EXERCISES

Explain the time period assumption.

(LO 1)

E3-1 Chloe Davis has prepared the following list of statements about the time period assumption.

Adjusting entries would not be necessary if a company's life were not divided into artificial time periods.

The IRS requires companies to file annual tax returns.

Accountants divide the economic life of a business into artificial time periods, but each transaction affects only one of these periods.

Accounting time periods are generally a month, a quarter, or a year.

A time period lasting one year is called an interim period.

All fiscal years are calendar years, but not all calendar years are fiscal years.

Instructions

Identify each statement as true or false. If false, indicate how to correct the statement.

Distinguish between cash and accrual basis of accounting.

(LO 1)

E3-2 On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially.

Instructions Image Missing

(a) What is the difference between accrual-basis accounting and cash-basis accounting?

(b) Why would politicians prefer the cash basis over the accrual basis?

(c) Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting.

Compute cash and accrual accounting income.

(LO 1)

E3-3 Carillo Industries collected $108,000 from customers in 2017. Of the amount collected, $25,000 was for services performed in 2016. In addition, Carillo performed services worth $36,000 in 2017, which will not be collected until 2018.

Carillo Industries also paid $72,000 for expenses in 2017. Of the amount paid, $30,000 was for expenses incurred on account in 2016. In addition, Carillo incurred $42,000 of expenses in 2017, which will not be paid until 2018.

Instructions

(a) Compute 2017 cash-basis net income.

(b) Compute 2017 accrual-basis net income.

Identify the type of adjusting entry needed.

(LO 1, 2, 3)

E3-4 Hong Corporation encounters the following situations:

Hong collects $1,300 from a customer in 2017 for services to be performed in 2018.

Hong incurs utility expense which is not yet paid in cash or recorded.

Hong's employees worked 3 days in 2017 but will not be paid until 2018.

Hong performs services for customers but has not yet received cash or recorded the transaction.

Hong paid $2,400 rent on December 1 for the 4 months starting December 1.

Hong received cash for future services and recorded a liability until the service was performed.

Hong performed consulting services for a client in December 2017. On December 31, it had not billed the client for services provided of $1,200.

Hong paid cash for an expense and recorded an asset until the item was used up.

Hong purchased $900 of supplies in 2017; at year-end, $400 of supplies remain unused.

Hong purchased equipment on January 1, 2017; the equipment will be used for 5 years.

Hong borrowed $10,000 on October 1, 2017, signing an 8% one-year note payable.

Instructions

Identify what type of adjusting entry (prepaid expense, unearned revenue, accrued expense, or accrued revenue) is needed in each situation at December 31, 2017.

Prepare adjusting entries from selected data.

(LO 2, 3)

E3-5 Devin Wolf Company has the following balances in selected accounts on December 31, 2017.

Accounts Receivable $ 0

Accumulated DepreciationEquipment 0

Equipment 7,000

Interest Payable 0

Notes Payable 10,000

Prepaid Insurance 2,100

Salaries and Wages Payable 0

Supplies 2,450

Unearned Service Revenue 30,000

All the accounts have normal balances. The information below has been gathered at December 31, 2017.

Devin Wolf Company borrowed $10,000 by signing a 9%, one-year note on September 1, 2017.

A count of supplies on December 31, 2017, indicates that supplies of $900 are on hand.

Depreciation on the equipment for 2017 is $1,000.

Devin Wolf Company paid $2,100 for 12 months of insurance coverage on June 1, 2017.

On December 1, 2017, Devin Wolf collected $32,000 for consulting services to be performed from December 1, 2017, through March 31, 2018.

Devin Wolf performed consulting services for a client in December 2017. The client will be billed $4,200.

Devin Wolf Company pays its employees total salaries of $9,000 every Monday for the preceding 5-day week (Monday through Friday). On Monday, December 29, employees were paid for the week ending December 26. All employees worked the last 3 days of 2017.

Instructions

Prepare adjusting entries for the seven items described above.

Identify types of adjustments and account relationships.

(LO 2, 3, 4)