ACCT 3351-Homework 3

Due: 11 PM September 13th

Please read carefully.

(1) Place your answers in the space provided on the Answers Sheet on Excel file provided,
(2) Save the file on your laptop using the following name: YourLastName-FirstName-ACCT3351HW3
(3) Login D2L and submit your file containing your answers through Dropbox by clicking the link for
Homework 3. You may find the following instructions useful:
How do I submit to a Dropbox? How do I confirm that the submission was made?
To submit to a Dropbox:
1. Go to the course in which you would like to submit to the Dropbox.
2. Select Dropbox.
3. Select the folder you would like to submit to.
4. Click Add a File > browse: choose the file that you want to submit.
5. Select Done.
6. The first screen will reappear, select Submit.
How to confirm that a submission was made:
1. Repeat Steps 1-3 above.
If you see that 1 submission has been made, and you can select the submission and see the file,
then the file has been submitted successfully. Also, after successful submission, you will be
receiving an email confirmation in D2L. Please keep this email as proof of submission until after
the semester is over and final grades are posted.
Part I. Short Essay please provide a short answer but right to the point to each question in the space
provided on the answers sheet
1. Give an example of a transaction that results in:
(a) A decrease in an asset and a decrease in a liability.
(b) A decrease in one asset and an increase in another asset.
(c) A decrease in one liability and an increase in another liability.
2. Andrea Pafko, a fellow student, contends that the double-entry system means that each transaction must be
recorded twice. Is Andrea correct? Explain.
3. What are principal purposes of preparing trial balance? Is it necessary that a trial balance be taken periodically?
4. What are reversing entries, and why are they used?
5. The revenue recognition principle states that companies should recognize revenue (a) when it is earned, and (b)
when it is realized or realizable. Revenues are earned when company has accomplished what it must do to be
entitled to the revenues. Revenues are realized when company exchanges goods and services for cash or claims to
cash (receivables). Revenues are realizable when assets received in exchange for services provided are readily
convertible to known amounts of cash or claims to cash. Assume the company that you work for, has provided
services to KPL Company. In exchange, KPL Company has given 1000 shares of common stock of KPL to your
company. How would recod the revenue for your company?
6. How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and
measures should be considered in assessing the materiality of a misstatement in the presentation of a financial
statement?

7. A worksheet is a permanent accounting record, and its use is required in the accounting cycle. Do you agree?
Explain.
8. What differences are there between the trial balance before closing and the trial balance after closing with respect
to the following accounts?
(a) Accounts Payable.
(b) Expense accounts.
(c) Revenue accounts.
(d) Retained Earnings account.
(e) Cash.
Part II. Multiple Choice Questions Select the best answer for each item
9. Factors that shape an accounting information system include the
a. nature of the business.
b. size of the firm.
c. volume of data to be handled.
d. All of these answer choices are correct.
10.

The process of transferring figures from the book of original entry to the ledger accounts is called
a. adjusting.
b. balancing.
c. ledgering.
d. posting.

11.

Debit always means

a. the right side of an account.
b. an increase.
c. a decrease.
d. None of these answer choices are correct.

12.

An accounting record into which the essential facts and figures in connection with all transactions are first
recorded is called the
a. ledger.
b. account.
c. trial balance.
d. None of these answer choices are correct.

13.

A trial balance
a. proves that debits and credits are equal in the ledger.
b. supplies a listing of open accounts and their balances that are used in preparing financial statements.
c. is normally prepared three times in the accounting cycle.
d. All of these answer choices are correct.

14.

Which of the following is a real (permanent) account?

a. Goodwill
b. Service Revenue
c. Accounts Receivable
d. Both Goodwill and Accounts Receivable

15.

Which of the following is a nominal (temporary) account?

a. Unearned Service Revenue
b. Salaries and Wages Expense
c. Inventory
d. Retained Earnings

16.

Nominal accounts are also called

a. temporary accounts.
b. permanent accounts.
c. real accounts.
d. None of these answer choices are correct.

17.

The double-entry accounting system means

a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry, then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. None of these answer choices are correct.

18.

When a corporation pays a note payable and interest,

a. the account notes payable will be increased.
b. the account interest expense will be decreased.
c. they will debit notes payable and interest expense.
d. they will debit cash.

19.

An optional step in the accounting cycle is the preparation of

a. adjusting entries.
b. closing entries.
c. a statement of cash flows.
d. a post-closing trial balance.

20.

Which of the following criteria must be met before an event or item should be recorded for accounting
purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event or item is an element.
d. All of these must be met.

21.

Which of the following is a recordable event or item?

a. Changes in managerial policy
c. Changes in personnel

b. The value of human resources

d. None of these answer choices are correct.

22.

Which of the following is not an internal event?

a. Depreciation
b. Using raw materials in the production process
c. Dividend declaration and subsequent payment
d. All of these are internal transactions.

23.

External events do not include

a. interaction between an entity and its environment.
b. a change in the price of a good or service that an entity buys or sells.
c. improvement in technology by a competitor.
d. using buildings and machinery in operations.

24.

A trial balance may prove that debits and credits are equal, but
a. an amount could be entered in the wrong account.
b. a transaction could have been entered twice.
c. a transaction could have been omitted.
d. All of these answer choices are correct.

25.

A general journal
a. chronologically lists transactions and other events, expressed in terms of debits and credits.
b. contains one record for each of the asset, liability, stockholders equity, revenue, and expense accounts.
c. lists all the increases and decreases in each account in one place.
d. contains only adjusting entries.

26.

The failure to properly record an adjusting entry to accrue an expense will result in an
a. understatement of expenses and an understatement of liabilities.
b. understatement of expenses and an overstatement of liabilities.
c. understatement of expenses and an overstatement of assets.
d. overstatement of expenses and an understatement of assets.

27.

Which of the following properly describes a deferral?

a. Cash is received after revenue is recognized.
b. Cash is received before revenue is recognized.
c. Cash is paid after expense is incurred.
d. Cash is paid in the same time period that an expense is incurre

28.

The failure to properly record an adjusting entry to accrue a revenue item will result in an
a. understatement of revenues and an understatement of liabilities.
b. overstatement of revenues and an overstatement of liabilities.
c. overstatement of revenues and an overstatement of assets.
d. understatement of revenues and an understatement of assets.

29.

The omission of the adjusting entry to record depreciation expense will result in an
a. overstatement of assets and an overstatement of owners' equity.
b. understatement of assets and an understatement of owner's equity.
c. overstatement of assets and an overstatement of liabilities.
d. overstatement of liabilities and an understatement of owners' equity.

30.

Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability

31.

On September 1, 2014, Lowe Co. issued a note payable to National Bank in the amount of $900,000, bearing
interest at 9%, and payable in three equal annual principal payments of $300,000. On this date, the bank's
prime rate was 8%. The first payment for interest and principal was made on September 1, 2015. At December
31, 2015, Lowe should record accrued interest payable of
a. $27,000.
b. $24,000.
c. $18,000.
d. $16,000.

32.

Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a oneyear, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenue.
This account had a balance of $3,800,000 at December 31, 2014 before year-end adjustment. Service contract
costs are charged as incurred to the Service Contract Expense account, which had a balance of $900,000 at
December 31, 2014.
Service contracts still outstanding at December 31, 2014 expire as follows:
During 2015
$960,000
During 2016
1,140,000
During 2017
700,000
What amount should be reported as Unearned Service Revenue in Eaton's December 31, 2014 balance sheet?
a. $2,900,000.
b. $2,800,000.
c. $1,900,000.
d. $1,000,000.

33.

In November and December 2014, Lane Co., a newly organized magazine publisher, received $60,000 for
1,000 three-year subscriptions at $20 per year, starting with the January 2015 issue. Lane included the entire
$60,000 in its 2014 income tax return. What amount should Lane report in its 2014 income statement for
subscriptions revenue?
a. $0.
b. $3,333.
c. $20,000.
d. $60,000.

34.

On June 1, 2014, Nott Corp. loaned Horn $800,000 on a 12% note, payable in five annual installments of
$160,000 beginning January 2, 2015. In connection with this loan, Horn was required to deposit $5,000 in a
noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn after all principal
and interest payments have been made. Interest on the note is payable on the first day of each month beginning
July 1, 2014. Horn made timely payments through November 1, 2014. On January 2, 2015, Nott received
payment of the first principal installment plus all interest due. At December 31, 2014, Nott's interest
receivable on the loan to Horn should be
a. $0.
b. $8,000.
c. $16,000.
d. $24,000.

35.

Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next
biweekly period. Colaw accrues salaries expense only at its December 31 year end. Data relating to salaries
earned in December 2014 are as follows:
Last payroll was paid on 12/26/14, for the 2-week period ended 12/26/14.
Overtime pay earned in the 2-week period ended 12/26/14 was $20,000.
Remaining work days in 2014 were December 29, 30, 31, on which days there was no overtime.
The recurring biweekly salaries total $360,000.
Assuming a five-day workweek, Colaw should record a liability at December 31, 2014 for accrued salaries
of
a. $108,000.
b. $128,000.
c. $216,000.
d. $236,000.

36.

Tolan Corp.'s trademark was licensed to Eddy Co. for royalties of 15% of sales of the trademarked items.
Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and
on September 15 for sales in January through June of the same year. Tolan received the following royalties
from Eddy:
March 15
September 15
2013
$5,000
$7,500
2014
6,000
9,500
Eddy estimated that sales of the trademarked items would total $30,000 for July through December 2014. In
Tolan's 2014 income statement for year ended on Dec. 31st, the royalty revenue should be
a. $14,000.
b. $15,500.
c. $20,000.
d. $20,500.

37.

At December 31, 2014, Sues Boutique had 1,000 gift certificates outstanding, which had been sold to
customers during 2014 for $60 each. Sues operates on a gross profit of 60% of its sales. What amount of
revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December 31, 2014?
a. $0.
b. $24,000.
c. $36,000.
d. $60,000.

38.

Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net
increase during the accounting period of the
Accounts Receivable
Accrued Expenses Payable
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes

39.

Gregg Corp. reported revenue of $1,450,000 in its accrual basis income statement for the year ended June
30, 2015. Additional information was as follows:
Accounts receivable June 30, 2014
$400,000
Accounts receivable June 30, 2015
530,000
Uncollectible accounts written off during the fiscal year
15,000
Under the cash basis, Gregg should report revenue of
a. $1,035,000.
b. $1,050,000.
c. $1,305,000.
d. $1,335,000.

40.

Jim Yount, M.D., keeps his accounting records on the cash basis. During 2015, Dr. Yount collected $350,000
from his patients. At December 31, 2014, Dr. Yount had accounts receivable of $40,000. At December 31,
2015, Dr. Yount had accounts receivable of $70,000 and unearned revenue of $10,000. On the accrual basis,
how much was Dr. Yount's patient service revenue for 2015?
a. $310,000.
b. $370,000.
c. $380,000.
d. $390,000.

41.

The following information is available for Ace Company for 2014:

Disbursements for purchases
Increase in trade accounts payable
Decrease in merchandise inventory
Cost of goods sold for 2014 was
a. $1,500,000.
b. $1,420,000.
c. $1,300,000.

$1,360,000
100,000
40,000
d. $1,220,000.

Part III. Journalizing

Regular Transactions:
Listed below are the transactions of Rose, D.D.S., for the month of February.
42 Rose begins practice as a dentist and invests $20,000 cash.
43 Purchases dental equipment on account from Green Jacket Co. for $17,280.
44 Pays rent for office space, $680 for the month.
45 Purchases dental supplies for cash, $942.
46 Receives cash of $1,690 from patients for services performed.
47 Pays miscellaneous office expenses, $430.
48 Bills patients $5,820 for services performed.
49 Pays Green Jacket Co. on account, $3,600.
50 Withdraws $3,000 cash from the business for personal use.
51 Receives $980 from patients on account.
52 Bills patients $2,110 for services performed.
53 Pays the following expenses in cash: Salaries and wages $1,800; miscellaneous office expenses $85.
Prior Period Adjustments:
Provide the necessary journal entries for the following events:
54. In 2014, company determined that it incorrectly overstated its depreciation expense by $10,000 in 2013.
Applicable Income tax rate in 2013 was 30%. Provide the necessary journal entry for correcting the error.
55. In 2014, company determined that it incorrectly understated its depreciation expense by $10,000 in 2013.
Applicable Income tax rate in 2013 was 30%. Provide the necessary journal entry for correcting the error.
56. In 2014, an internal audit discovered that amortization of intangible assets was understated by $35,000 in a prior
period. Applicable Income tax rate in 2013 was 30%. Provide the necessary journal entry for correcting the error.

57. In 2014, it was detected that $9000 payment for purchase of one year insurance policy on November 1st of 2013
all of it was erroneously charged to the expense of 2013. Applicable income tax rate for last year was 30%. Provide
the necessary journal entry that has to be made on March 1, 2014.
58. In 2014, paid $5000 for unrecorded advertising expenses which were incurred in prior year and should have
been charged to expenses of the prior year (applicable income tax rate for prior period was 30%). Provide the
necessary journal entry for correcting the error.
59. In 2014, during an internal audit, it was detected that $8000 services provided to a client on account was double
accounted (double recorded). Applicable income tax rate for prior year was 30%. Provide the necessary journal
entry for correcting the error.
60. During an internal audit, company realized that $10,000 services provided to a client in cash last year was not
recorded and accounted for. Applicable income tax rate for prior year was 30%. Provide an entry to adjust for the
error.
61. In 2014, during an internal audit, company realized that collection of $20000 in advance from customers in 2013
erroneously was recorded as revenues for 2013 when actual services were are supposed to be provided to customers
in 2014. Applicable income tax rate for prior year was 30%. Provide an entry to adjust for the error.
Adjusting Entries:
At year end, the following items have not yet been recorded. Provide the necessary journal entries:
62. Insurance expired during the year, $2,000.
63. Estimated bad debts, 1% of gross sales.
64. Depreciation on equipment, 10% per year on original cost.
65. Interest at 5% is receivable on the note for one full year.
66. Rent paid in advance at December 31, $5,400 (originally charged to expense).
67. Accrued salaries and wages at December 31, $5,800.
Presented below is the trial balance of the Polo, Inc. as of Dec. 31. The books are closed annually on Dec. 31.
Trial Balance
Dec. 31, 2014
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Prepaid Insurance
Land
Buildings
Accumulated DepreciationBuildings
Equipment
Accumulated DepreciationEquipment
Common Stock
Retained Earnings
Dues Revenue
Interest Revenue
Rent Revenue
Utilities Expenses
Salaries and Wages Expense
Maintenance and Repairs Expense

Debit
$15,000
13,000

Credit

$1,100
9,000
350,000
120,000
38,400
150,000
70,000
400,000
82,000
200,000
5,900
17,600
54,000
80,000
24,000
$815,000

$815,000

From the trial balance and the information given below, prepare annual adjusting entries. (Omit explanations.)
68. The buildings have an estimated life of 30 years with no salvage value (straight-line method).
69. The equipment is depreciated at 10% per year.
70. Insurance expired during the year $3,500.
The rent revenue represents the amount received for 11 months for dining facilities. The December rent has not yet been
71.
received.
72. It is estimated that 12% of the accounts receivable will be uncollectible.
73. Salaries and wages earned but not paid by December 31, $3,600.
74. Dues received in advance from members $8,900
Closing Entries:
Presented below is the adjusted trial balance of the Shaw Company as of December 31.
Adjusted Trial Balance
Dec. 31, 2014
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Prepaid Insurance
Land
Buildings
Accumulated DepreciationBuildings
Equipment
Accumulated DepreciationEquipment
Salaries and Wages Payable
Common Stock
Retained Earnings
Dividends
Dues Revenue
Interest Revenue
Rent Revenue
Utilities Expenses
Salaries and Wages Expense
Maintenance and Repairs Expense
Bad Debt Expense
Unearned Dues Revenue
Rent Receivable
Depreciation Expense
Insurance Expense
Totals

Dr.
$15,000
13,000

Cr.

$1,560
5,500
350,000
120,000
42,400
150,000
85,000
3,600
410,000
82,000
10,000
191,100
5,900
19,200
54,000
83,600
24,000
460
8,900
1,600
19,000
3,500
$849,660

$849,660

The books are closed annually on December 31. Provide the necessary journal enties for:
75. Closing revenue accounts
76. Closing expense accounts
77. Closing dividend account

Reversing Entries:

Data for the next 3 questions: Angie Company has borrowed money from bank and pays $1,800 of
interest on 10th of each month to bank. On December 31, as part of adjusting entries, Angie mad an entry
to account for $1,200 of accrued interest expense on a loan. On January 10th of new year, Angie paid the
monthly interest of $1800 to bank.
78. Assume Angie company does not make any reversing entry on Jan. 1st of the new year. Provide the
journal entry that Angie has to make on Jan. 10th in regard to interest payment.
79. Assume Angie company make reversing entries on Jan. 1st each year. Provide the reversing journal
entry that Angie has to make on Jan. 1st in this regard.
80. Assume Angie company has made the necessary reversing entry on Jan. 1st of the new year. Provide
the journal entry that Angie has to make on Jan. 10th in regard to interest payment.
81. As you can see in the below, the trial balance of Shaw Company does not balance.
Trial Balance
31-Jan-15
Debit
Cash
Accounts Receivable
Prepaid Insurance

$
8,000
4,500

Equipment
Accounts Payable
Property Taxes Payable
Owner's Capital
Service Revenue
Salaries and Wages Expense
Advertising Expense
Property Tax Expense

Credit

$
4,800
2,570
700

560
11,200
6,960
4,200
1,100
$20,890

800
$24,500

Your review of the ledger reveals the following.

a) Each account had a normal balance.
b) The debit amounts in Prepaid Insurance, Accounts Payable, and Property Tax Expense were each understated
$100.
c) A transposition error was made in Accounts Receivable and Service Revenue; the correct balances for
Accounts Receivable and Service Revenue are $2,750 and $6,690, respectively.
d) A debit posting to Advertising Expense of $300 was omitted.
e) A $1,500 cash drawing by the owner was debited to Owner's Capital and credited to Cash.
Prepare a correct trial balance. What is the total amount of debits in the corrected trial balance?

82. Royall & Associates maintain their records on the cash basis. You have been engaged to convert its cash basis
income statement to the accrual basis. The cash basis income statement, along with additional information, follows:
Royall & Associates
Income Statement (Cash Basis)
For the Year Ended December 31, 2014
Cash receipts from customers
Cash payments:
Salaries and wages
Income taxes
Insurance
Interest
Net income

$450,000
$170,000
65,000
40,000
25,000
$150,000

300,000

Additional information:

Accounts receivable
Salaries and wages payable
Income taxes payable
Prepaid insurance
Accumulated depreciation
Interest payable
No plant assets were sold during 2014.
How much is the amount of net income under accrual basis accounting?

Balances at 12/31
2014
2013
$50,000
$30,000
10,000
20,000
24,000
19,000
8,000
4,000
95,000
75,000
3,000
9,000