ACC 225 CheckPoint Adjustments and Accrual and Cash Basis Accounting

ACC 225 CheckPoint Adjustments and Accrual and Cash Basis Accounting QS 3-1 Identifying accounting adjustments Classify the following adjusting entries as involving prepaid expenses (PE), unearned revenues (UR), accrued expenses (AE), or accrued revenues (AR). a. To record revenue earned that was previously received as cash in advance. ), unearned revenues (UR) b. To record annual depreciation expense. accrued expenses (AE) c. To record wages expense incurred but not yet paid (nor recorded). Accrued expenses (AE) d. To record revenue earned but not yet billed (nor recorded). Accrued revenues (AR) e. To record expiration of prepaid insurance. Prepaid expenses (PE), insurance paid in advance QS3-9 In its first year of operations, Harden Co. earned $39,000 in revenues and received $33,000 cash from these customers. The company incurred expenses of $22,500 but had not paid $2,250 of them at year-end. Harden also prepaid $3,750 cash for expenses that would be incurred the next year. Calculate the first year's net income under both the cash basis and the accrual basis of accounting. Solutions QS3-1 a. b. c. d. e.

UR PE AE AR PE

Unearned revenue Prepaid expenses (Depreciation) Accrued expenses Accrued revenue Prepaid expenses

QS3-9 Cash Accounting: Revenues (cash receipts).......................................... $33,000 Expenses (cash payments: $22,500 - $2,250 + $3,750) 24,000 Net income ............................................................... $ 9,000 Accrual Accounting: Revenues (earned) ................................................... $39,000 Expenses (incurred) ................................................. 22,500 Net income................................................................ $16,500

Exercise 3-1 In the blank space beside each adjusting entry, enter the letter of the explanation A through F that most closely describes the entry: A. To record this period’s depreciation expense. B. To record accrued salaries expense. C. To record this period’s use of a prepaid expense. D. To record accrued interest revenue. E. To record accrued interest expense. F. To record the earning of previously unearned income.

Exercise 3-1 Solution 1. 2. 3.

B. E. C.

4. 5. 6.

F D A.

Exercise 3-7 Balance Sheet Insurance Asset using Accrual Cash * Basis Basis Dec. 31, 2003 $11,700 $0

Insurance Expense using Accrual Cash ** Basis Basis 2003......... $ 4,500 $16,200

Dec. 31, 2004

6,300

0

2004.........

5,400

0

Dec. 31, 2005

900

0

2005.........

5,400

0

Dec. 31, 2006

0

0

2006.........

900

0

Total........

$16,200

$16,200

EXPLANATIONS: *

Accrual asset balance equals months left in the policy x $450 per month (monthly cost is computed as $450, from $16,200 divided by 36 months). Months Left Balance 12/31/2003... 26 $11,700 12/31/2004... 14 6,300 12/31/2005... 2 900 12/31/2006... 0 0 **

Accrual insurance expense equals months covered in the year x $450 per month. Months Covered Expense 2003...... 10 $ 4,500 2004...... 12 5,400 2005...... 12 5,400 2006...... 2 900 $16,200