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 Wages expense Net income Cash Accounts receivable Supplies Prepaid insurance Office equipment Total assets Unearned fees $69,400 (44,150) $25,250 Cole Designs Inc. Balance Sheet December 31, 20Y3 Assets Liabilities Stockholders' Equity Common stock Retained earnings Total liabilities and stockholders' equity $5,250 31,200 3,500 3,600 11,000 $54,550 $8,900 $12,000 33,650 45,650 $54,550 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 $75,250 Expenses: Wages expense $46,450 Supplies expense 3,430 Insurance expense 1,800 Depreciation expense 1,400 Total expenses (53,080) Net income $22,170 Cash Accounts receivable Supplies Prepaid insurance Office equipment Cole Designs Inc. Balance Sheet December 31, 20Y3 Assets Accumulated depreciation-office equipment Total assets $5,250 31,650 70 1,800 $11,000 (1,400) 9,600 $48,370 Liabilities Wages payable Unearned fees Total liabilities $2,300 3,500 $5,800 Stockholders' Equity Common stock $12,000 Retained earnings 30,570 42,570 Total liabilities and stockholders' equity $48,370 Accounting Bases Under which basis of accounting would adjusting entries never be recorded? Which accounts would most likely not be used under the cash basis of accounting? a. Supplies Expense b. Unearned Fees c. Accounts Payable d. Revenue e. Accounts Receivable f. Cash Matching Principle/Revenue Recognition Under the accrual basis of accounting, many 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 Under the accrual basis of accounting, the revenue recognition principle states that Review the following selected transaction data 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 May. b. 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. 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. Net income Stockholders' equity Revenues Total assets Total expenses Overstated Understated Neither Total liabilities 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 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31