adjusts its accounts monthly. Most
P
Preparing and guests of the campground pay at the time they check out, and the amounts collected are credited
through
Analyzing the Effects
A to Camper Revenue. The following information is available as a source for preparing the adjusting
LO6 of Adjusting Entries
o entries at December 31:
1. Enchanted Forest invests some of its excess cash in certificates of deposit (CDs) with its local
bank. Accrued interest revenue on its CDs at December 31 is $400. None of the interest has
LO9 yet been received. (Debit Interest Receivable.)
2. A six-month bank loan in the amount of $12,000 had been obtained on September 1.
Interest is to be computed at an annual rate of 8.5 percent and is payable when the loan
becomes due.
3. Depreciation on buildings owned by the campground is based on a 25-year life. The original
cost of the buildings was $600,000. The Accumulated Depreciation: Buildings account has a
credit balance of $310,000 at December 31, prior to the adjusting entry process. The straight-
line method of depreciation is used.
4. Management signed an agreement to let Boy Scout Troop 538 of Lewisburg, Pennsylvania,
use the campground in June of next year. The agreement specifies that the Boy Scouts
will pay a daily rate of $15 per campsite, with a clause providing a minimum total charge
of $1,475.
5. Salaries earned by campground employees that have not yet been paid amount to $1,250.
6. As of December 31, Enchanted Forest has earned $2,400 of revenue from current campers
who will not be billed until they check out. (Debit Camper Revenue Receivable.)
7. Several lakefront campsites are currently being leased on a long-term basis by a group of
senior citizens. Six months’ rent of $5,400 was collected in advance and credited to Unearned
Camper Revenue on October 1 of the current year.
8. A bus to carry campers to and from town and the airport had been rented the first week of
December at a daily rate of $40. At December 31, no rental payment has been made, although
the campground has had use of the bus for 25 days.
9. Unrecorded Income Taxes Expense accrued in December amounts to $8,400. This amount
will not be paid until January 15.

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Problem Set A 173

Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation). If no adjusting entry is required, explain why.
b. Four types of adjusting entries are described at the beginning of the chapter. Using these
descriptions, identify the type of each adjusting entry prepared in part a above.
c. Indicate the effects that each of the adjustments in part a will have on the following six total
amounts in the campground’s financial statements for the month of December. Organize your
answer in tabular form, using the column headings shown below. Use the letters I for increase,
D for decrease, and NE for no effect. Adjusting entry 1 is provided as an example.

Income Statement Balance Sheet

Net Owners’
Adjusting Revenue ⫺ Expenses ⫽ Income Assets ⫽ Liabilities ⫹ Equity
1 I NE I I NE I

d. What is the amount of interest expense recognized for the entire current year on the $12,000
bank loan obtained September 1?
e. Compute the book value of the campground’s buildings to be reported in the current year’s
December 31 balance sheet. (Refer to paragraph 3.)

LO1 PROBLEM 4.3A

P Gunflint Adventures operates an airplane service that takes fishing parties to a remote lake resort in
A
Analysis of Adjusted northern Manitoba, Canada. Individuals must purchase their tickets at least one month in advance
through
Data
D during the busy summer season. The company adjusts its accounts only once each month. Selected
LO7 balances appearing in the company’s June 30 adjusted trial balance appear as follows:
x
e cel
Debit Credit
LO9
Prepaid airport rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,200
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Airplane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
Accumulated depreciation: airplane . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,000
Unearned passenger revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000

Other Information
1. The airplane is being depreciated over a 20-year life with no residual value.
2. Unearned passenger revenue represents advance ticket sales for bookings in July and August
at $300 per ticket.
3. Six months’ airport rent had been prepaid on May 1.
4. The unexpired insurance is what remains of a 12-month policy purchased on February 1.
5. Passenger revenue earned in June totaled $75,000.

Instructions
a. Determine the following:
1. The age of the airplane in months.
2. The monthly airport rent expense.
3. The amount paid for the 12-month insurance policy on February 1.
b. Prepare the adjusting entries made on June 30 involving the following accounts:
1. Depreciation Expense: Airplane
2. Airport Rent Expense
3. Insurance Expense
4. Passenger Revenue Earned

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174 Chapter 4 The Accounting Cycle: Accruals and Deferrals

LO1 P
PROBLEM 4.4A Campus Theater adjusts its accounts every month. Below is the company’s unadjusted trial balance
P
Preparing Adjusting dated August 31, 2011. Additional information is provided for use in preparing the company’s
through
E
Entries from a Trial adjusting entries for the month of August. (Bear in mind that adjusting entries have already been
LO7 B
Balance made for the first seven months of 2011, but not for August.)

LO9
x
e cel
CAMPUS THEATER
UNADJUSTED TRIAL BALANCE
AUGUST 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000
Prepaid film rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,000
Accumulated depreciation: building . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,000
Fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Accumulated depreciation: fixtures and equipment . . . . . . . . . . . . . . . 12,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400
Unearned admissions revenue (YMCA) . . . . . . . . . . . . . . . . . . . . . . . 1,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,610
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Admissions revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305,200
Concessions revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,350
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,500
Film rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,500
Utilities expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,500
Depreciation expense: building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900
Depreciation expense: fixtures and equipment . . . . . . . . . . . . . . . . . . 4,200
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
$622,300 $622,300

Other Data
1. Film rental expense for the month is $15,200. However, the film rental expense for several
months has been paid in advance.
2. The building is being depreciated over a period of 20 years (240 months).
3. The fixtures and equipment are being depreciated over a period of five years (60 months).
4. On the first of each month, the theater pays the interest that accrued in the prior month on its
note payable. At August 31, accrued interest payable on this note amounts to $1,500.
5. The theater allows the local YMCA to bring children attending summer camp to the movies
on any weekday afternoon for a fixed fee of $500 per month. On June 28, the YMCA made a
$1,500 advance payment covering the months of July, August, and September.
6. The theater receives a percentage of the revenue earned by Tastie Corporation, the conces-
sionaire operating the snack bar. For snack bar sales in August, Tastie owes Campus Theater
$2,250, payable on September 10. No entry has yet been made to record this revenue. (Credit
Concessions Revenue.)
7. Salaries earned by employees, but not recorded or paid as of August 31, amount to $1,700. No
entry has yet been made to record this liability and expense.
8. Income taxes expense for August is estimated at $4,200. This amount will be paid in the
September 15 installment payment.

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 Confirming Pages

Problem Set A 175

9. Utilities expense is recorded as monthly bills are received. No adjusting entries for utilities
expense are made at month-end.

Instructions
a. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation).
b. Refer to the balances shown in the unadjusted trial balance at August 31. How many months of
expense are included in each of the following account balances? (Remember, Campus Theater
adjusts its accounts monthly. Thus, the accounts shown were last adjusted on July 31, 2011.)
1. Utilities Expense
2. Depreciation Expense
3. Accumulated Depreciation: Building
c. Assume the theater has been operating profitably all year. Although the August 31 trial bal-
ance shows substantial income taxes expense, income taxes payable is a much smaller amount.
This relationship is quite normal throughout much of the year. Explain.

LO1 P
PROBLEM 4.5A Terrific Temps fills temporary employment positions for local businesses. Some businesses pay in
P
Preparing Adjusting advance for services; others are billed after services have been performed. Advanced payments are
through
E
Entries and credited to an account entitled Unearned Fees. Adjusting entries are performed on a monthly basis.
LO7 D
Determining Account An unadjusted trial balance dated December 31, 2011, follows. (Bear in mind that adjusting entries
B
Balances have already been made for the first 11 months of 2011, but not for December.)

LO9
TERRIFIC TEMPS
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,020
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,200
Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,500
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,180
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320
Unearned fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Fees earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Travel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,980
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,900
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
$225,000 $225,000

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176 Chapter 4 The Accounting Cycle: Accruals and Deferrals

Other Data
1. Accrued but unrecorded fees earned as of December 31, 2011, amount to $1,500.
2. Records show that $2,500 of cash receipts originally recorded as unearned fees had been
earned as of December 31.
3. The company purchased a six-month insurance policy on September 1, 2011, for $1,800.
4. On December 1, 2011, the company paid its rent through February 28, 2012.
5. Office supplies on hand at December 31 amount to $400.
6. All equipment was purchased when the business first formed. The estimated life of the equip-
ment at that time was 10 years (or 120 months).
7. On August 1, 2011, the company borrowed $12,000 by signing a six-month, 8 percent note
payable. The entire note, plus six months’ accrued interest, is due on February 1, 2012.
8. Accrued but unrecorded salaries at December 31 amount to $2,700.
9. Estimated income taxes expense for the entire year totals $15,000. Taxes are due in the first
quarter of 2012.

Instructions
a. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation).
b. Determine that amount at which each of the following accounts will be reported in the
company’s 2011 income statement:
1. Fees Earned
2. Travel Expense
3. Insurance Expense
4. Rent Expense
5. Office Supplies Expense
6. Utilities Expense
7. Depreciation Expense: Equipment
8. Interest Expense
9. Salaries Expense
10. Income Taxes Expense
c. The unadjusted trial balance reports dividends of $3,000. As of December 31, 2011, have
these dividends been paid? Explain.

LO1 PROBLEM 4.6A

P Alpine Expeditions operates a mountain climbing school in Colorado. Some clients pay in advance
P
Preparing Adjusting for services; others are billed after services have been performed. Advance payments are credited
through
Entries and
E to an account entitled Unearned Client Revenue. Adjusting entries are performed on a monthly
LO7 Determining Account
D basis. An unadjusted trial balance dated December 31, 2011, follows. (Bear in mind that adjusting
Balances
B entries have already been made for the first 11 months of 2011, but not for December.)

LO9

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 Confirming Pages

Problem Set A 177

ALPINE EXPEDITIONS
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,900
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,000
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Prepaid advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Climbing supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900
Climbing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,600
Accumulated depreciation: climbing equipment . . . . . . . . . . . . . . . . . $ 38,400
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Unearned client revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,400
Client revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500
Climbing supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,400
Repairs expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Depreciation expense: climbing equipment . . . . . . . . . . . . . . . . . . . . . 13,200
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,200
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,750
$328,000 $328,000

Other Data
1. Accrued but unrecorded fees earned as of December 31 amount to $6,400.
2. Records show that $6,600 of cash receipts originally recorded as unearned client revenue had
been earned as of December 31.
3. The company purchased a 12-month insurance policy on June 1, 2011, for $36,000.
4. On December 1, 2011, the company paid $2,200 for numerous advertisements in several
climbing magazines. Half of these advertisements have appeared in print as of December 31.
5. Climbing supplies on hand at December 31 amount to $2,000.
6. All climbing equipment was purchased when the business first formed. The estimated life of
the equipment at that time was four years (or 48 months).
7. On October 1, 2011, the company borrowed $10,000 by signing an eight-month, 9 percent
note payable. The entire note, plus eight months’ accrued interest, is due on June 1, 2012.
8. Accrued but unrecorded salaries at December 31 amount to $3,100.
9. Estimated income taxes expense for the entire year totals $14,000. Taxes are due in the first
quarter of 2012.

Instructions
a. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation).
b. Determine that amount at which each of the following accounts will be reported in the com-
pany’s balance sheet dated December 31, 2011:
1. Cash 6. Climbing Equipment 10. Interest Payable
2. Accounts Receivable 7. Accumulated Depreciation: 11. Income Taxes Payable
3. Unexpired Insurance Climbing Equipment 12. Unearned Client
4. Prepaid Advertising 8. Salaries Payable Revenue
5. Climbing Supplies 9. Notes Payable
c. Which of the accounts listed in part b represent deferred expenses? Explain.

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178 Chapter 4 The Accounting Cycle: Accruals and Deferrals

LO1 P
PROBLEM 4.7A Ken Hensley Enterprises, Inc., is a small recording studio in St. Louis. Rock bands use the studio
P
Preparing Adjusting to mix high-quality demo recordings distributed to talent agents. New clients are required to pay in
through
E
Entries from a Trial advance for studio services. Bands with established credit are billed for studio services at the end
B
Balance of each month. Adjusting entries are performed on a monthly basis. An unadjusted trial balance
LO7
dated December 31, 2011, follows. (Bear in mind that adjusting entries already have been made for
the first eleven months of 2011, but not for December.)
LO9
KEN HENSLEY ENTERPRISES, INC.
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,170
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,400
Studio supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,600
Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Prepaid studio rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Recording equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Accumulated depreciation: recording equipment . . . . . . . . . . . . . . . . . $ 52,500
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Unearned studio revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,000
Studio revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,000
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,680
Depreciation expense: recording equipment . . . . . . . . . . . . . . . . . . . . 16,500
Studio rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,350
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,900
$307,140 $307,140

Other Data
1. Records show that $4,400 in studio revenue had not yet been billed or recorded as of
December 31.
2. Studio supplies on hand at December 31 amount to $6,900.
3. On August 1, 2011, the studio purchased a six-month insurance policy for $1,500. The entire
premium was initially debited to Unexpired Insurance.
4. The studio is located in a rented building. On November 1, 2011, the studio paid $6,000 rent
in advance for November, December, and January. The entire amount was debited to Prepaid
Studio Rent.
5. The useful life of the studio’s recording equipment is estimated to be five years (or 60 months).
The straight-line method of depreciation is used.
6. On May 1, 2011, the studio borrowed $16,000 by signing a 12-month, 9 percent note payable
to First Federal Bank of St. Louis. The entire $16,000 plus 12 months’ interest is due in full
on April 30, 2012.
7. Records show that $3,600 of cash receipts originally recorded as Unearned Studio Revenue
had been earned as of December 31.
8. Salaries earned by recording technicians that remain unpaid at December 31 amount to $540.
9. The studio’s accountant estimates that income taxes expense for the entire year ended December
31, 2011, is $19,600. (Note that $17,900 of this amount has already been recorded.)

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 Confirming Pages

Problem Set A 179

Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation).
b. Using figures from the company’s unadjusted trial balance in conjunction with the adjusting
entries made in part a, compute net income for the year ended December 31, 2011.
c. Was the studio’s monthly rent for the last 2 months of 2011 more or less than during the first
10 months of the year? Explain your answer.
d. Was the studio’s monthly insurance expense for the last five months of 2011 more or less than
the average monthly expense for the first seven months of the year? Explain your answer.
e. If the studio purchased all of its equipment when it first began operations, for how many
months has it been in business? Explain your answer.
f. Indicate the effect of each adjusting entry prepared in part a on the major elements of the com-
pany’s income statement and balance sheet. Organize your answer in tabular form using the
column headings shown. Use the symbols I for increase, D for decrease, and NE for no effect.
The answer for the adjusting entry number 1 is provided as an example.

Income Statement Balance Sheet

Adjusting Net Owners’
Entry Revenue ⫺ Expenses ⫽ Income Assets ⫽ Liabilities ⫹ Equity
1 I NE I I NE I

LO1 PROBLEM 4.8A

P Coyne Corporation recently hired Elaine Herrold as its new bookkeeper. Herrold was not very
U
Understanding the experienced and made seven recording errors during the last accounting period. The nature of each
through
Effects of Various
E error is described in the following table.
LO7 Errors
E
Instructions
Indicate the effect of the following errors on each of the financial statement elements described in
LO9 the column headings in the table. Use the following symbols: O ⫽ overstated, U ⫽ understated,
and NE ⫽ no effect.

Total Total Net Total Total Owners’

Error Revenue Expenses Income Assets Liabilities Equity
a. Recorded a dividend as an expense
reported in the income statement.

b. Recorded the payment of an account

payable as a debit to accounts payable
and a credit to an expense account.
c. Failed to record depreciation expense.

d. Recorded the sale of capital stock as

a debit to cash and a credit to retained
earnings.
e. Recorded the receipt of a customer
deposit as a debit to cash and a credit
to fees earned.
f. Failed to record expired portion of
an insurance policy.

g. Failed to record accrued interest

earned on an outstanding note
receivable.

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180 Chapter 4 The Accounting Cycle: Accruals and Deferrals

Problem Set B accounting

LO1 PROBLEM 4.1B

P The Georgia Gun Club adjusts its accounts monthly and closes its accounts annually. Club mem-
P
Preparing Adjusting bers pay their annual dues in advance by January 4. The entire amount is initially credited to
through Unearned Membership Dues. At the end of each month, an appropriate portion of this amount
Entries
E
is credited to Membership Dues Earned. Guests of the club normally pay their fees before being
LO7
allowed to use the facilities. The amounts collected are credited to Guest Fee Revenue at the time
of receipt. Certain guests, however, are billed at the end of the month. The following information
is available as a source for preparing adjusting entries at December 31:
1. Salaries earned by the club’s employees that have not yet been recorded or paid amount to $13,600.
2. The Georgia State Police used the club’s facilities for target practice on December 30 of the
current year. At December 31, the $3,200 owed by the state police for guest fees had not yet
been recorded or billed.
3. Membership dues earned in December, for collections received at the beginning of the year,
amount to $140,000.
4. Depreciation of the furniture and fixtures in the clubhouse is based on an estimated life of eight
years. These items had originally been purchased for $120,000. The straight-line method is used.
(Note: The clubhouse building was constructed in 1956 and is fully depreciated.)
5. A 12-month bank loan in the amount of $60,000 had been obtained by the club on October 4.
Interest is computed at an annual rate of 8 percent. The entire $60,000, plus all of the interest
accrued over the 12-month life of the loan, is due in full on September 30 of the upcoming
year. The necessary adjusting entry was made on November 30 to record the first two months
of accrued interest expense. However, no adjustment has been made to record interest expense
accrued in December.
6. A one-year property insurance policy had been purchased on April 30. The entire premium of
$10,800 was initially recorded as Unexpired Insurance.
7. In December, the club entered into an agreement to host the annual tournament of the Georgia
Junior Rifle Association. The club expects to generate guest fees of $7,200 from this event.
8. Unrecorded Income Taxes Expense accrued in December amounts to $12,600. This amount
will not be paid until January 22.

Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation). If no adjusting entry is required, explain why.
b. Four types of adjusting entries are described at the beginning of the chapter. Using these
descriptions, identify the type of each adjusting entry prepared in part a above.
c. Although the clubhouse building is fully depreciated, it is in excellent physical condition.
Explain how this can be.

LO1 PROBLEM 4.2B

P Big Oaks, a large campground in Vermont, adjusts its accounts monthly and closes its accounts
P
Preparing and annually on December 31. Most guests of the campground pay at the time they check out, and the
through
Analyzing the Effects
A amounts collected are credited to Camper Revenue. The following information is available as a
LO6 of Adjusting Entries
o source for preparing the adjusting entries at December 31:
1. Big Oaks invests some of its excess cash in certificates of deposit (CDs) with its local bank.
Accrued interest revenue on its CDs at December 31 is $425. None of the interest has yet been
LO9 received. (Debit Interest Receivable.)
2. An eight-month bank loan in the amount of $12,000 had been obtained on October 1. Interest
is to be computed at an annual rate of 8 percent and is payable when the loan becomes due.
3. Depreciation on buildings owned by the campground is based on a 20-year life. The original
cost of the buildings was $720,000. The Accumulated Depreciation: Buildings account has a
credit balance of $160,000 at December 31, prior to the adjusting entry process. The straight-
line method of depreciation is used.
4. Management signed an agreement to let Girl Scouts from Easton, Connecticut, use the camp-
ground in June of next year. The agreement specifies that the Girl Scouts will pay a daily rate
of $15 per campsite, with a clause providing a minimum total charge of $1,200.
5. Salaries earned by campground employees that have not yet been paid amount to $1,515.

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Problem Set B 181

6. As of December 31, Big Oaks has earned $2,700 of revenue from current campers who will
not be billed until they check out. (Debit Camper Revenue Receivable.)
7. Several lakefront campsites are currently being leased on a long-term basis by a group of
senior citizens. Five months’ rent of $7,500 was collected in advance and credited to Unearned
Camper Revenue on November 1 of the current year.
8. A bus to carry campers to and from town and the airport had been rented the first week of
December at a daily rate of $45. At December 31, no rental payment has been made, although
the campground has had use of the bus for 18 days.
9. Unrecorded Income Taxes Expense accrued in December amounts to $6,600. This amount
will not be paid until January 15.

Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation). If no adjusting entry is required, explain why.
b. Four types of adjusting entries are described at the beginning of the chapter. Using these
descriptions, identify the type of each adjusting entry prepared in part a above.
c. Indicate the effects that each of the adjustments in part a will have on the following six total
amounts in the campground’s financial statements for the month of December. Organize your
answer in tabular form, using the column headings shown below. Use the letters I for increase,
D for decrease, and NE for no effect. Adjusting entry 1 is provided as an example.

Income Statement Balance Sheet

Adjusting Net Owners’
Entry Revenue ⫺ Expenses ⫽ Income Assets ⫽ Liabilities ⫹ Equity
1 I NE I I NE I

d. What is the amount of interest expense recognized for the entire current year on the $12,000
bank loan obtained October 1?
e. Compute the book value of the campground’s buildings to be reported in the current year’s
December 31 balance sheet. (Refer to paragraph 3.)
LO1 PROBLEM
P 4.3B River Rat, Inc., operates a ferry that takes travelers across the Wild River. The company adjusts its
Analysis
A of Adjusted accounts at the end of each month. Selected account balances appearing in the April 30 adjusted
through
Data
D trial balance are as follows:
LO7
Debit Credit
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000
LO9
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400
Ferry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000
Accumulated depreciation: ferry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Unearned passenger revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,040

Other Data
1. The ferry is being depreciated over an eight-year estimated useful life.
2. The unearned passenger revenue represents tickets good for future rides sold to a resort hotel
for $2 per ticket on April 1. During April, 160 of the tickets were used.
3. Five months’ rent had been prepaid on April 1.
4. The unexpired insurance is a 12-month fire insurance policy purchased on March 1.

Instructions
a. Determine the following:
1. The age of the ferry in months.
2. How many $2 tickets for future rides were sold to the resort hotel on April 1.
3. The monthly rent expense.
4. The original cost of the 12-month fire insurance policy.
b. Prepare the adjusting entries that were made on April 30.

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182 Chapter 4 The Accounting Cycle: Accruals and Deferrals

LO1 P
PROBLEM 4.4B The Off-Campus Playhouse adjusts its accounts every month. Below is the company’s unadjusted
P
Preparing Adjusting trial balance dated September 30, 2011. Additional information is provided for use in preparing the
through
E
Entries from a Trial company’s adjusting entries for the month of September. (Bear in mind that adjusting entries have
B
Balance already been made for the first eight months of 2011, but not for September.)
LO7

OFF-CAMPUS PLAYHOUSE
LO9 UNADJUSTED TRIAL BALANCE
SEPTEMBER 30, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,200
Prepaid costume rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Accumulated depreciation: building . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,500
Fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Accumulated depreciation: fixtures and equipment . . . . . . . . . . . . . . . 4,500
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,700
Unearned admissions revenue (nursing homes) . . . . . . . . . . . . . . . . . 1,500
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,700
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,400
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Admissions revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,200
Concessions revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,600
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,400
Costume rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,100
Depreciation expense: building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Depreciation expense: fixtures and equipment . . . . . . . . . . . . . . . . . . 2,400
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,500
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
$370,100 $370,100

Other Data
1. Costume rental expense for the month is $600. However, the costume rental expense for sev-
eral months has been paid in advance.
2. The building is being depreciated over a period of 25 years (300 months).
3. The fixtures and equipment are being depreciated over a period of five years (60 months).
4. On the first of each month, the theater pays the interest which accrued in the prior month on
its note payable. At September 30, accrued interest payable on this note amounts to $1,062.
5. The playhouse allows local nursing homes to bring seniors to the plays on any weekday per-
formance for a fixed price of $500 per month. On August 31, a nursing home made a $1,500
advance payment covering the months of September, October, and November.
6. The theater receives a percentage of the revenue earned by Sweet Corporation, the conces-
sionaire operating the snack bar. For snack bar sales in September, Sweet owes Off-Campus
Playhouse $4,600, payable on October 14. No entry has yet been made to record this revenue.
(Credit Concessions Revenue.)
7. Salaries earned by employees, but not recorded or paid as of September 30, amount to $2,200.
No entry has yet been made to record this liability and expense.
8. Income taxes expense for September is estimated at $3,600. This amount will be paid in the
October 15 installment payment.
9. Utilities expense is recorded as monthly bills are received. No adjusting entries for utilities
expense are made at month-end.

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Problem Set B 183

Instructions
a. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation).
b. Refer to the balances shown in the unadjusted trial balance at September 30. How many
months of expense are included in each of the following balances? (Remember, Off-Campus
Playhouse adjusts its accounts monthly. Thus, the accounts shown were last adjusted on
August 31, 2011.)
1. Utilities expense
2. Depreciation expense
3. Accumulated depreciation: building
c. Assume the playhouse has been operating profitably all year. Although the September 30
trial balance shows substantial income taxes expense, income taxes payable is a much smaller
amount. This relationship is quite normal throughout much of the year. Explain.

LO1 PROBLEM 4.5B

P Marvelous Music provides music lessons to student musicians. Some students pay in advance for
P
Preparing Adjusting lessons; others are billed after lessons have been provided. Advance payments are credited to an
through
Entries and
E account entitled Unearned Lesson Revenue. Adjusting entries are performed on a monthly basis.
LO7 Determining Account
D An unadjusted trial balance dated December 31, 2011, follows. (Bear in mind that adjusting entries
Balances
B have already been made for the first 11 months of 2011, but not for December.)

LO9
MARVELOUS MUSIC
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,800
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100
Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Sheet music supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
Music equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Accumulated depreciation: music equipment . . . . . . . . . . . . . . . . . . . . $ 72,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400
Unearned lesson revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,600
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Lesson revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,375
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500
Sheet music supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Depreciation expense: music equipment . . . . . . . . . . . . . . . . . . . . . . . 33,000
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,500
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,845
$317,000 $317,000

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184 Chapter 4 The Accounting Cycle: Accruals and Deferrals

Other Data
1. Accrued but unrecorded lesson revenue earned as of December 31, 2011, amounts to $3,200.
2. Records show that $800 of cash receipts originally recorded as unearned lesson revenue had
been earned as of December 31.
3. The company purchased a 12-month insurance policy on August 1, 2011, for $4,800.
4. On October 1, 2011, the company paid $9,000 for rent through March 31, 2012.
5. Sheet music supplies on hand at December 31 amount to $200.
6. All music equipment was purchased when the business was first formed. Its estimated life at
that time was five years (or 60 months).
7. On November 1, 2011, the company borrowed $5,000 by signing a three-month, 6 percent
note payable. The entire note, plus three months’ accrued interest, is due on February 1, 2012.
8. Accrued but unrecorded salaries at December 31 amount to $3,500.
9. Estimated income taxes expense for the entire year totals $22,000. Taxes are due in the first
quarter of 2012.

Instructions
a. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation).
b. Determine that amount at which each of the following accounts will be reported in the com-
pany’s 2011 income statement:
1. Lesson Revenue Earned
2. Advertising Expense
3. Insurance Expense
4. Rent Expense
5. Sheet Music Supplies Expense
6. Utilities Expense
7. Depreciation Expense: Music Equipment
8. Interest Expense
9. Salaries Expense
10. Income Taxes Expense
c. The unadjusted trial balance reports dividends of $1,000. As of December 31, 2011, have
these dividends been paid? Explain.

LO1 PROBLEM 4.6B

P Mate Ease is an Internet dating service. All members pay in advance to be listed in the database.
P
Preparing Adjusting Advance payments are credited to an account entitled Unearned Member Dues. Adjusting entries
through
Entries and
E are performed on a monthly basis. An unadjusted trial balance dated December 31, 2011, follows.
LO7 Determining Account
D (Bear in mind that adjusting entries have already been made for the first 11 months of 2011, but
Balances
B not for December.)

LO9

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Problem Set B 185

MATE EASE
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $169,500
Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,800
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,600
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,160
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,000
Accumulated depreciation: computer equipment . . . . . . . . . . . . . . . . . $ 54,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,750
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Unearned member dues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Client fees earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508,450
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,290
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,200
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,300
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,400
Internet connection expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Depreciation expense: computer equipment . . . . . . . . . . . . . . . . . . . . 33,000
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,750
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
$775,000 $775,000

Other Data
1. Records show that $21,000 of cash receipts originally recorded as unearned member dues had
been earned as of December 31, 2011.
2. The company purchased a six-month insurance policy on October 1, 2011, for $19,200.
3. On November 1, 2011, the company paid $21,900 for rent through January 31, 2012.
4. Office supplies on hand at December 31 amount to $440.
5. All computer equipment was purchased when the business first formed. The estimated life of
the equipment at that time was three years (or 36 months).
6. On March 1, 2011, the company borrowed $90,000 by signing a 12-month, 10 percent note
payable. The entire note, plus 12 months’ accrued interest, is due on March 1, 2012.
7. Accrued but unrecorded salaries at December 31 amount to $10,500.
8. Estimated income taxes expense for the entire year totals $16,000. Taxes are due in the first
quarter of 2012.

Instructions
a. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an
explanation).
b. Determine that amount at which each of the following accounts will be reported in the com-
pany’s balance sheet dated December 31, 2011:
1. Cash 7. Accounts Payable
2. Unexpired Insurance 8. Notes Payable
3. Prepaid Rent 9. Salaries Payable
4. Office Supplies 10. Interest Payable
5. Computer Equipment 11. Income Taxes Payable
6. Accumulated Depreciation: Computer Equipment 12. Unearned Member Dues
c. Why doesn’t the company immediately record advance payments from customers as revenue?

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186 Chapter 4 The Accounting Cycle: Accruals and Deferrals

LO1 PROBLEM 4.7B

P Clint Stillmore operates a private investigating agency called Stillmore Investigations. Some cli-
P
Preparing Adjusting ents pay in advance for services; others are billed after services have been performed. Advance
through
Entries from a Trial
E payments are credited to an account entitled Unearned Retainer Fees. Adjusting entries are per-
Balance
B formed on a monthly basis. An unadjusted trial balance dated December 31, 2011, follows. (Bear
LO7
in mind that adjusting entries have already been made for the first 11 months of 2011, but not for
December.)
LO9
Other Data
1. Accrued but unrecorded client fees earned at December 31 amount to $1,500.
2. Records show that $2,500 of cash receipts originally recorded as Unearned Retainer Fees had
been earned as of December 31.
3. Office supplies on hand at December 31 amount to $110.
4. The company purchased all of its office equipment when it first began business. At that time,
the equipment’s estimated useful life was six years (or 72 months).
5. On October 1, 2011, the company renewed its rental agreement paying $1,800 cash for six
months’ rent in advance.
6. On March 1 of the current year, the company paid $1,080 cash to renew its 12-month insur-
ance policy.
7. Accrued but unrecorded salaries at December 31 amount to $1,900.
8. On June 1, 2011, the company borrowed money from the bank by signing a $9,000, 8 percent,
12-month note payable. The entire note, plus 12 months’ accrued interest, is due on May 31,
2012.
9. The company’s CPA estimates that income taxes expense for the entire year is $7,500.

STILLMORE INVESTIGATIONS
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,585
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
Office equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Accumulated depreciation: office equipment . . . . . . . . . . . . . . . . . . . $ 35,250
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750
Note payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Unearned retainer fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Client fees earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605
Depreciation expense: office equipment. . . . . . . . . . . . . . . . . . . . . . . 8,250
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,775
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,100
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,900
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,260 $149,260

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 Confirming Pages

Problem Set B 187

Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation).
b. Prepare the company’s adjusted trial balance dated December 31, 2011.
c. Using figures from the adjusted trial balance prepared in b, compute net income for the year
ended December 31, 2011.
d. How much was the company’s average monthly rent expense in January through September of
2011? Explain your answer.
e. How much was the company’s average monthly insurance expense in January and February of
2011? Explain your answer.
f. If the company purchased all of its office equipment when it first began operations, for how
many months has it been in business? Explain your answer.
g. Indicate the effect of each adjusting entry prepared in part a on the major elements of the com-
pany’s income statement and balance sheet. Organize your answer in tabular form using the
column headings shown. Use the symbols I for increase, D for decrease, and NE for no effect.
The answer for adjusting entry number 1 is provided as an example.

Income Statement Balance Sheet

Adjusting Net Owners’
Entry Revenue ⫺ Expenses ⫽ Income Assets ⫽ Liabilities ⫹ Equity
1 I NE I I NE I

LO1 PROBLEM
P 4.8B Stephen Corporation recently hired Tom Waters as its new bookkeeper. Waters is very inexperi-
Understanding
U the enced and has made seven recording errors during the last accounting period. The nature of each
through
Effects
E of Various error is described in the following table.
LO7 Errors
E
Instructions
Indicate the effect of the following errors on each of the financial statement elements described in
LO9 the column headings in the table. Use the following symbols: O ⫽ overstated, U ⫽ understated,
and NE ⫽ no effect

Total Total Net Total Total Owners’

Error Revenue Expenses Income Assets Liabilities Equity
a. Recorded a declared but unpaid
dividend by debiting dividends and
crediting cash.
b. Recorded a receipt of an account
receivable as a debit to cash and a credit
to fees earned.
c. Recorded depreciation expense twice.

d. Recorded the sale of capital stock as

a debit to cash and a credit to revenue.

e. Purchased equipment and debited

supplies expense and credited cash.

f. Failed to record expired portion of

prepaid advertising.

g. Failed to record accrued and unpaid

interest expense.

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 Confirming Pages

188 Chapter 4 The Accounting Cycle: Accruals and Deferrals

Critical Thinking Cases

LO1 CASE 4.1
C Property Management Professionals provides building management services to owners of office
S
Should This Be buildings and shopping centers. The company closes its accounts at the end of the calendar year.
through
Adjusted?
A The manner in which the company has recorded several transactions occurring during 2011 is
LO7 described as follows:
a. On September 1, received advance payment from a shopping center for property manage-
ment services to be performed over the three-month period beginning September 1. The entire
amount received was credited directly to a revenue account.
b. On December 1, received advance payment from the same customer described in part a for
services to be rendered over the three-month period beginning December 1. This time, the
entire amount received was credited to an unearned revenue account.
c. Rendered management services for many customers in December. Normal procedure is to
record revenue on the date the customer is billed, which is early in the month after the services
have been rendered.
d. On December 15, made full payment for a one-year insurance policy that goes into effect on
January 2, 2012. The cost of the policy was debited to Unexpired Insurance.
e. Numerous purchases of equipment were debited to asset accounts, rather than to expense
accounts.
f. Payroll expense is recorded when employees are paid. Payday for the last two weeks of
December falls on January 2, 2012.

Instructions
For each item above, explain whether an adjusting entry is needed at December 31, 2011, and
state the reasons for your answer. If you recommend an adjusting entry, explain the effects this
entry would have on assets, liabilities, owners’ equity, revenue, and expenses in the 2011 financial
statements.

LO8 CASE 4.2

C The concept of materiality is one of the most basic principles underlying financial accounting.
T
The Concept a. Answer the following questions:
off Materiality
1. Why is the materiality of a transaction or an event a matter of professional judgment?
2. What criteria should accountants consider in determining whether a transaction or an
event is material?
3. Does the concept of materiality mean that financial statements are not precise, down to
the last dollar? Does this concept make financial statements less useful to most users?
b. Avis Rent-a-Car purchases a large number of cars each year for its rental fleet. The cost of
any individual automobile is immaterial to Avis, which is a very large corporation. Would it
be acceptable for Avis to charge the purchase of automobiles for its rental fleet directly to
expense, rather than to an asset account? Explain.

LO3 CASE 4.3

C Slippery Slope, Inc., is a downhill ski area in northern New England. In an attempt to attract more
Hold the Expenses!
H ski enthusiasts, Slippery Slope’s management recently engaged in an aggressive preseason adver-
tising campaign in which it spent $9,000 to distribute brochures, $17,000 to air broadcast media
LO7 spots, and $14,000 to run magazine and newspaper ads.
Slippery Slope is now planning to borrow money from a local bank to expand its snowmaking
capabilities next season. In preparing financial statements to be used by the bank, Slippery Slope’s
LO8
management capitalized the entire $40,000 of advertising expenditures as Prepaid Advertising in
the current year’s balance sheet. It decided to defer converting this asset to advertising expense for
three years, arguing that it will take a least that long to realize the full benefit of its promotional
efforts. Management also contends that it does not matter how the $40,000 advertising expenditure
is reported, because the amount is immaterial.

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Critical Thinking Cases 189

Instructions
a. Does management’s decision to defer converting this $40,000 prepayment to advertising
expense comply with generally accepted accounting principles? Defend your answer.
b. Could management’s decision to defer reporting this expenditure as an expense for three years
have any ethical implications? Explain.

LO1 IN
INTERNET Visit Hershey’s home page at:
CASE 4.4
C
through
Identifying Accounts
Id
www.hersheys.com
LO6 Requiring Adjusting
R From Hershey’s home page, access its most recent annual report (see the “Investor Relations”
Entries
E link). Examine the company’s balance sheet and identify the accounts most likely to have been
involved in the end-of-year adjusting entry process.
Internet sites are time and date sensitive. It is the purpose of these exercises to have you explore
the Internet. You may need to use the Yahoo! search engine www.yahoo.com (or another favorite
search engine) to find a company’s current Web address.

Answers to Self-Test Questions

1. c 2. d, $11,670 ($27,900 ⫺ $17,340 ⫺ $2,700 ⫺ $1,440 ⫹ $3,300 ⫹ $1,950)
3. d 4. b, c 5. b, c, d

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