Exercise Questions

Question 2.1

On December 15, 2015, a public company received an order from a customer for services to be performed on December 28, 2015. Due to a backlog of orders, the company does not perform the services until January 3, 2016. The customer pays for the services on January 6, 2016. When should revenue be recorded for the company? Why (support your argument with a principle from the textbook)?

Question 2.2

Scranton Motors Ltd company faced the following situations.

The business has an interest expense of $9,000 early in January 2017.

An interest revenue of $2,000 has been earned but not yet received.

When the business collected $12,000 in advance three months ago, the accountant debited Cash and credited Unearned Revenue. The client was paying for two cars, one delivered in December, the other will be delivered in February 2017.

Salary expense is $500 per day Monday through Friday and the business pays employees each Friday. For example, purposes, assume that this year, December 31 falls on a Tuesday.

The unadjusted balance of the Supplies account is $2,100. The total cost of supplies on hand is $800.

Equipment was purchased at the beginning of this year at a cost of $40,000. The equipments useful life is four years. Record the depreciation for this year and then determine the equipments carrying amount.

6. Journalize the adjusting entry needed at year end for each situation. Each scenario should be considered independently.

Question 2.3

7. Prepare the required closing entries for the following selected accounts from the records of ShipIT Transportation Inc. on December 31, 2016.

Cost of services sold	$11,600
Accumulated depreciation	17,800
Selling, general, and administrative expense	6,900
Retained earnings, December 31, 2015	1,900
Service revenue	23,600
Depreciation expense	4,100
Other revenue	600
Income tax expense	400
Dividends	400
Income tax payable	300

8. How much net income did ShipIT Transportation Inc. earn during the year ended December 31, 2016? Prepare a T-account for Retained Earnings to show the December 31, 2016 balance of Retained Earnings.

Question 2.4

Academic Consultants Inc. had the following selected transactions in August 2016:

Month	Day	Transactions
Aug.	1	Prepaid insurance for August through December, $1,000
	4	Purchased software for cash, $800
	5	Performed service and received cash, $900
	8	Paid advertising expense, $300
	11	Performed service on account, $3,000
	19	Purchased computer on account, $1,600
	24	Collected for the August 11 service
	26	Paid account payable from August 19
	29	Paid salary expense, $900
	31	Adjusted for August insurance expense (see Aug 1)
	31	Earned revenue of $800 that was collected in advance in July

9. Show how each transaction would be handled using the cash basis and the accrual basis. Under each column, give the amount of revenue or expense for August. Journal entries are not required. Use the following format for your answer and show your computations.

Academic Consultants Inc.
Amount of Revenue (Expense) for August 2016
Date		Cash Basis		Accrual Basis
Aug	1	Revenue/(Expense)	Amount	Revenue/(Expense)	Amount

10. Compute August income (loss) before tax under each accounting method.

11. Explain which measure of net income or net loss is preferable.