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Revenue Recognition, Cash and Accrual Bases

Annual Adjustments

Assignment: Week 3 Assignment Score: 61.24% Save Exit Submit Assignment for Grading Questions 002_Exercise 4-26 1. Question 4 of 6 Check My Work 2. 3. eBook eBook 4. Revenue Recognition, Cash and Accrual Bases 5. Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 6. 1,000 three-year nonrefundable memberships for $366 each. The club expects to sell 100 additional threeyear memberships for $900 each over each of the next two years. Membership fees are paid when clients sign up. The club's bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3. Required: Hide Convert the income statements for each of the three years to the accrual basis. Indicate a net loss with a minus sign. Hathaway Health Club Income Statements Year 1 Year 2 Year 3 Sales $ $ $ $ $ $ $ $ $ $ $ $ Expenses: Depreciation Salaries and wages Advertising Rent and utilities Total expenses Net income (loss) Check My Work Icon Key 002_Exercise 4-26 Save Exit Submit Assignment for Grading Cengage Learning Cengage Technical Support Question 4 of 6 Assignment: Week 3 Assignment Score: 61.24% Save Exit Submit Assignment for Grading Questions 003_Problem 4-02 (Algorithmic) 1. Question 5 of 6 Check My Work 2. 3. eBook 4. Annual Adjustments 5. Palmer Industries prepares annual financial statements and adjusts its accounts only at the end of the year. 6. The following information is available for the year ended December 31, 2014: Required: 1. For each of the following situations, identify and analyze the adjustment to be recorded on December 31, 2014. Do not round intermediate calculations. If required, round your final answer to the nearest dollar. a. Palmer purchased computer equipment two years ago for $20,450. The equipment has an estimated useful life of five years and an estimated salvage value of $200. Use straight line method of depreciation. Activity Operating Accounts Accumulated Depreciation-Computer Increase, Depreciation Expense Computer Statement(s) Balance Sheet and Income Statement Hide Feedback Correct Check My Work Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) The adjustment to recognize depreciation is conceptually the same as the adjustment for Prepaid Insurance. The asset account is reduced and an expense is recognized. As the insurance expires, the original amount is reduced. With tangible assets, as the cost is allocated over the expected life, the whole of the asset remains intact. Contra-accounts are used to record all of the expense write-offs, depreciation expense, in an account called 'accumulated depreciation' that represents the running total of expense for the asset. Contra-accounts function opposite the associated account. 5) Calculate depreciable cost. Subtract salvage value from asset cost. 6) Divide depreciable cost by useful life for depreciation expense. 7) This is a deferred expense, cash paid before expense is incurred. Unexpired costs are assets. As costs expire, they become expense. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. Balance Sheet Assets Accumulated Depreciation-Computer = L No Entry Hide Feedback Partially Correct b. The Office Supplies account had a balance of $3,910 on January 1, 2014. During 2014, Palmer added $18,640 to the account for purchases of office supplies during the year. A count of the supplies on hand at the end of December 2014 indicates a balance of $1,960. Activity Operating Accounts Office Supplies on Hand Decrease, Supplies Expense Increase Statement(s) Balance Sheet and Income Statement Hide Feedback Correct Check My Work Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Add beginning balance plus purchases less the ending balance for the amount used (expensed). Expenses decrease Stockholders' Equity. Unexpired costs are assets. As costs expire, they become expense How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Assets Office Supplies on Hand = Liabilities No Entry Hide Feedback Partially Correct c. On August 1, 2014, Palmer created a liability account, Customer Deposits, for $19,800. This sum represents an amount that a customer paid in advance and that will be earned evenly by Palmer over a six-month period. Activity Operating Accounts Customer Deposits Decrease, Fees Earned Increase Statement(s) Balance Sheet and Income Statement Hide Feedback Correct Check My Work Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) This is a deferred revenue, cash received before revenue is earned. Cash is received before service to earn the revenue has been performed, creating customer deposits (liability). Liability increased and cash increased. Record revenue as earned. 5) Record revenues earned from August to year-end, five months. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Assets = No Entry Liabilities Retained Earnings Hide Feedback Partially Correct d. Palmer rented some office space on November 1, 2014, at a rate of $1,800 per month. On that date, Palmer recorded Prepaid Rent for three months' rent paid in advance. Activity Operating Accounts Prepaid Rent Decrease, Rent Expense Increase Statement(s) Balance Sheet and Income Statement Hide Feedback Correct Check My Work Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) This is a deferred expense, cash paid before expense is incurred. Unexpired costs are assets. As costs expire, they become expense. Record rent expense for two months. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Assets = Prepaid Rent Liabilities No Entry Hide Feedback Partially Correct e. Palmer took out a 120-day, 9%, $140,000 note on November 1, 2014, with interest and principal to be paid at maturity. Assume a 360-day year. Activity Operating Accounts Interest Payable Increase, Interest Expense Increase Statement(s) Balance Sheet and Income Statement Hide Feedback Correct Check My Work Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) This is an accrued liability, expense incurred before cash is paid. Cash is paid after an expense is actually incurred. Record expense as incurred. 5) Record monthly interest as incurred with interest expense and interest payable. Calculate interest = principle x rate x time (60/360). How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Assets = No Entry Liabilities Interest Payable Hide Feedback Partially Correct f. Palmer operates five days per week with an average daily payroll of $950. Palmer pays its employees every Thursday. December 31, 2014, is a Wednesday. Activity Operating Accounts Wages Payable Increase, Wages Expense Increase Statement(s) Balance Sheet and Income Statement Hide Feedback Correct Check My Work Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) This is an accrued liability, expense incurred before cash is paid. Cash is paid after an expense is actually incurred. Record expense as incurred. 5) Determine daily payroll amount. Record accrual for four days' (Friday, Monday, Tuesday, & Wednesday) wages. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Assets No Entry = Liabilities Wages Payable Hide Feedback Partially Correct 2. Assume that Palmer's accountant forgets to record the adjustments on December 31, 2014. Will net income for the year be understated or overstated? Overstated By what amount? (Ignore the effect of income taxes.) $ Hide Feedback Partially Correct Check My Work Feedback 1. Add all expenses and all revenues. Determine net. 2. Revenues - expenses = net income. The net of not recording revenues and expenses; if negative the results are higher net income, if positive the results are lower net income. Check My Work Icon Key 003_Problem 4-02 (Algorithmic) Save Exit Submit Assignment for Grading Cengage Learning Cengage Technical Support Question 5 of 6 Assignment: Week 3 Assignment Score: 61.24% Save Exit Submit Assignment for Grading Questions 003_Problem 4-08 Algorithmic 1. Question 6 of Check My Work 2. 3. eBook 4. Revenue and Expense Recognition 5. Two years ago, Darlene Darby opened a delivery service. Darby reports the following accounts on her 6. income statement: Sales $71,160 Advertising Expense 3,490 Salaries Expense 36,400 Rent Expense 9,150 These amounts represent two years of revenue and expenses. Darby asks you how she can tell how much of the income is from the first year of business and how much is from the second year. She provides the following additional data: a. Sales in the second year are double those of the first year. b. Advertising expense is for a $490 opening promotion and weekly ads in the newspaper. c. Salaries represent one employee for the first nine months and two employees for the remainder of the time. Each is paid the same salary. No raises have been granted. d. Rent has not changed since the business opened. Required: Hide Prepare income statements for Years 1 and 2. Darby Delivery Service Income Statements Year 1 $ Expenses: Year 2 $ Total expenses $ $ $ $ $ $ Check My Work Icon Key 003_Problem 4-08 Algorithmic Save Exit Submit Assignment for Grading Cengage Learning Cengage Technical Support Question 6 of