Chapter 3

CHAPTER 3
THE ADJUSTING PROCESS

QUESTION INFORMATION
Number
Objective
Description
EO3-1
3-1
Difficult
y
Easy
EO3-2
3-1
Easy
5 min
Analytic
EO3-3
3-1
Easy
5 min
Analytic
EO3-4
3-1
Easy
5 min
Analytic
EO3-5
3-3
Easy
5 min
Analytic
EO3-6
3-3
Easy
5 min
Analytic
EO3-7
3-1
Easy
5 min
Analytic
EO3-8
3-1
Easy
5 min
Analytic
EO3-9
3-2
Easy
5 min
Analytic
EO3-10
3-2
Easy
5 min
Analytic
EO3-11
3-2
Easy
5 min
Analytic
EO3-12
3-3
Easy
5 min
Analytic
EO3-13
3-2
Easy
5 min
Analytic
EO3-14
3-2
Easy
5 min
Analytic
EO3-15
3-2
Easy
5 min
Analytic
PE3-1A
3-1
Easy
5 min
Analytic
PE3-1B
3-1
Easy
5 min
Analytic
PE3-2A
3-1
Accounts requiring
adjustment
Accounts requiring
adjustment
Type of adjustment
Easy
5 min
Analytic
PE3-2B
3-1
Type of adjustment
Easy
5 min
Analytic
PE3-3A
3-2
Easy
5 min
Analytic
PE3-3B
3-2
Easy
5 min
Analytic
PE3-4A
3-2
Easy
5 min
Analytic
PE3-4B
3-2
Easy
5 min
Analytic
PE3-5A
3-2
Easy
5 min
Analytic
PE3-5B
3-2
Easy
5 min
Analytic
PE3-6A
3-2
Adjustment for
supplies used
Adjustment for
insurance expired
Adjustment for
unearned fees
Adjustment for
unearned rent
Adjustment for
accrued fees
Adjustment for
accrued fees
Adjustment for
salaries payable
Easy
5 min
Analytic
121
Time
AACSB
AICPA
5 min
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
SS
GL
Number
Objective
PE3-6B
3-2
PE3-7A
3-2
PE3-7B
3-2
PE3-8A
3-3
PE3-8B
3-3
PE3-9A
3-4
PE3-9B
3-4
Ex3-1
3-1
Ex3-2
3-1
Ex3-3
3-2
Ex3-4
3-2
Ex3-5
3-2
Ex3-6
3-2
Ex3-7
3-2
Ex3-8
3-2
Ex3-9
3-2
Ex3-10
3-2
Ex3-11
3-2
Ex3-12
3-3
Ex3-13
3-2
Ex3-14
3-2
Ex3-15
3-2
Ex3-16
3-2
Ex3-17
3-2
Ex3-18
3-2
Ex3-19
3-2
Ex3-20
3-2
Ex3-21
3-2, 3-3
Description
Adjustment for
salaries payable
Adjustment for
depreciation
Adjustment for
depreciation
Effect of omitting
adjustments
Effect of omitting
adjustments
Effect of errors on
adjusted trial balance
Effect of errors on
adjusted trial balance
Classifying types of
adjustments
Classifying types of
adjustments
Adjusting entry for
supplies
Determining supplies
purchased
Effect of omitting
adjusting entry
Adjusting entries for
prepaid insurance
prepaid insurance
unearned fees
Effect of omitting
adjusting entry
Adjusting entry for
accrued fees
unearned and
accrued fees
Effect on financial
statements of
omitting adjusting
entry
accrued salaries
Determining wages
paid
Effect of omitting
adjusting entry
Effect of omitting
adjusting entry
prepaid and accrued
taxes
Adjustment for
depreciation
Determining fixed
asset's book value
Book value of fixed
assets
Effects of errors on
financial statements
Difficult
y
Easy
Time
AACSB
AICPA
5 min
Analytic
Easy
5 min
Analytic
Easy
5 min
Analytic
Moderate
Analytic
Easy
10
min
10
min
10
min
10
min
5 min
Easy
5 min
Analytic
Easy
5 min
Analytic
Easy
5 min
Analytic
Moderate
5 min
Analytic
Easy
5 min
Analytic
Easy
5 min
Analytic
Easy
5 min
Analytic
Moderate
5 min
Analytic
Easy
5 min
Analytic
Easy
5 min
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
Moderate
5 min
Analytic
FNMeasurement
Easy
5 min
Analytic
Easy
5 min
Analytic
Moderate
5 min
Analytic
Moderate
5 min
Analytic
Moderate
10
min
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
Easy
5 min
Analytic
Easy
5 min
Analytic
Easy
5 min
Analytic
Easy
5 min
Analytic
Moderate
Moderate
Moderate
122
Analytic
Analytic
Analytic
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
SS
GL
Number
Objective
Ex3-22
3-2, 3-3
Ex3-23
3-2, 3-3
Ex3-24
3-2, 3-3
Ex3-25
3-2, 3-3
Ex3-26
3-4
Ex3-27
3-4
Pr3-1A
3-2
depreciation; effect of
error
Adjusting entries from
trial balance
Adjusting entries from
trial balance
Adjusting entries
Pr3-2A
3-2
Adjusting entries
Moderate
Pr3-3A
3-2
Adjusting entries
Moderate
Pr3-4A
Adjusting entries
Moderate
Pr3-6A
3-2, 3-3,
3-4
3-2, 3-3,
3-4
3-3
Pr3-1B
3-2
Adjusting entries and

adjusted balances
errors
Adjusting entries
Pr3-2B
3-2
Adjusting entries
Moderate
Pr3-3B
3-2
Adjusting errors
Moderate
Pr3-4B
3-2, 3-3,
3-4
3-2, 3-3,
3-4
Adjusting entries
Moderate
Pr3-5A
Pr3-5B
Description
Difficult
y
Easy
Time
AACSB
AICPA
5 min
Analytic
Moderate
10
min
10
min
5 min
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
10
min
15
min
30
min
45
min
1 hr
Analytic
Analytic
Difficult
45
min
1 hr
Difficult
1 hr
Analytic
Moderate
30
min
45
min
1 hr
Analytic
Analytic
Difficult
45
min
1 hr
Difficult
1 hr
Analytic
FNMeasurement
Moderate
15
min
Ethics
BB-Industry
Easy
5 min
Analytic
FNMeasurement
FNMeasurement
FNMeasurement
BB-Critical
Thinking
Moderate
Easy
Moderate
Difficult
Moderate
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Pr3-6B
3-3
DM-3
SA3-1
3-1
SA3-2
3-1

adjusted trial
balances
errors
Continuing Problem
Ethics and
professional conduct
in business
Accrued expense
Analytic
SA3-3
3-1
Accrued revenue
Easy
5 min
Analytic
SA3-4
3-3, 3-4
Moderate
1-1
15
min
15
min
Analytic
SA3-5
Adjustments and
Code of ethics
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
FNMeasurement
SS
GL
KA
KA
Exl
KA
Exl
KA
KA
Exl
KA
Exl
KA
Easy
123
Ethics
EYE OPENERS
1. a. Under cash-basis accounting, revenues
are reported in the period in which cash
is received and expenses are reported
in the period in which cash is paid.
b. Under
accrual-basis
accounting,
revenues are reported in the period in
which they are earned and expenses
are
reported in the same period as the
revenues to which they relate.
2. a. 2008
b. 2007
3. a. 2008
b. 2007
4. The matching concept is related to the
accrual basis.
5. Yes. The cash amount listed on the trial
balance is normally the amount of cash on
hand and needs no adjustment at the end of
the period.
6. No. The amount listed on the trial balance,
before adjustments, normally represents the
cost of supplies on hand at the beginning of
the period plus the cost of the supplies
purchased during the period. Some of the
supplies have been used; therefore, an
adjustment is necessary for the supplies
used before the amount for the balance
sheet is determined.
7. Adjusting entries are necessary at the end
of an accounting period to bring the ledger
up to date.
8. Adjusting entries bring the ledger up to date
as a normal part of the accounting cycle.
Correcting entries correct errors in the
ledger.
9. Four different categories of adjusting entries
include
prepaid
expenses
(deferred
expenses), unearned revenues (deferred
revenues), accrued expenses (accrued
liabilities), and accrued revenues (accrued
assets).
10. Statement (b): Increases the balance of an

expense account.
11. Statement (a): Increases the balance of a
revenue account.
12. Yes, because every adjusting entry affects
expenses or revenues.
13. a. The balance is the sum of the beginning
balance and the amount of the
insurance premiums paid during the
period.
b. The balance is the unexpired premiums
at the end of the period.
14. a. The rights acquired represent an asset.
b. The justification for debiting Rent
Expense is that when the ledger is
summarized in a trial balance at the end
of the month and statements are
prepared, the rent will have become an
expense. Hence, no adjusting entry will
be necessary.
15. a. The portion of the cost of a fixed asset
deducted from revenue of the period is
debited to Depreciation Expense. It is
the expired cost for the period. The
reduction in the fixed asset account is
recorded by a credit to Accumulated
Depreciation rather than to the fixed
asset account. The use of the contra
asset
account
facilitates
the
presentation of original cost and
accumulated depreciation on the
balance sheet.
b. Depreciation Expensedebit balance;
Accumulated
Depreciationcredit
balance.
c. No, it is not customary for the balances
of the two accounts to be equal in
amount.
d. Depreciation Expense appears in the
income
statement;
Accumulated
Depreciation appears on the balance
sheet.
124
PRACTICE EXERCISES
PE 31A
a. Yes
b. No
c. No
d. Yes
e.
f.
Yes
Yes
c. Yes
d. No
e.
f.
Yes
No
PE 31B
a. No
b. No
PE 32A
a. Unearned revenue
b. Accrued expense
c. Prepaid expense
d. Accrued revenue
PE 32B
a. Accrued expense
b. Accrued revenue
c. Prepaid expense
d. Unearned revenue
PE 33A
Supplies Expense............................................................
Supplies......................................................................
Supplies used ($1,245 + $2,860 $1,349).
2,756
2,756
PE 33B
Insurance Expense..........................................................
Prepaid Insurance......................................................
Insurance expired ($4,800 + $5,850 $4,125).
125
6,525
6,525
PE 34A
Unearned Fees.................................................................
Fees Earned................................................................
Fees earned ($23,676 $7,388).
16,288
16,288
PE 34B
Unearned Rent.................................................................
Rent Revenue.............................................................
Rent earned [($6,900/12) 5 months].
2,875
2,875
PE 35A
Accounts Receivable......................................................
Fees Earned................................................................
Accrued fees.
7,234
7,234
PE 35B
Fees Earned................................................................
Accrued fees.
1,772
1,772
PE 36A
Salaries Expense.............................................................
Salaries Payable.........................................................
Accrued salaries [($11,875/5 days) 2 days].
4,750
4,750
PE 36B
Salaries Expense.............................................................
126
16,560
16,560
PE 37A
Depreciation Expense.....................................................
Accumulated DepreciationEquipment.................
Depreciation on equipment.
6,450
6,450
PE 37B
1,820
1,820
PE 38A
a. Revenues were understated by $9,638.
b. Expenses were understated by $3,056 ($2,276 + $780).
c. Net income was understated by $6,582 ($9,638 $3,056).
PE 38B
a. Revenues were understated by $6,481.
b. Expenses were understated by $8,534 ($1,034 + $7,500).
c. Net income was overstated by $2,053 ($8,534 $6,481).
PE 39A
a. The totals are equal since the adjusting entry was omitted.
b. The totals are unequal. The debit total is higher by $9 ($2,565 $2,556).
PE 39B
a. The totals are unequal. The credit total is higher by $180 ($640 $460).
b. The totals are equal even though the credit should have been to Wages
Payable instead of Accounts Payable.
127
EXERCISES
Ex. 31
1.
2.
3.
4.
Accrued revenue
Accrued expense
Accrued expense
Accrued expense
5.
6.
7.
8.
Prepaid expense
Unearned revenue
Prepaid expense
Unearned revenue
Ex. 32
Account
Accounts Receivable............................
Cash........................................................
Charmaine Hollis, Drawing...................
Interest Payable.....................................
Interest Receivable................................
Land........................................................
Office Equipment...................................
Prepaid Rent..........................................
Supplies..................................................
Unearned Fees.......................................
Wages Expense.....................................
Answer
Normally requires adjustment (AR).

Does not normally require adjustment.
Normally requires adjustment (AE).
Normally requires adjustment (AR).
Normally requires adjustment (PE).
Normally requires adjustment (PE).
Normally requires adjustment (UR).
Normally requires adjustment (AE).
Ex. 33
Supplies......................................................................
Supplies used ($2,975 $614).
Ex. 34
$1,540 ($279 + $1,261)
128
2,361
2,361
Ex. 35
a. Insurance expense (or expenses) will be understated. Net income will be
overstated.
b. Prepaid insurance (or assets) will be overstated. Owners equity will be
overstated.
Ex. 36
a.
Insurance expired ($6,175 $1,995).
4,180
b. Insurance Expense..........................................................
4,180
4,180
4,180
Ex. 37
a.
5,450
b. Insurance Expense..........................................................
5,450
5,450
5,450
Ex. 38
Unearned Fees.................................................................
Fees Earned................................................................
Fees earned ($49,500 $27,180).
129
22,320
22,320
Ex. 39
a. Rent revenue (or revenues) will be understated. Net income will be
understated.
b. Owners equity at the end of the period will be understated. Unearned rent (or
liabilities) will be overstated.
Ex. 310
a.
Fees Earned................................................................
Accrued fees.
17,600
17,600
b. No. If the cash basis of accounting is used, revenues are recognized only
when the cash is received. Therefore, earned but unbilled revenues would not
be recognized in the accounts, and no adjusting entry would be necessary.
Ex. 311
a.
Unearned Fees.................................................................
Fees Earned................................................................
Unearned fees earned during year.
12,300
b. Accounts Receivable......................................................
Fees Earned................................................................
Accrued fees earned.
7,100
12,300
7,100
Ex. 312
a. Fees earned (or revenues) will be understated. Net income will be understated.
b. Accounts (fees) receivable (or assets) will be understated. Owners equity will
be understated.
130
Ex. 313
a.
Salary Expense................................................................
12,375
b. Salary Expense................................................................
16,500
12,375
16,500
Ex. 314
$65,670 ($72,150 $6,480)
Ex. 315
a. Salary expense (or expenses) will be understated. Net income will be
overstated.
b. Salaries payable (or liabilities) will be understated. Owners equity will be
overstated.
Ex. 316
a. Salary expense (or expenses) will be overstated. Net income will be
understated.
b. The balance sheet will be correct. This is because salaries payable has been
satisfied, and the net income errors have offset each other. Thus, owners
equity is correct.
131
Ex. 317
a.
Taxes Expense................................................................
Prepaid Taxes.............................................................
Prepaid taxes expired [($3,000/12) 9 months].
2,250
Taxes Expense................................................................
Taxes Payable............................................................
Accrued taxes.
16,425
2,250
16,425
b. $18,675 ($2,250 + $16,425)
Ex. 318
Accumulated Depreciation........................................
3,275
3,275
Ex. 319
a. $416,750 ($678,950 $262,200)
b. No. Depreciation is an allocation of the cost of the equipment to the periods
benefiting from its use. It does not necessarily relate to value or loss of value.
Ex. 320
a. $2,223,000,000 ($6,078,000,000 $3,855,000,000)
b. No. Depreciation is an allocation method, not a valuation method. That is,
depreciation allocates the cost of a fixed asset over its useful life.
Depreciation does not attempt to measure market values, which may vary
significantly from year to year.
Ex. 321
$324,755,000 ($95,789,000 + $228,966,000)
132
Ex. 322
a. $606,000,000
b. 58.8% ($606,000,000/$1,030,000,000)
Ex. 323
Error (a)
1.
2.
3.
4.
5.
6.
Revenue for the year would be...............

Expenses for the year would be.............
Net income for the year would be..........
Assets at August 31 would be................
Liabilities at August 31 would be...........
Owners equity at August 31
would be....................................................
Error (b)
Overstated
Understated
0
0
0
0
12,450
$12,450
0
12,450
0
0
12,450
Overstated
Understated
0
0
7,280
0
0
$
0
7,280
0
0
7,280
7,280
Ex. 324
$267,970 ($262,800 + $12,450 $7,280)
Ex. 325
a.
18,100
18,100
b. (1) Depreciation expense would be understated. Net income would be

overstated.
(2) Accumulated depreciation would be understated, and total assets would
be overstated. Owners equity would be overstated.
133
Ex. 326
1.
2.
3.
4.
5.
Fees Earned................................................................
12
Supplies......................................................................
24
15
Wages Expense...............................................................
Wages Payable...........................................................
134
12
9
24
15
3
Ex. 327
1. The accountant debited Accounts Receivable for $3,750, but did not credit
Laundry Revenue. This adjusting entry represents accrued laundry revenue.
2. The accountant credited Laundry Equipment for the depreciation expense of
$6,000, instead of crediting the accumulated depreciation account.
3. The accountant credited the prepaid insurance account for $3,800, but only
debited the insurance expense account for $800.
4. The accountant did not debit Wages Expense for $1,200.
5. The accountant debited rather than credited Laundry Supplies for $1,750.
The corrected adjusted trial balance is shown below.
Sweetwater Laundry
Adjusted Trial Balance
October 31, 2008
Debit
Balances
Cash..............................................................................
Accounts Receivable..................................................
Laundry Supplies........................................................
Prepaid Insurance.......................................................
Laundry Equipment.....................................................
Accumulated Depreciation.........................................
Accounts Payable........................................................
Wages Payable............................................................
Mattie Ivy, Capital........................................................
Mattie Ivy, Drawing......................................................
Laundry Revenue........................................................
Wages Expense...........................................................
Rent Expense...............................................................
Utilities Expense..........................................................
Depreciation Expense.................................................
Laundry Supplies Expense........................................
Insurance Expense......................................................
Miscellaneous Expense..............................................
7,500
22,000
2,000
1,400
140,000
54,000
9,600
1,200
60,300
28,775
185,850
50,400
25,575
18,500
6,000
1,750
3,800
3,250
310,950
135
Credit
Balances
310,950
PROBLEMS
Prob. 31A
1.
a. Supplies Expense......................................................
Supplies.................................................................
1,350
b. Unearned Rent............................................................
Rent Revenue........................................................
Rent earned ($3,750/3).
1,250
c. Wages Expense..........................................................
Wages Payable.....................................................
Accrued wages.
1,000
d. Accounts Receivable.................................................
Fees Earned..........................................................
12,275
e. Depreciation Expense...............................................
Accumulated Depreciation..................................
Depreciation expense.
850
1,350
1,250
1,000
12,275
850
2. Adjusting entries are a planned part of the accounting process to update the
accounts. Correcting entries are not planned, but arise only when necessary
to correct errors.
136
Prob. 32A
a. Accounts Receivable.................................................
Fees Earned..........................................................
1,650
b. Supplies Expense......................................................
Supplies.................................................................
1,850
c. Rent Expense.............................................................
Prepaid Rent.........................................................
Prepaid rent expired.
5,000
d. Depreciation Expense...............................................
Equipment depreciation.
1,150
e. Unearned Fees...........................................................
Fees Earned..........................................................
Fees earned ($8,500 $1,500).
7,000
f. Wages Expense..........................................................
Wages Payable.....................................................
Accrued wages.
3,150
137
1,650
1,850
5,000
1,150
7,000
3,150
Prob. 33A
a.
Fees Earned................................................................
1,775
b. Supplies Expense............................................................
Supplies......................................................................
Supplies used ($5,400 $1,200).
4,200
c.
4,100
d. Unearned Fees.................................................................
Fees Earned................................................................
Fees earned.
1,750
e.
Wages Expense...............................................................
Wages Payable...........................................................
Accrued wages.
138
1,775
4,200
4,100
1,750
600
600
Prob. 34A
2008
Apr. 30
30
30
30
30
30
30
Supplies Expense.................................................
Supplies...........................................................
2,850
Insurance Expense...............................................
Prepaid Insurance...........................................
3,250
Depreciation ExpenseEquipment...................
Accumulated DepreciationEquipment......
Equipment depreciation
($34,000 $31,500).
2,500
Depreciation ExpenseAutomobiles................
Accumulated DepreciationAutomobiles
Automobile depreciation
($20,400 $18,250).
2,150
Utilities Expense...................................................
Accounts Payable...........................................
Accrued utilities expense
($8,800 $8,310).
490
Salary Expense.....................................................
Salaries Payable..............................................
Accrued salary ($174,300 $172,300).
2,000
Unearned Service Fees........................................

Service Fees Earned.......................................
Service fees earned ($6,000 $2,900).
3,100
139
2,850
3,250
2,500
2,150
490
2,000
3,100
Prob. 35A
1.
a.
b.
c.
d.
e.
f.
g.
Insurance Expense..................................................
Prepaid Insurance..............................................
4,500
Supplies Expense...................................................
Supplies..............................................................
1,500
Depreciation ExpenseBuilding..........................
Accumulated DepreciationBuilding.............
Building depreciation.
1,600
Depreciation ExpenseEquipment......................
Accumulated DepreciationEquipment.........
4,400
Unearned Rent.........................................................
Rent Revenue.....................................................
Rent revenue earned ($6,750 $3,250).
3,500
Salaries and Wages Expense................................

Salaries and Wages Payable............................
Accrued salaries and wages.
2,800
Accounts Receivable..............................................
Fees Earned........................................................
6,200
140
4,500
1,500
1,600
4,400
3,500
2,800
6,200
Prob. 35A
Concluded
2.
CAMBRIDGE COMPANY
December 31, 2008
Debit
Balances
Cash..............................................................................
Supplies........................................................................
Land..............................................................................
Building........................................................................
Accumulated DepreciationBuilding.......................
Equipment....................................................................
Accumulated DepreciationEquipment..................
Salaries and Wages Payable......................................
Unearned Rent.............................................................
Dave Maier, Capital.....................................................
Dave Maier, Drawing...................................................
Fees Earned.................................................................
Rent Revenue...............................................................
Salaries and Wages Expense.....................................
Advertising Expense...................................................
Repairs Expense.........................................................
Depreciation ExpenseEquipment..........................
Depreciation ExpenseBuilding..............................
Supplies Expense........................................................
141
Credit
Balances
5,550
34,550
2,700
480
112,500
212,250
139,150
135,300
102,350
12,150
2,800
3,250
201,000
15,000
300,800
3,500
146,170
42,375
22,800
17,250
4,400
4,500
1,600
1,500
6,075
765,000
765,000
Prob. 36A
1.
Supplies.................................................................
Supplies used.
1,800
b. Accounts Receivable.................................................
Fees Earned..........................................................
11,600
c. Depreciation Expense...............................................
4,950
d. Wages Expense..........................................................
Wages Payable.....................................................
Accrued wages.
2,250
1,800
11,600
4,950
2,250
2.
Reported amounts
Corrections:
Adjustment (a)
Adjustment (b)
Adjustment (c)
Adjustment (d)
Corrected amounts
Net
Income
Total
Assets
Total
Liabilities
Total
Owners
Equity
$155,000
$350,000
$120,000
$230,000
1,800
+ 11,600
4,950
2,250
$157,600
1,800
+ 11,600
4,950
0
$354,850
0
0
0
+ 2,250
$122,250
1,800
+ 11,600
4,950
2,250
$232,600
142
Prob. 31B
1. a. Accounts Receivable..................................................
Fees Earned............................................................
11,385
b. Supplies Expense........................................................
Supplies..................................................................
2,233
c. Wages Expense...........................................................
Wages Payable.......................................................
Accrued wages.
1,500
d. Unearned Rent.............................................................
Rent Revenue.........................................................
Rent earned ($9,450/3).
3,150
e. Depreciation Expense.................................................
Accumulated Depreciation...................................
Depreciation expense.
2,650
11,385
2,233
1,500
3,150
2,650
2. Adjusting entries are a planned part of the accounting process to update the
accounts. Correcting entries are not planned, but arise only when necessary
to correct errors.
143
Prob. 32B
Supplies.................................................................
1,645
b. Depreciation Expense...............................................
Depreciation for year.
1,375
c. Rent Expense.............................................................
Prepaid Rent.........................................................
Rent expired.
4,525
d. Wages Expense..........................................................
Wages Payable.....................................................
Accrued wages.
2,200
e. Unearned Fees...........................................................
Fees Earned..........................................................
Fees earned ($6,175 $1,500).
4,675
f. Accounts Receivable.................................................
Fees Earned..........................................................
Accrued fees.
6,780
144
1,645
1,375
4,525
2,200
4,675
6,780
Prob. 33B
Supplies.................................................................
($1,820 $300).
1,520
b. Accounts Receivable.................................................
Fees Earned..........................................................
2,310
c. Depreciation Expense...............................................
1,500
d. Wages Expense..........................................................
Wages Payable.....................................................
475
e. Unearned Fees...........................................................
Fees Earned..........................................................
1,000
145
1,520
2,310
1,500
475
1,000
Prob. 34B
2008
July 31
31
31
31
31
31
31
Supplies Expense.................................................
Supplies..........................................................
2,625
Insurance Expense...............................................
Prepaid Insurance..........................................
4,450
Depreciation ExpenseBuildings......................
Accumulated DepreciationBuildings.......
Depreciation ($53,100 $49,500).
3,600
Depreciation ExpenseTrucks..........................
Accumulated DepreciationTrucks............
Depreciation ($13,300 $11,800).
1,500
Utilities Expense...................................................
Accounts Payable..........................................
Accrued utilities expense ($7,520 $6,920).
2,625
4,450
3,600
1,500
600
600
Salary Expense.....................................................
Salaries Payable............................................
Accrued salaries ($74,780 $73,600).
1,180
Unearned Service Fees........................................

Service Fees Earned......................................
Service fees earned ($154,980 $152,680).
2,300
146
1,180
2,300
Prob. 35B
1.
a.
b.
c.
d.
e.
f.
g.
Depreciation ExpenseBuilding..........................
Accumulated DepreciationBuilding.............
Building depreciation.
3,500
Depreciation ExpenseEquipment......................
Accumulated DepreciationEquipment.........
2,300
Salaries and Wages Expense................................

Salaries and Wages Payable............................
Accrued salaries and wages.
1,100
Insurance Expense..................................................
Prepaid Insurance..............................................
Insurance expired ($3,000 $750).
2,250
Accounts Receivable..............................................
Fees Earned........................................................
3,250
Supplies Expense...................................................
Supplies..............................................................
1,200
Unearned Rent.........................................................
Rent Revenue.....................................................
Rent earned ($3,600 $1,500).
2,100
147
3,500
2,300
1,100
2,250
3,250
1,200
2,100
Prob. 35B
Concluded
2.
LINCOLN SERVICE CO.
December 31, 2008
Debit
Balances
Cash..............................................................................
Supplies........................................................................
Land..............................................................................
Building........................................................................
Accumulated DepreciationBuilding.......................
Equipment....................................................................
Accumulated DepreciationEquipment..................
Salaries and Wages Payable......................................
Unearned Rent.............................................................
Molly Jordan, Capital..................................................
Molly Jordan, Drawing................................................
Fees Earned.................................................................
Rent Revenue...............................................................
Salaries and Wages Expense.....................................
Repairs Expense.........................................................
Depreciation ExpenseEquipment..........................
Depreciation ExpenseBuilding..............................
148
Credit
Balances
2,100
13,550
750
525
50,000
80,750
41,350
44,000
19,950
3,750
1,100
1,500
83,550
2,500
131,850
2,100
52,000
14,100
7,500
6,100
2,300
2,250
3,500
1,200
2,025
285,150
285,150
Prob. 36B
1.
a. Accounts Receivable.................................................
Fees Earned..........................................................
8,000
b. Depreciation Expense...............................................
Depreciation for October.
5,500
c. Wages Expense..........................................................
Wages Payable.....................................................
Accrued wages.
2,500
d. Supplies Expense......................................................
Supplies.................................................................
Supplies used.
1,725
8,000
5,500
2,500
1,725
2.
Reported amounts
Corrections:
Adjustment (a)
Adjustment (b)
Adjustment (c)
Adjustment (d)
Corrected amounts
Net
Income
Total
Assets
Total
Liabilities
Total
Owners
Equity
$ 99,480
$400,000
$100,000
$300,000
+ 8,000
5,500
2,500
1,725
$ 97,755
0
0
+ 2,500
0
$102,500
+ 8,000
5,500
2,500
1,725
$298,275
8,000
5,500
0
1,725
$400,775
149
CONTINUING PROBLEM
1.
JOURNAL
Date
2008
May 31
Page 3
Post.
Ref.
Description
Debit
Accounts Receivable...........................
Fees Earned..........................................
Accrued fees earned
(35 hours $40 = $1,400).
12
41
1,400
31Supplies Expense.......................................
Supplies................................................
Supplies used ($920 $160).
56
14
760
31Insurance Expense.....................................
Prepaid Insurance................................
Insurance expired
($3,360/12 months =
$280 per month).
57
15
280
31Depreciation Expense................................
Accum. Depr.Office Equipment......
Office equipment depreciation.
58
18
100
31Unearned Revenue......................................
Fees Earned..........................................
Fees earned ($4,800/2).
23
41
2,400
31Wages Expense.....................................
Wages Payable................................
Accrued wages.
50
22
200
150
Credit
1,400
760
280
100
2,400
200
Continuing Problem
Continued
2.
Cash
Date
2008
May 1
1
1
1
2
3
3
4
8
11
13
14
16
21
22
23
27
28
29
30
31
31
31
11
Item
Balance....................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
Post.
Ref.
Dr.
Cr.
Dr.
Balance
Cr.
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
2
.............
2,500
.............
.............
1,350
4,800
.............
.............
.............
750
.............
.............
1,500
.............
.............
750
.............
.............
.............
400
2,800
.............
.............
.............
.............
1,600
3,360
.............
.............
250
300
180
.............
500
1,000
.............
325
800
.............
560
1,000
150
.............
.............
900
1,000
9,160
11,660
10,060
6,700
8,050
12,850
12,600
12,300
12,120
12,870
12,370
11,370
12,870
12,545
11,745
12,495
11,935
10,935
10,785
11,185
13,985
13,085
12,085
Accounts Receivable
2008
May 1
2
23
30
31
Balance....................
..................................
..................................
..................................
Adjusting.................
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
12
1
2
2
3
.............
.............
1,750
1,100
1,400
151
.............
1,350
.............
.............
.............
1,350
1,750
2,850
4,250
.............
.............
.............
.............
Continuing Problem
Continued
Supplies
14
Date
2008
May 1
18
31
Item
Balance....................
..................................
Adjusting.................
Post.
Ref.
Dr.
Cr.
2
3
.............
750
.............
.............
.............
760
Dr.
Balance
Cr.
170
920
160
Prepaid Insurance
2008
May 1
31
..................................
Adjusting.................
15
1
3
3,360
.............
.............
280
3,360
3,080
Office Equipment
2008
May 5
..................................
Adjusting.................
5,000
.............
5,000
.............
Balance....................
..................................
..................................
..................................
100
.............
Adjusting.................
1
1
2
.............
250
.............
.............
.............
.............
5,000
750
.............
.............
.............
..................................
Adjusting.................
250
5,000
5,750
22
.............
200
.............
Unearned Revenue
2008
May 3
31
100
21
Wages Payable
2008
May 31
.............
18
Accounts Payable
2008
May 1
3
5
18
.............
.............
17
Accumulated DepreciationOffice Equipment

2008
May 31
.............
.............
.............
200
23
1
3
.............
2,400
152
4,800
.............
.............
.............
4,800
2,400
Continuing Problem
Continued
Kris Payne, Capital

Date
2008
May 1
1
Item
Balance....................
..................................
31
Post.
Ref.
Dr.
Cr.
Dr.
Balance
Cr.
.............
.............
.............
2,500
.............
.............
Kris Payne, Drawing

2008
May 1
31
Balance....................
..................................
10,000
12,500
32
.............
1,000
.............
.............
300
1,300
Income Summary
.............
.............
33
This account is not used in Chapter 3.

Fees Earned
2008
May 1
11
16
23
30
31
31
31
Balance....................
..................................
..................................
..................................
..................................
..................................
Adjusting.................
Adjusting.................
41
1
2
2
2
2
3
3
.............
.............
.............
.............
.............
.............
.............
.............
.............
750
1,500
2,500
1,500
2,800
1,400
2,400
.............
.............
.............
.............
.............
.............
.............
.............
Wages Expense
2008
May 1
14
28
31
Balance....................
..................................
..................................
Adjusting.................
50
1
2
3
.............
1,000
1,000
200
.............
.............
.............
.............
400
1,400
2,400
2,600
Office Rent Expense

2008
May 1
1
Balance....................
..................................
5,700
6,450
7,950
10,450
11,950
14,750
16,150
18,550
.............
.............
.............
.............
51
.............
1,600
153
.............
.............
1,000
2,600
.............
.............
Continuing Problem
Continued
Equipment Rent Expense

Date
2008
May 1
13
Item
Balance....................
..................................
52
Post.
Ref.
Dr.
Cr.
.............
500
.............
.............
Dr.
800
1,300
Utilities Expense
2008
May 1
27
Balance....................
..................................
Balance....................
..................................
..................................
.............
560
.............
.............
350
910
Balance....................
..................................
..................................
2
2
.............
325
900
.............
.............
.............
1,340
1,665
2,565
Balance....................
Adjusting.................
1
2
.............
180
800
.............
.............
.............
750
930
1,730
Adjusting.................
.............
760
.............
.............
180
940
Adjusting.................
.............
.............
57
280
.............
280
Depreciation Expense
2008
May 31
.............
.............
.............
56
Insurance Expense
2008
May 31
.............
.............
.............
55
Supplies Expense
2008
May 1
31
.............
.............
54
Advertising Expense
2008
May 1
8
22
.............
.............
53
Music Expense
2008
May 1
21
31
Balance
Cr.
.............
58
100
154
.............
100
.............
Continuing Problem
Concluded
Miscellaneous Expense
Date
2008
May 1
4
29
59
Item
Balance....................
..................................
..................................
Post.
Ref.
Dr.
Cr.
1
2
.............
300
150
.............
.............
.............
Dr.
150
450
600
Balance
Cr.
.............
.............
.............
3.
DANCIN MUSIC
May 31, 2008
Debit
Balances
Cash..............................................................................
Supplies........................................................................
Office Equipment.........................................................
Accumulated DepreciationOffice Equipment.......
Wages Payable............................................................
Unearned Revenue......................................................
Kris Payne, Capital......................................................
Kris Payne, Drawing....................................................
Fees Earned.................................................................
Wages Expense...........................................................
Office Rent Expense...................................................
Equipment Rent Expense...........................................
Music Expense.............................................................
Depreciation Expense.................................................
155
Credit
Balances
12,085
4,250
160
3,080
5,000
100
5,750
200
2,400
12,500
1,300
18,550
2,600
2,600
1,300
910
2,565
1,730
940
280
100
600
39,500
39,500
SPECIAL ACTIVITIES
Activity 31
It is acceptable for Annette to prepare the financial statements for Harre Real
Estate on an accrual basis. The revision of the financial statements to include the
accrual of the $10,000 commissions as of December 31, 2007, is proper if there
remain no contingencies related to the signed, unconditional contract of sale.
That is, if the closing and title transfer is not contingent upon an appraisal,
obtaining a loan, etc., then the earnings process has been completed from the
perspective of Harre Real Estate and the commissions have been earned. If
contingencies remain, then the commission should not be accrued as of
December 31, 2007. Indicating on the loan application to First National Bank that
Harre Real Estate has not been rejected previously for credit is unethical and
unprofessional. In addition, intentionally filing false loan documents is illegal.
Activity 32
The cost of the warranty repairs, $1,560, should be recognized as an expense of
2008 in order to properly match revenues from the sale of the Expedition with the
related expenses. Since the cost of the actual repairs will not be known at the
time of sale (2008), Ford Motor Company would estimate warranty costs and
expenses at the end of 2008. This estimate would be recorded in the accounts
through use of an adjusting entry. The adjusting entry would debit Warranty
Expense and credit Estimated Warranty Payable, a liability account.
156
Activity 33
Revenue is normally recorded when the services are provided or when the goods
are delivered (title passes) to the buyer. By waiting until after the services are
provided, the expenses of providing the services can be more accurately
measured and matched against the related revenues. Also, at this point, the
provider of the services has a right to demand payment for the services if
payment
hasnt
already been received.
Airlines, such as American Airlines, normally record revenue from ticket sales
after completing a flight. At this point, the boarding passes, which have been
collected from the passengers, represent revenue to the airline. In addition, the
expenses related to each flight, such as landing fees and fuel, would have been
incurred and would be accurately measured.
Note to Instructors: You might point out to students the following points related
to the discussion of the adjusting process in this chapter.
(1)
(2)
The receipt of revenue from customers in advance of a flight represents

unearned revenues to the airline. For example, the purchase of discount
tickets, which often requires prepayment months in advance of the actual
flight, is unearned revenue to the airline.
At the end of the airlines accounting period, it would have adjusting entries
related to such items as the following:
Accrued wages for employees

Depreciation on airplanes, terminal buildings, etc.
Unearned revenues (described above)
Accrued income from transporting freight, etc.
Accrued income from other airlines
(When a flight is delayed or canceled, airlines often accept
passengers from other airlines and then later collect the revenue
from the other airline.)
Prepaid expenses related to insurance, etc.
157
Activity 34
a. There are several indications that adjusting entries were not recorded before
the financial statements were prepared, including:
1.
All expenses on the income statement are identified as paid items and
not as expenses.
2.
No expense is reported on the income statement for depreciation, and no

accumulated depreciation is reported on the balance sheet.
3.
No supplies, accounts payable, or wages payable are reported on the

balance sheet.
b. Likely accounts requiring adjustment include:

1.
Truck (for depreciation).
2.
Supplies (paid) expense for supplies on hand.
3.
Insurance (paid) expense for unexpired insurance.
4.
Wages accrued.
5.
Utilities accrued.
Activity 35
Note to Instructors: The purpose of this activity is to familiarize students with
behaviors that are common in codes of conduct. In addition, this activity
addresses an actual ethical dilemma for students.
158

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Chapter 3

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CHAPTER 3

THE ADJUSTING PROCESS

Adjusting entries and

Adjusting entries and

10. Statement (b): Increases the balance of an

Normally requires adjustment (AR).

b. $18,675 ($2,250 + $16,425)

Revenue for the year would be...............

b. (1) Depreciation expense would be understated. Net income would be

Unearned Service Fees........................................

Salaries and Wages Expense................................

Unearned Service Fees........................................

Salaries and Wages Expense................................

Accumulated DepreciationOffice Equipment

Kris Payne, Capital

Kris Payne, Drawing

This account is not used in Chapter 3.

Office Rent Expense

Equipment Rent Expense

The receipt of revenue from customers in advance of a flight represents

Accrued wages for employees

No expense is reported on the income statement for depreciation, and no

No supplies, accounts payable, or wages payable are reported on the

b. Likely accounts requiring adjustment include:

Truck (for depreciation).

Supplies (paid) expense for supplies on hand.

Insurance (paid) expense for unexpired insurance.

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