ch04Solutions.docx

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ch04Solutions

CHAPTER4

AccrualAccountingConcepts

StudyObjectives

1.Explaintherevenuerecognitionprincipleandthematchingprinciple.

2.Differentiatebetweenthecashbasisandtheaccrualbasisofaccounting.

3.Explainwhyadjustingentriesareneeded,andidentifythemajortypesofadjustingentries.

4.Prepareadjustingentriesfordeferrals.

5.Prepareadjustingentriesforaccruals.

6.Describethenatureandpurposeoftheadjustedtrialbalance.

7.Explainthepurposeofclosingentries.

8.Describetherequiredstepsintheaccountingcycle.

9.Understandthecausesofdifferencesbetweennetincomeandcashprovidedby

operatingactivities.

10.Describethepurposeandthebasicformofaworksheet.

SummaryofQuestionsbyStudyObjectivesandBloom’sTaxonomy

Item

SO

BT

Item

SO

BT

Item

SO

BT

Item

SO

BT

Item

SO

BT

Questions

1.

1

C

9.

4

C

16.

5

K

23.

6

C

30.

7

K

2.

1

K

10.

4

C

17.

5

AN

24.

2

C

31.

8

K

3.

1

C

11.

4

K

18.

5

AP

25.

6

C

32.

8

K

4.

1

AP

12.

4

K

19.

4,5

K

26.

7

K

33.

8

C

5.

3

C

13.

1

C

20.

4,5

K

27.

7

C

34.

8

C

6.

3

C

14.

1

AN

21.

5

C

28.

7

C

35.

10*

K

7.

3

C

15.

5

C

22.

5

C

29.

7

K

36.

10*

K

8.

4

K

BriefExercises

1.

2,9

C

4.

4

AP

7.

4

AP

10.

6

AP

13.

7

K

2.

3

C

5.

4

AP

8.

5

AP

11.

6

AP

14.

7

AP

3.

3

AN

6.

4

AP

9.

6

AN

12.

6

K

15.

8

K

DoIt!

ReviewExercises

1.

4

AP

2.

5

AP

3.

6

C

4.

7

AP

Exercises

1.

1

C

5.

2,9

AP

9.

4,5

AP

13.

1,4,5,6

AN

17.

6

AP

2.

1

K

6.

2,4,

5,9

AP

10.

4,5

AP

14.

7

AP

18.

7

AP

3.

1

C

7.

2,3,9

C

11.

4,5

AP

15.

4,5,6

AN

4.

2,4,

5,9

AP

8.

3,4,

5

AN

12.

1,4,5,6

AP

16.

4,5,

6

AP

SummaryofQuestionsbyStudyObjectivesandBloom’sTaxonomy（Continued）

Problems:

SetA

1.

2,4,

9

AP

3.

4,5,

6,7

AP

5.

4,5

AP

7.

4,5,

6

AP

8.

4,5,6,7,

8

AP

2.

4,5,

6

AP

4.

4,5,

6,7

AP

6.

4,5

AN

Problems:

SetB

1.

2,4,

9

AP

3.

4,5,

6,7

AP

5.

4,5

AP

7.

4,5,

6

AP

8.

4,5,6,7,

8

AP

2.

4,5,

6

AP

4.

4,5,

6,7

AP

6.

4,5

AN

ASSIGNMENTCHARACTERISTICSTABLE

Problem

Number

Description

Difficulty

Level

Time

Allotted（min.）

1A

Recordtransactionsonaccrualbasis;convertrevenuetocashreceipts.

Simple

20–30

2A

Prepareadjustingentries,posttoledgeraccounts,andprepareanadjustedtrialbalance.

Simple

40–50

3A

Prepareadjustingentries,adjustedtrialbalance,and

financialstatements.

Simple

50–60

4A

Prepareadjustingentriesandfinancialstatements;identifyaccountstobeclosed.

Moderate

40–50

5A

Prepareadjustingentries.

Moderate

30–40

6A

Prepareadjustingentriesandacorrectedincome

statement.

Moderate

30–40

7A

Journalizetransactionsandfollowthroughaccounting

cycletopreparationoffinancialstatements.

Moderate

60–70

8A

Completeallstepsinaccountingcycle.

Moderate

70–80

1B

Recordtransactionsonaccrualbasis;convertrevenuetocashreceipts.

Simple

20–30

2B

Prepareadjustingentries,posttoledgeraccounts,andprepareadjustedtrialbalance.

Simple

40–50

3B

Prepareadjustingentries,adjustedtrialbalance,and

financialstatements.

Simple

50–60

4B

Prepareadjustingentriesandfinancialstatements;

identifyaccountstobeclosed.

Moderate

40–50

5B

Prepareadjustingentries.

Moderate

30–40

6B

Prepareadjustingentriesandacorrectedincome

statement.

Moderate

30–40

7B

Journalizetransactionsandfollowthroughaccounting

cycletopreparationoffinancialstatements.

Moderate

60–70

8B

Completeallstepsinaccountingcycle.

Moderate

70–80

ANSWERSTOQUESTIONS

1.（a）Underthetimeperiodassumption,anaccountantisrequiredtodeterminetheeffectofeachaccountingtransactiononspecificaccountingperiods.

（b）Anaccountingtimeperiodthatisoneyearinlengthisreferredtoasafiscalyear.

2.Thetwogenerallyacceptedaccountingprinciplesthatpertaintoadjustingtheaccountsare:

Therevenuerecognitionprinciple,whichstatesthatrevenueshouldberecognizedinthetime

periodinwhichitisearned.

Thematchingprinciplewhichstatesthatefforts（expenses）bematchedwithaccomplishments（revenues）thattheyhelpedgenerate.

3.ThelawfirmshouldrecognizetherevenueinApril.Therevenuerecognitionprinciplestatesthatrevenueshouldberecognizedintheaccountingperiodinwhichitisearned.

4.Expensesof$4,500shouldbedeductedfromtherevenuesinApril.Underthematchingprincipleefforts（expenses）shouldbematchedwithaccomplishments（revenues）.

5.No,adjustingentriesarerequiredbytherevenuerecognitionandmatchingprinciples.

6.Thefinancialinformationinatrialbalancemaynotbeup-to-datebecause:

（1）Someeventsarenotjournalizeddailybecauseitisnotusefulorefficienttodoso.

（2）Theexpirationofsomecostsoccurswiththepassageoftimeratherthanasaresultof

recurringdailytransactions.

（3）Someitemsmaybeunrecordedbecausethetransactiondataarenotknown.

7.Thetwocategoriesofadjustingentriesaredeferralsandaccruals.Deferralsconsistofrevenuesandexpensespaidbeforetheyareearnedorincurred.Accrualsconsistofrevenuesandexpensesearnedorincurredpriortopayment.

8.Inaprepaidexpenseadjustingentry,expensesaredebitedandassetsarecredited.

9.No.Depreciationistheprocessofallocatingthecostofanassettoexpenseoveritsusefullife.

Depreciationresultsinthepresentationofthebookvalueoftheasset,notitsmarketvalue.

10.Depreciationexpenseisanexpenseaccountwhosenormalbalanceisadebit.Thisaccountshowsthecostthathasexpiredduringthecurrentaccountingperiod.Accumulateddepreciationisacontraassetaccountwhosenormalbalanceisacredit.Thebalanceinthisaccountisthedepreciationthathasbeenrecognizedfromthedateofacquisitiontothebalancesheetdate.

11.Equipment$15,000

Less:

AccumulatedDepreciation9,000$6,000

12.Inanunearnedrevenueadjustingentry,liabilitiesaredebitedandrevenuesarecredited.

13.Thesaleofathree-yearmaintenancecontractonDecember29,2009willhavenoeffectonthe2009incomestatementbutreceiptof$100,000onDecember29,2009willincreaseanasset,cash,andaliability,unearnedrevenue.AsComputerTechnologiesprovidesservicetoits

customerduring2010,2011,and2012,theliabilitywilldecreaseandrevenuewillberecognized.Accrualaccountingrulesrequirethatrevenueberecognizedasitisearnedratherthanwhencashisreceived.

QuestionsChapter4（Continued）

14.Thispromotionplansoundslikeabadideafortworeasons.

（1）GAAPrequiresthatthesaleofagiftcardberecordedasunearnedrevenue（aliability）ratherthansalesrevenue.Revenuerecognitionisdelayeduntilthegiftcardisusedorexpires.Mickey’splanwillnothelpthecompanymeetitstargetrevenueunlesscustomersusethecardsbyyear-end.

（2）Sellinga$50cardfor$40willprobablynothelpthecompanymeetitstargetnetincome.

Althoughthispromotionmayresultinadditionalsalesrevenueasthecardsareused,the

incomeresultingfromthecardswillbemuchlessthanusualsincetheyeliminate$10ofnormalgrossprofit.

15.Assetandrevenue.Anassetisdebitedandrevenueiscredited.

16.Expenseandliability.Anexpenseisdebitedandaliabilityiscredited.

17.Netincomewasunderstated$300becausepriortoadjustmentrevenuesareunderstatedby$800andexpensesareunderstatedby$500.Thedifferenceinthiscaseis$300（$800–$500）.

18.Theentryis:

Jan.9SalariesPayable1,100

SalariesExpense4,900

Cash6,000

19.（a）Accruedrevenues.（d）Accruedexpensesorprepaidexpenses.

（b）Unearnedrevenues.（e）Prepaidexpenses.

（c）Accruedexpenses.（f）Accruedrevenuesorunearnedrevenues.

20.（a）SalariesPayable.（d）SuppliesExpense.

（b）AccumulatedDepreciation.（e）ServiceRevenue.

（c）InterestExpense.（f）ServiceRevenue.

21.Disagree.Anadjustingentryaffectsonlyonebalancesheetaccountandoneincomestatement

account.

22.TootsieRollreportsAccountsReceivable.Thissuggeststhatitrecordsrevenuewhenithasdeliveredgoods,eventhoughithasn’treceivedpayment.Ifitusedacashbasisitwouldn’trecordrevenueuntilcashwasreceived,anditwouldthereforenotestablishreceivables.

23.Financialstatementscanbepreparedfromanadjustedtrialbalancebecausethebalancesofallaccountshavebeenadjustedtoshowtheeffectsofallfinancialeventsthathaveoccurredduringtheaccountingperiod.

24.（a）Informationpresentedonanaccrualbasisisusefulbecauseitrevealsimportantinformationabouttherelationshipbetweeneffortsandresults.Thisinformationisusefulinpredictingfutureresults.Trendsinrevenuesandexpensesarethusmoremeaningful.

（b）Informationpresentedonacashbasisisusefulforpredictingthefutureavailabilityofcash.Cashbasisfinancialstatementsprovideusefulinformationaboutacompany’ssourcesandusesofcash.

25.Theamountshownintheadjustedtrialbalancecolumnforanaccountequalstheaccount

balanceintheledgerafteradjustingentrieshavebeenjourna