Adjustments

CHAPTER 3
Measuring Business Income: The Adjusting Process
LEARNING OBJECTIVES
1. Distinguish accrual-basis accounting from cash-basis

accounting.
2. Apply the revenue and matching principles.
3. Make adjusting entries.
4. Prepare an adjusted trial balance.
5. Prepare the financial statements from the adjusted trial
balance.
A1. Account for a prepaid expense recorded initially as
an expense.
A2. Account for an unearned (deferred) revenue
recorded initially as a revenue.
TRUE/FALSE
1. Accrual-basis accounting results in a more accurate measurement of net income than does
the cash basis.
True L.O. 1 Easy Page: 92
2. Under the accrual-basis of accounting, revenues are recorded when a service is performed.
3. The revenue principle deals with recording expenses incurred to earn revenue in the same
period the revenue is recorded.
False L.O. 2 Moderate Page: 94
4. The matching principle is closely related to the cash basis of accounting.
5. The adjusting entry to record $500 of expired insurance would include a debit to prepaid
insurance.
6. The adjusting entry to record $400 of earned revenue received in advance would include a
debit to a revenue account.
7. Adjusting entries only involve balance sheet accounts.
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False L.O. 3 Easy Page: 97
8. The adjusting entry to record accrued salaries includes a debit to salary expense.
9. Failure to adjust for an accrued expense will understate expenses and overstate net income.
True L.O. 3 Difficult Page: 104
10. Failure to adjust for accrued revenue results in net income being understated and assets
being overstated.
False L.O. 3 Difficult Page: 104
11. The process of allocating the cost of plant assets to expense over their useful lives is called
deferred revenue.
False L.O. 3 Easy Page: 100
12. Every adjusting entry affects an account on the income statement and an account on the
balance sheet.
True L.O. 3 Moderate Page: 97
13. The cost of a plant asset less its accumulated depreciation is referred to as book value.
14. The adjusted trial balance includes all accounts contained in the ledger with updated,
adjusted balances.
15. The financial statements will contain errors if they are prepared before the adjusting entries
are completed.
16. The income statement should be prepared before the balance sheet is prepared.
17. Capital on the adjusted trial balance represents capital at the beginning of the accounting
period.
18. A prepaid expense recorded initially as an expense is adjusted by debiting the asset
account.
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CHAPTER 3
True L.O. A1 Difficult Page: 98
19. When a prepaid expense is recorded initially as an expense, the adjusting entry transfers
the unused portion of the expense to an asset account.
20. Unearned revenue recorded initially as revenue is adjusted by crediting a liability account.
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MULTIPLE CHOICE
21. An accountant records a transaction when cash is paid or received under which basis of
accounting?
a) cash
b) deferred
c) accrual
d) liability
a L.O. 1 Moderate Page: 92
22. The two most widely used bases of accounting are:

a) financial and managerial
b) cash and financial
c) accrual and managerial
d) accrual and cash
d L.O. 1 Easy Page: 92
23. An accountant recognizes the impact of a business expense when it is incurred under which
basis of accounting?
a) financial
b) managerial
c) cash
d) accrual
24. An accountant records revenue when earned under which basis of accounting?
a) accrual
b) tax
c) accrual
d) financial
a L.O. 1 Easy Page: 92
25. Under the cash basis of accounting, the receipt of cash from a customer in advance of
performing the service would be credited to a:
a) revenue account
b) deferred asset account
c) deferred revenue account
d) prepaid asset account
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26. Under the accrual basis of accounting, the receipt of cash from a customer in advance of
performing the service would be credited to a(n):
a) accrued revenue account
b) prepaid asset account
c) deferred revenue account
d) deferred asset account
c L.O. 1 Moderate Page: 104
27. Which of the following circumstances would result in a decrease in income under the
accrual basis but would not result in a decrease in income under the cash basis?:
a) purchase of supplies on account
b) payment of rent in advance
c) expiration of prepaid rent
d) purchase of equipment on account
28. Accrued expenses are expenses that have:

a) been paid but not incurred
b) been paid and incurred
c) not been paid nor incurred
d) not been paid but incurred
d L.O. 2 Difficult Page: 102
29. Accruals involve the recording of an expense or a revenue account:

a) either before or at the same time the cash is paid or received
b) before the cash is paid or received
c) at the same time the cash is paid or received
d) after the cash is paid or received
b L.O. 2 Difficult Page: 97
30. Unearned rent is an example of a(n):

a) accrued revenue
b) deferred revenue
c) accrued expense
d) deferred expense
31. The primary difference between deferred and accrued expenses is that accrued expenses:
a) have been paid but deferred expenses haven't
b) have not been paid but deferred expenses have
c) involve assets instead of liabilities
d) there is no difference between deferred and accrued expenses
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32. Accrued revenue has:
a) not been earned nor received
b) been earned but not received
c) not been earned but has been received
d) been earned and received
33. Adjusting for prepaid insurance is an example of a(n)?

a) accrued expense
b) deferred revenue
c) accrued revenue
d) deferred expense
d L.O. 3 Moderate Page: 98
34. Failure to record the adjusting entry for expired rent:

a) overstates assets and overstates equity
b) understates assets and overstates equity
c) overstates assets and understates equity
d) understates assets and understates equity
a L.O. 3 Difficult Page: 98
35. Failure to record an accrued expense:

a) overstates expenses
b) overstates liabilities
c) understates liabilities
d) overstates assets
c L.O. 3 Difficult Page: 103
36. Failure to record the adjusting entry for annual depreciation:

a) overstates liabilities
b) overstates revenue
c) overstates assets
d) understates assets
37. On September 1, 20X4, Four Brothers Company pays $48,000 cash for six months rent. The
balance in prepaid rent on December 31, 20X4, after adjustment, would be:
a) $6,000
b) $24,000
c) $12,000
d) $16,000
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38. On October 1, 20X4, Five Brothers Company pays $72,000 cash for eight months rent. The
amount of the adjusting entry on December 31, 20X4, would be:
a) $12,000
b) $24,000
c) $27,000
d) $0
39. Clean Hair Salon Company bought $10,000 of equipment at the beginning of 20X4.
Depreciation expense on the 20X4 income statement is $400. What is the balance in
accumulated depreciation on December 31, 20X4?
a) $5,000
b) $0
c) $4,600
d) $400
40. The supplies account shows a beginning balance of $3,000. Assume the supplies account
shows a debit for $5,500 representing supplies purchased during the period and the
supplies inventory at year-end is $1,700. The adjusting entry involves a:
a) debit to supplies expense for $6,800
b) debit to supplies for $6,800
c) debit to supplies expense for $1,700
d) debit to supplies for $1,700
41. A business pays weekly salaries on Friday of $25,000 for a five-day week ending on Friday.
Assuming the fiscal period ends on a Thursday, the adjusting entry for accrued salaries
would involve a:
a) debit to salary payable for $5,000
b) debit to salary expense for $20,000
c) credit to salary payable for $5,000
d) credit to salary expense for $25,000
42. Essex Company records $8,000 of service revenue received in advance and $4,500 of
accrued service revenue. Unearned revenue has a year-end balance of $4,900. The effect
of these entries on total service revenue for the year is an increase of:
a) $9,400
b) $12,900
c) $7,600
d) $4,900
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43. Perfect Carpet Cleaners recorded $4,500 of unearned service revenue being earned and the
collection of $4,000 cash for service revenue previously accrued. The impact of these two
entries on total service revenue is:
a) a decrease of $4,500
b) an increase of $4,500
c) an increase of $8,500
d) an increase of $500
44. Micro Services Company records the payment of $500 cash for a previously accrued
expense and the accrual of $325 for another expense. The impact of these two entries on
total expenses and net income is:
Total Expenses Net Income
a) increase by $825 decrease by $325
b) increase by $825 decrease by $825
c) increase by $325 decrease by $325
d) increase by $325 decrease by $825
45. At the end of the fiscal period, Wiles Company omitted the adjusting entry for accrued
salaries. The effect of this error on the financial statements is to:
a) understate equity
b) understate assets
c) overstate net income
d) overstate liabilities
46. At the end of the fiscal period, Burton Company omitted the adjusting entry for depreciation
on equipment. The effect of this error on the financial statements is to:
a) understate liabilities
b) understate owner's equity
c) overstate expenses
d) overstate assets
47. If an adjustment for prepaid insurance is not made at year-end, liabilities will be:
a) unaffected
b) understated
c) overstated
d) unable to determine with the given information
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48. A company began operations and purchased $6,000 of supplies. By year-end, $2,700 was
still on hand. The adjusting entry at year end would include a:
a) debit to supplies of $6,000
b) credit to supplies for $3,300
c) credit to supplies for $2,700
d) debit to supplies expense for $2,700
b L.O. 3 Moderate Page: 99
49. The entry for depreciation has what effect on the financial statements:
a) increases expenses and decreases assets
b) decreases net income and increases assets
c) increases assets and decreases liabilities
d) decreases assets and increases liabilities
50. An accrued revenue adjustment has the following effect on the balance sheet:
a) decreases liabilities
b) increases assets
c) increase liabilities
d) cannot be determined with the information given
51. Prepaid rent shows a beginning balance of $500 and an ending balance of $2,800. The rent
expense account was debited during the adjusting process for $1,800. How much cash was
spent for rent?
a) $1,500
b) $4,100
c) $1,000
d) $3,300
52. An accrued liability adjustment has the following effect on the balance sheet:
a) decrease liabilities
b) increase assets
c) increase liabilities
d) increase equity
53. A deferred expense adjustment has the following effect on the balance sheet:
a) increase liabilities
b) increase assets
c) decrease assets
d) increase equity

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54. Unearned revenue shows a beginning balance of $4,700 and an ending balance of $3,400.
The adjusting entry shows a credit to service revenue for $10,200. How much cash was
received in advance during the year?
a) $8,900
b) $10,200
c) $14,900
d) $13,600
55. Accumulated depreciation shows a beginning balance of $9,300 and an ending balance of
$10,700. How much depreciation expense was reported on the current year s income
statement?
a) $9,300
b) $1,200
c) $1,400
d) $10,700
56. Equipment with a cost of $115,000 has a useful life of 4 years and no salvage value. Using
straight-line depreciation, what is the book value after 3 years?
a) $28,750
b) $86,250
c) $103,000
d) $38,333
57. Accumulated depreciation on an asset plus its book value equals:

a) depreciation expense for the current year
b) depreciation expense to be recorded in future years
c) depreciation expense recorded in past years
d) the cost of the equipment
58. If a required prepaid adjustment had not been made, the financial statements would have
been affected as follows:
a) net income understated, assets understated, liabilities understated, and owner s equity
unaffected
b) net income understated, assets unaffected, liabilities overstated, and owner s equity
understated
c) net income overstated, assets understated, liabilities understated, and owner s equity
unaffected
d) net income overstated, assets overstated, liabilities unaffected, and owner s equity
overstated
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59. If a required accrued expense adjustment had not been made, the financial statements
would have been affected as follows:
a) net income understated, assets overstated, liabilities unaffected, and owner s equity
understated
b) net income understated, assets overstated, liabilities understated, and owner s equity
unaffected
c) net income overstated, assets unaffected, liabilities understated, and owner s equity
overstated
d) net income overstated, assets overstated, liabilities understated, and owner s equity
overstated
60. If a required unearned revenue adjustment had not been made, the financial statements
would have been affected as follows:
a) net income understated, assets overstated, liabilities unaffected, and owner s equity
overstated
b) net income overstated, assets unaffected, liabilities understated, and owner s equity
unaffected
c) net income understated, assets unaffected, liabilities overstated, and owner s equity
understated
d) net income overstated, assets overstated, liabilities overstated, and owner s equity
unaffected
61. If the adjusting entry to record the current period s prepaid rent expired is omitted:
a) current assets will be overstated
b) current assets will be understated
c) current liabilities will be overstated
d) current liabilities will be understated
62. Adjusting entries always involve a(n):

a) liability account
b) asset account and a liability account
c) asset account and a revenue account
d) balance sheet account and an income statement account
63. Net income is reported on the income statement at $63,000. Adjusting entries for accrued
salaries of $600 and depreciation on equipment of $1,500 were accidentally omitted. The
correct net income is:
a) $65,100
b) $62,400
c) $61,500
d) $60,900
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64. Net income is reported on the income statement at $80,000. Adjusting entries for accrued
revenues of $6,000 and deferred revenue earned during the current period of $2,500 were
accidentally omitted. The correct net income is:
a) $88,500
b) $81,000
c) $77,500
d) $78,500
65. If the adjusting entry to record revenue earned during the current period when the cash was
received in the last accounting period is not recorded:
a) assets will be overstated
b) liabilities will be overstated
c) liabilities will be understated
d) assets will be understated
66. An accrued expense adjustment has the following effect on the financial statements:
a) increases expenses and increases net income
b) increases expenses and decreases assets
c) increases expenses and increases liabilities
d) decreases expenses and increases liabilities
67. The type of account and normal balance of accumulated depreciation is:
a) equity; credit
b) liability; credit
c) contra equity; debit
d) contra asset; credit
68. The balance in prepaid rent after adjustment represents:

a) a liability on the balance sheet
b) an expense on the income statement
c) revenue on the income statement
d) an asset on the balance sheet
69. The balance in unearned revenue after adjustment represents:

a) a contra liability on the balance sheet
b) a contra expense on the income statement
c) a liability on the balance sheet
d) revenue on the income statement

67
70. A liability that arises from an expense that the business has incurred but has not yet paid is
called a(n):
a) accrued asset
b) accrued expense
c) deferred revenue
d) deferred expense
b L.O. 3 Moderate Page: 102
71. A company accepted $6,000 on September 1 for services to be performed evenly over the
next 12 months. The adjusting entry on December 31 would include a:
a) debit to unearned revenue $2,500
b) debit to service revenue for $2,500
c) debit to unearned revenue for $2,000
d) credit to service revenue for $3,500
72. All accounts in the general ledger appear on a company s:

a) statement of owner's equity
b) adjusted trial balance
c) income statement
d) statement of cash flows
b L.O. 4 Easy Page: 108
73. Combining the amounts from the unadjusted trial balance with the adjustments gives rise to
the:
a) unadjusted trial balance
b) income statement
c) balance sheet
d) adjusted trial balance
74. Unearned revenue was not adjusted to show $3,000 of revenue earned during the current
period. What is the effect of this error on the balance sheet?
a) liabilities are overstated
b) liabilities are understated
c) assets are overstated
d) assets are understated
75. Financial statements are prepared from:

a) the previous years financial statements
b) an unadjusted trial balance
c) the general journal
d) an adjusted trial balance
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76. Net income appears on the:

a) income statement and the statement of owners equity
b) income statement only
c) statement of owners equity only
d) balance sheet and income statement
77. The financial statement which lists the revenue and expense accounts is referred to as the:
a) statement of owners equity
b) balance sheet
c) statement of cash flows
d) income statement
78. The balance sheet reports the:

a) assets, liabilities, and equity at a certain point in time
b) assets, equity, and revenues at a certain point in time
c) assets, expenses, and revenues for a period of time
d) assets, liabilities, and equity for a period of time
79. The _______________ is/are transferred from the income statement to the statement of
owners equity.
a) assets
b) liabilities
c) net income
d) beginning capital
c L.O. 5 Easy Page: 109
80. The ________________ is/are transferred from the statement of owner s equity to the balance
sheet.
a) revenues
b) ending capital
c) beginning capital
d) expenses
b L.O. 5 Easy Page: 109
81. When a prepaid expense is initially recorded as an expense, the adjusting entry:
a) transfers the used portion to an asset account
b) transfers the unused portion to an asset account
c) transfers the used portion to an expense account
d) impossible to determine without more information
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b L.O. A1 Difficult Page: 134
82. Lynwood Company prepaid 24 months of rent in advance on October 1, 20X5. Lynwood
Company debited rent expense for the entire amount of $12,000. The adjusting entry on
December 31, 20X5, would include a:
a) debit to prepaid rent for $10,500
b) debit to prepaid rent for $1,500
c) credit to rent expense for $1,500
d) debit to rent expense for $10,500
a L.O. A1 Difficult Page: 134
83. Garrison Corporation prepaid six months of insurance in advance on July 1, 20X5. Garrison
Corporation debited insurance expense for the entire amount of $12,000. The adjusting
entry on December 31, 20X5, would include:
a) a debit to prepaid insurance for $6,000
b) a debit to prepaid insurance for $12,000
c) a credit to insurance expense for $12,000
d) no adjustment is necessary on December 31, 20X5
d L.O. A1 Difficult Page: 134
84. When a prepaid expense is initially recorded as an expense, the adjusting entry would
include a:
a) debit to a deferred revenue account
b) debit to an asset account
c) debit to an unearned expense account
d) debit to a contra account
85. When a prepaid expense is initially recorded as an expense, the adjusting entry has the
following effect on net income:
a) increase
b) decrease
c) increase or decrease
d) no effect
86. When an unearned revenue is initially recorded as a revenue, the adjusting entry:
a) transfers the earned portion to a liability account
b) transfers the earned portion to a revenue account
c) transfers the unearned portion to a liability account
d) transfers the unearned portion to a revenue account
c L.O. A2 Difficult Page: 134
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87. When an unearned revenue is initially recorded as a revenue, the adjusting entry would
include a(n):
a) credit to a liability
b) debit to a liability
c) debit to an asset
d) credit to revenue
88. When an unearned revenue is initially recorded as a revenue, the adjusting entry would
affect net income as follows:
a) increase or decrease
b) decrease
c) increase
d) no effect
89. When an unearned revenue is initially recorded as a revenue, the adjusting entry has the
following effect on the financial statements:
a) revenue decreases and owners equity decreases
b) revenue increases and liabilities decrease
c) net income increases and owners equity increases
d) net income increases and assets decrease
90. On April 1 of the current year, Jamie Company received $15,000 for services to be
performed evenly over the next 12 months. Jamie Company initially recorded the $15,000
as service revenue. The adjusting entry on December 31 of the current year will include a:
a) debit to service revenue for $11,250
b) credit to unearned service revenue for $11,250
c) debit to unearned service revenue for $3,750
d) debit to service revenue for $3,750
d L.O. A2 Difficult Page: 135
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MATCHING
a) unearned revenue
b) cash-basis accounting
c) revenue principle
d) accrual-basis accounting
e) accrued expense
f) matching principle
g) accrued revenue
h) depreciation
i) contra account
j) book value
91. __________ An accounting system that records only transactions in which cash is received or
paid
92. __________ An accounting system that records the impact of a business event as it occurs,
regardless of whether the transaction affected cash
93. __________ An expense that has been incurred but not yet paid in cash
94. __________ A revenue that has been earned but not yet received in cash
95. __________ An assets cost less accumulated depreciation
96. __________ An account that always has a companion account, and whose normal balance is
opposite that of the companion account
97. _________ The basis for recording revenues
98. _________ A liability created when a business collects cash from customers in advance of
doing work for a customer
99. _________ Expense associated with allocating the cost of a plant asset over its useful life
100._ _______ The basis for recording expenses
Solution:
91. b
92. d
93. e
94. g
95. j
96. i
97. c
98. a
99. h
100. f
L.O. all Moderate Page: all
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CHAPTER 3
PROBLEMS AND CRITICAL THINKING EXERCISES
101. Explain the difference between the cash-basis of accounting and the accrual-basis of
accounting. Are adjusting entries necessary in both methods? Explain.
Solution:
The cash basis of accounting recognizes revenues and expenses only when cash is received
or paid. No adjustments are necessary at the end of the period. There is also no need for
receivable or payable
accounts.
Under the accrual basis of accounting, the accountant recognizes the impact of a business
transaction on an entity when the transaction occurs, whether or not cash is received or
paid. Adjustments are usually necessary at the end of the period to update certain asset
and liability accounts and to recognize revenues that have been earned but not collected
and expenses that have been incurred but not paid.
L.O. 1 Moderate Page: 92
102. Douglas Brothers reports the following transactions for May, 20X5:
May 1 Performed a service on account, $800.

1 Purchased a one-year insurance policy for cash, $2,100.
15 Paid wages to employees, $950.
20 Completed a job for a customer and collected $800 cash.
23 Collected $500 of the amount due from May 1.
30 Accrued wages of $650.
Show the amount of revenue and expense recognized for each transaction as of May 31,
20X5, under both the cash basis and the accrual basis of accounting by completing the
following chart.
CASH-BASIS ACCOUNTING
Date Revenue Expense
ACCRUAL-BASIS ACCOUNTING
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Solution:
CASH-BASIS ACCOUNTING
May 1 $2,100
15 $ 950
20 $ 800
23 $ 500
ACCRUAL-BASIS ACCOUNTING
May 1 $ 800
15 $ 950
20 $ 800
30 $ 650
31 $175*
*May 1 - May 31 = 1 month of a one-year insurance policy costing
$2,100 expired.
103. For each of the following, state whether you agree or disagree with the accounting
treatment. What principles support your view?
a) Payment of a three-year insurance policy is charged to insurance expense and not

adjusted.
b) A company records all revenue when earned, whether it has been collected or not.
c) Management of Classic Cars requires the accountants to prepare monthly financial
statements.
d) Because the December telephone bill did not arrive until January, no telephone expense
was recorded for December.
Solution:
a) Disagree. The payment should be recorded as a prepaid expense or asset until

consumed. Adjusting entries will be required to record the expense as time passes. The
matching principle supports this conclusion. It states that expenses should be matched
against revenues during the same time period. If the payment is recorded as an
expense, the adjusting entry will require the transfer of the unused part to the
appropriate asset account.
b) Agree. The revenue recognition principle states that revenue should be recognized as it
is earned, regardless of when the cash is received.
c) Agree. The time-period concept states that financial statements should be prepared as
often as necessary, and should be prepared at regular intervals.
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d) Disagree. Whether or not the bill was received, the expense was incurred and should be
recognized. The matching principle supports this position.
104. On December 31, 20X2, Jones Company omitted the following adjusting entries:
a) Accrued wages of $5,000 owed to employees

b) Accrued revenue for services rendered of $5,500
Assuming the financial statements are prepared before the errors are discovered, state the
effects of each error on the financial statement elements by completing the chart.
Error a Error b
Overstate Understate Overstate Understate
d d d d
Assets at Dec. 31, 20X2, would be
Liabilities at Dec. 31, 20X2, would be
Net income for 20X2 would be
Owner's equity at Dec. 31, 20X2,
would be
Solution:
Error a Error b
Overstate Understate Overstate Understate
d d d d
Assets at Dec. 31, 20X2, would be -0- -0- -0- $5,500
Liabilities at Dec. 31, 20X2, would be -0- $5,000 -0- -0-
Net income for 20X2 would be $5,000 -0- -0- $5,500
Owner's equity at Dec. 31, 20X2, $5,000 -0- -0- $5,500
would be
L.O. 3 Difficult Page: 96
105. Given the following adjustment data, state whether the resulting adjustment will be a
deferral or an accrual.
a) Recorded service revenue received in advance from clients.

b) Recorded salaries earned by employees at end of month, payment to be made early next
month.
c) Prepaid insurance was used during the month.
d) Estimated current month's utilities bill and recorded the amount. The bill is to be
received and paid next month.
e) Performed services on account, payment to be received next month.
f) Supplies were used during the month.
Solution:
a) deferral
b) accrual
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c) deferral
d) accrual
e) accrual
f) deferral
106. Compute the amounts indicated for each of the following independent situations.
Situation
A B C D
Beginning supplies balance ? $1,75 $2,50 $2,00
0 0 0
Payments for supplies during the year $3,800 ? $3,30 $1,80
0 0
Ending supplies balance $2,300 $2,17 ? $2,90
0 0
Supplies expense on the income $1,600 $1,70 $3,55 ?
statement 0 0
Solution:
Situation
A B C D
Beginning supplies balance $ 100 $1,75 $2,50 $2,00
0 0 0
Payments for supplies during the year $3,800 $2,12 $3,30 $1,80
0 0 0
Ending supplies balance $2,300 $2,17 $2,25 $2,90
0 0 0
Supplies expense on the income $1,600 $1,70 $3,55 $
statement 0 0 900
107. Prepare adjusting entries for the following items on December 31, the end of the fiscal year
for Cleaner Carpets.
a) Prepaid rent expired during the year, $8,500

b) Supplies used during the year, $2,250
c) Salaries owed to employees at year-end, $2,500
d) Unearned service revenue earned, $5,500
e) Services performed but unbilled, $3,200
f) Depreciation on equipment, $2,200
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Solution:
GENERAL JOURNAL
Date Accounts Debit Credit
a) Rent Expense 8,50
0
Prepaid Rent 8,50
0
b) Supplies Expense 2,25
0
Supplies 2,25
0
c) Salary Expense 2,50
0
Salary Payable 2,50
0
d) Unearned Service Revenue 5,50
0
Service Revenue 5,50
0
e) Accounts Receivable 3,20
0
0
f) Depreciation Expense 2,20
0
Accumulated Depreciation 2,20
0
108. Based on the partial trial balance and the partial adjusted trial balance shown below,
prepare the six missing adjusting entries. The adjusting entries should be dated December
31.
Account Trial Balance Adjusted Trial Balance

Debit Credit Debit Credit
Accounts receivable 105,600 108,800
Supplies 5,000 2,200
Prepaid insurance 10,600 7,800
Accumulated depreciation 50,300 59,200
Salary payable 4,800
Unearned service revenue 13,500 13,100
Service revenue 215,900 219,500
Salary expense 110,600 115,400
Insurance expense 2,800
Supplies expense 2,800
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CHAPTER 3
Depreciation expense 8,900
79
Solution:
GENERAL JOURNAL
Dec. 31 Accounts Receivable 3,200
31 Supplies Expense 2,800
Supplies 2,800
31 Insurance Expense 2,800
Prepaid Insurance 2,800
31 Depreciation Expense 8,900
Accumulated Depreciation 8,900
31 Unearned Service Revenue 400
Service Revenue 400
31 Salary Expense 4,800
Salary Payable 4,800
80
CHAPTER 3
110. State the effect on net income, total assets and total liabilities if the following adjustments
were not made.
a) Depreciation on buildings, $26,000.
b) Utilities expense incurred but not yet recorded, $2,200.
c) Unearned revenue earned during the period, $3,600.
d) Supplies used during the period, $1,700.
e) Service revenue earned, but not yet collected, $2,400.
Item Effect on Net Income Effect on Total Assets Effect on Total Liabilities
a)
b)
c)
d)
e)
Solution:
Item Effect on Net Income Effect on Total Assets Effect on Total Liabilities
a) Overstated $26,000 Overstated $26,000 No effect
b) Overstated $2,200 No effect Understated $2,200
c) Understated $3,600 No effect Overstated $3,600
d) Overstated $1,700 Overstated $1,700 No effect
e) Understated $2,400 Understated $2,400 No effect
81
111. Prepare an adjusted trial balance based on the following adjustment data and the
unadjusted trial balance.
Great Shapers Company

Trial Balance
December 31, 20X7
Debit Credit
Cash $ 12,000
Accounts receivable 20,500
Office supplies 9,500
Prepaid insurance 10,200
Equipment 100,500
Accum. depn.-equipment $ 30,900
Accounts payable 15,500
Unearned service revenue 20,600
Alice Browning, capital 100,200
Alice Browning, withdrawals 20,600
Service revenue 63,700
Salary expense 30,600
Advertising expense 15,400
Utilities expense 9,900
Miscellaneous expense 1,700
Total $230,900 $230,900
Adjustment data:
a) Office supplies on hand on December 31, 20X7, amount to $4,600.
b) During the year, $6,400 of prepaid insurance expired.
c) Depreciation on equipment for the year is $11,400.
d) Unearned service revenue on December 31, 20X7, amounts to $6,800.
e) Salaries owed to employees on December 31, 20X7, amount to $2,300.
82
CHAPTER 3
Solution:
Great Shapers Company

Adjusted Trial Balance
December 31, 20X7
Debit Credit
Cash $ 12,000
Office supplies 4,600
Equipment 100,500
Alice Browning, capital 100,200
Alice Browning, withdrawals 20,600
Miscellaneous expense 1,700
Insurance expense 6,400
Depn. expense-equipment 11,400
Total $244,600 $244,600
83
112. Based on the following adjusted trial balance, prepare a balance sheet for Anne Davis and
Associates on December 31, 20X5. You will have to compute the owner's capital account
balance on December 31, 20X5.
Anne Davis and Associates

December 31, 20X5
Debit Credit
Cash $ 3,600
Office supplies 700
Equipment 15,600
Unearned service revenue 800
Anne Davis, capital 12,900
Anne Davis, withdrawals 4,900
Depn. expense-equipment 1,300
Supplies expense 500
Insurance expense 650
Total $34,750 $34,750
84
CHAPTER 3
Solution:
Anne Davis and Associates
Balance Sheet
December 31, 20X5
Assets
Current assets
Cash $ 3,600
Office supplies 700
Total current assets $ 7,500
Plant assets
Equipment $15,600
Less: accumulated depn. 3,900 11,700
Total assets $19,200
Liabilities
Current liabilities
Accounts payable $ 6,800
Unearned service revenue 800
Total current liabilities $ 8,700
Owner s equity
Anne Davis, capital 10,500
Total liabilities and owners equity $19,200
85
113. Based on the following adjusted trial balance, prepare an income statement for Little
Company for the year ended December 31, 20X5.
Little Company
December 31, 20X5
Debit Credit
Cash $10,500
Supplies 2,700
Office furniture 10,000
Accum. depn.-office furniture $ 4,350
Salary payable 760
J. Little, capital 12,550
J. Little, withdrawals 2,800
Rent expense 2,850
Depn. expense-office furn. 350
Total $48,860 $48,860
Solution:
Little Company
Income Statement
For the Year Ended December 31, 20X5
Revenue:
Service revenue $30,060
Expenses:
Salary expense $ 8,360
Rent expense 2,850
Depreciation expense-office furniture 350
Total expenses 12,860
Net income $17,200
86
CHAPTER 3
114. Based on the following adjusted account balances, prepare a statement of owner s equity
for the Tonya Valentine Company for the year ended December 31, 20X6.
Service revenue $12,800

Tonya Valentine, capital, Jan. 1, 20X6 13,200
Insurance expense 900
Tonya Valentine, withdrawals 4,500
Solution:
Tonya Valentine Company

Statement of Owners Equity
Year Ended December 31, 20X6
Tonya Valentine, capital, Jan. 1, 20X6 $13,200

Add: Net income for the year 1,750
14,950
Less: Withdrawals for the year 4,500
Tonya Valentine, capital, Dec. 31, 20X6 $10,450
L.O. 5 Easy Page: 109
115. Wilson Company initially records all prepaid expenses as expenses and all unearned
revenues as revenues. Given the following information, prepare the necessary adjusting
entries at year-end,
December 31, 20X5.
a) On January 3, 20X5, $3,500 of supplies were purchased. A count revealed $900 still on
hand at December 31, 20X5.
b) On January 4, 20X5, a $21,000 payment was made to an insurance agency for three
years of insurance.
c) On June 30, 20X5, received nine months rent in advance from a tenant, $8,100.
d) On August 1, 20X5, received six months rent in advance from a tenant, $5,400.
Solution:
GENERAL JOURNAL
a) Supplies 900
Supplies Expense 900
b) Prepaid Insurance 14,000
Insurance Expense 14,000
c) Rent Revenue 2,700
Unearned Rent Revenue 2,700
d) Rent Revenue 900
Unearned Rent Revenue 900
87
L.O. A1-A2 Difficult Page: 134-135
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CHAPTER 3

Measuring Business Income: The Adjusting Process

1. Distinguish accrual-basis accounting from cash-basis

True L.O. 1 Easy Page: 92

True L.O. 1 Easy Page: 92

False L.O. 2 Moderate Page: 94

4. The matching principle is closely related to the cash basis of accounting.

False L.O. 2 Moderate Page: 95

False L.O. 3 Moderate Page: 98

False L.O. 3 Moderate Page: 104

7. Adjusting entries only involve balance sheet accounts.

True L.O. 3 Easy Page: 103

True L.O. 3 Difficult Page: 104

False L.O. 3 Difficult Page: 104

False L.O. 3 Easy Page: 100

True L.O. 3 Moderate Page: 97

True L.O. 3 Moderate Page: 101

True L.O. 4 Easy Page: 108

True L.O. 5 Easy Page: 108

True L.O. 5 Easy Page: 109

True L.O. 5 Moderate Page: 108

True L.O. A1 Difficult Page: 98

True L.O. A1 Difficult Page: 98

True L.O. A2 Difficult Page: 104

a L.O. 1 Moderate Page: 92

22. The two most widely used bases of accounting are:

d L.O. 1 Easy Page: 92

d L.O. 1 Easy Page: 92

a L.O. 1 Easy Page: 92

a L.O. 1 Moderate Page: 92

c L.O. 1 Moderate Page: 104

c L.O. 1 Moderate Page: 98

28. Accrued expenses are expenses that have:

d L.O. 2 Difficult Page: 102

29. Accruals involve the recording of an expense or a revenue account:

b L.O. 2 Difficult Page: 97

30. Unearned rent is an example of a(n):

b L.O. 2 Difficult Page: 105

b L.O. 2 Difficult Page: 102

b L.O. 2 Difficult Page: 104

33. Adjusting for prepaid insurance is an example of a(n)?

d L.O. 3 Moderate Page: 98

34. Failure to record the adjusting entry for expired rent:

a L.O. 3 Difficult Page: 98

35. Failure to record an accrued expense:

c L.O. 3 Difficult Page: 103

36. Failure to record the adjusting entry for annual depreciation:

c L.O. 3 Difficult Page: 100

d L.O. 3 Moderate Page: 98

c L.O. 3 Moderate Page: 98

d L.O. 3 Moderate Page: 100

a L.O. 3 Moderate Page: 99

b L.O. 3 Difficult Page: 103

c L.O. 3 Difficult Page: 104

b L.O. 3 Difficult Page: 104

c L.O. 3 Difficult Page: 102

c L.O. 3 Difficult Page: 103

d L.O. 3 Difficult Page: 100

a L.O. 3 Difficult Page: 98

b L.O. 3 Moderate Page: 99

a L.O. 3 Difficult Page: 100

b L.O. 3 Difficult Page: 104

b L.O. 3 Difficult Page: 98

c L.O. 3 Difficult Page: 102

72. All accounts in the general ledger appear on a company s: