12 CNOW Critical Thinking Problem Mastery Problem: The Adjusting Process. Unadjusted Financial Statements These financial statements were prepared from the unadjusted trial balance. Cole Designs Inc. Income Statement For the Year Ended December 31, 20Y3 Fees earned $67,400 Wages expense 44,900) Net income $22,500 Cole Designs Inc. Balance Sheet December 31, 20Y3 Assets Cash $5,500 Accounts receivable 31,800 Supplies 3,625 Prepaid insurance 3,600 Office equipment 11,000 Total assets $55,525 Liabilities Unearned fees $7,700 Stockholders' Equity Common stock $12,000 Retained earnings 35,825 47,825 Total liabilities and stockholders' equity $55,525 Adjusted Financial Statements These financial statements were prepared from the adjusted trial balance. Cole Designs Inc. Income Statement For the Year Ended December 31, 20Y3 Fees earned $73,300 Expenses Wages expense $46,600 Supplies expense 3,555 Insurance expense 2,400 Depreciation expense 2,100 Total expenses (54,655) Net income $18,645 Cole Designs Inc. Balance Sheet Check My Work Next Assignment Score: 89.83% All work saved. ave and Exit Submit Assignment for GradingDecember 31, 20Y3 Assets Cash $5,500 Accounts receivable 32,60 Supplies 70 Prepaid insurance 1,200 Office equipment $11,000 Accumulated depreciation-office equipment (2,100) 8,900 Total assets $48,270 Liabilities Wages payable $1,70 Unearned fees 2,600 Total liabilities $4,300 Stockholders' Equity Common stock $12,000 Retained earnings 31,970 43,970 Total liabilities and stockholders' equity $48,270 Accounting Bases Under which basis of accounting would adjusting entries never be recorded? Cash basis of accounting Which accounts would most likely not be used under the cash basis of accounting? . Supplies Expense b. Unearned Fees . Accounts Payable 1. Revenue . Accounts Receivable F. Cash b, c and e Feedback Check My Work Keep in mind when revenues and expenses are recognized under the cash basis of accounting. Matching Principle/Revenue Recognition Under the accrual basis of accounting any of the account balances in the ledger at the end of the accounting period are reported on the financial statements without change. Some accounts require updating, though. When preparing financial statements, the economic life of the business is divided into time periods. The matching principle states that The expenses incurred during a period e matched with the revenue that those expenses generated. Under the accrual basis of accounting, the states that Revenues are recognized when services have been performed or products have been delivered to customers. Review the following sel ta of a business for April. Keeping the matching principle in mind, indicate which of the following would be used to compute net income for the month of April. a. Cash paid in April for expenses incurred in Mb. Cash paid in April for expenses incurred in April. c. Cash received in April from customers for services performed in May. d. Expenses incurred in April but not paid until June. e. Services provided to customers on account during April. F. Cash received from cash customers for services performed in April. b, d, e and f Feedback Check My Work Review the definitions of the matching principle and revenue recognition. Pay particular attention to when revenues are earned and their related expenses are incurred. Overstated, Understated Assume that the Cole Designs Inc. financial statements in the Unadjusted Financial Statements panel were prepared from the unadjusted trial balance and the financial statements in the Adjusted Financial Statements panel were prepared from the adjusted trial balance. For the following financial statement items, indicate Yes or No if the item was overstated, understated or neither on the financial statements prepared using the unadjusted trial balance. Overstated Understated Neither Net income Yes V No V No Stockholders' equity Yes No V No Revenues No Yes V No Total assets Yes No No Total expenses No V Yes No Total liabilities Yes No V No Feedback Check My Work Compare the amounts reported for the stated items of the two sets of financial statements. Adjusting Entries Journalize the six December 31 adjusting entries for Cole Designs Inc. that adjusted the accounts to arrive at the financial statements in the Adjusted Financial Statements panel. If an amount box does not require an entry, leave it blank. Dec. 31 Accounts Receivable Fees Earned Dec. 31 Supplies Expense Supplies 10 00 00 00 10 00 00 00 Dec. 31 Insurance Expense Prepaid Insurance Dec. 31 Depreciation Expense Accumulated Depreciation-Office Equipment