MASTERINGADJUSTINGENTRIES

TESTBANKSOLUTIONS

Section1WHYWEUSEACCRUALS,DEFERRALSANDOTHERADJUSTMENTS

1. c.
2. a.
3. b.
4. a.
5. d.
6. c.
7. d.

Section2ACCRUEDREVENUE

1. b.
2. d.
3. c. $15,0008%=$1,200.Inaccrualaccounting,revenueisrecognizedwhen
earnedregardlessofwhencashisreceived.
4. c. Theoriginalentrymusthavecreditedthe$1,500toRevenue.To
recognize$4,000revenueearnedthisyear,another$2,500mustbe
credited(addedto)Revenue.
5. d. WithoutanAJEthatdebits(increases)A/Randcredits(increases)
Revenue,assetsandnetincomewillbeunderstated.Liabilitiesarenot
affectedbecausenoliabilitywasinvolved.

Section3ACCRUEDEXPENSES(ACCRUEDLIABILITIES)

1. b. $20,000aweek/5workdays=$4,000salariesaccrueddaily2days=
$8,000.
2. b. TheAJEshoulddebitUtilitiesExpenseandcreditaliability(payable)
account,UtilityExpensePayable.
3. d. $35,000/5=$7,000insalariesaccruedeachworkday4days=$28,000.
4. c. Althoughthe$5,000invoiceisforthenext5monthsofads,only$2,000
(2months)canberecognizedasanexpenseforthecurrentyear.$1,000was
recognizedonNovember1,soanadditional$1,000mustberecognizedwith
adebittoAdvertisingExpenseandthatsameunpaid$1,000isnowa
liabilitywithacredittoAdvertisingPayableuntilyoupayit.
5. a. TheAJEwilldebitSalaryExpenseandcreditSalaryPayable.Without
thisentry,netincomewillbeoverstatedandliabilitiesunderstated.
Assetsarenotinvolved.
6. b. $10,0008%5/12=$333.
7. b. $20,0006%=$1,200ayear,$1,2002/12=$200.

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Section4REVENUECOLLECTEDINADVANCE(UNEARNEDREVENUE)

1. d. Thequestiondoesnotsaywhetheralltherevenuewasearned.If,atyear
end,allrevenuehavebeenearned,(a)iscorrect:noAJEwillberequired.
Butifallrevenuehasnotbeenearned,then(c)iscorrect:theremayneedto
beanAJEthatdebitsRevenuetoreducethebalancetotheamountearned
andcreditsUnearnedRevenuefortheamounttobeearnedinthefuture.
2. a. AsofDecember31,only4monthsrevenuehasbeenearned($24,000/12
4=$8,000)sothebalanceinRevenuemustbereducedby$9,000
($17,000balance$8,000earned)andtransferredtoUnearnedRent
Revenuetobeearnedinthefuture.
3. d. OnDecember31,only4monthsrevenuehasbeenearned($24,000/124
=$8,000),sothebalanceinRevenuemustbereducedby$7,000($15,000
balance$8,000earned)andtransferredtoUnearnedRentRevenue
untilitisearnedinthefuture.
4. c. Atyearend,$17,500ofrevenuehasbeenearned($125,00014%),sothe
balanceinRevenuemustbereducedby$22,500($40,000balance
$17,500earned)andtransferredtoUnearnedPaintingRevenueuntilitis
earnedinthefuture.
5. c. Atyearend,$18,750ofrenthasbeenearned($75,000/123)andmust
betransferredfromtheliabilityaccountRentReceivedinAdvanceto
RentRevenuetorecognizetheamountearned.
6. a. Atyearend,$3,000inrevenuehasbeenearned($15,00020%)sothe
$3,000mustbetransferredtoRevenue.
7. a. Atyearend,onlypartofthe$10,000advancehasbeenearnedsoweneed
anAJEthattransferstheportionnotearnedtoaliabilityaccount,such
asUnearnedRevenue,tobeearnedinthefuture.WithoutthisAJE,net
incomewillbeoverstatedbecausetoomuchrevenueisrecognized,and
liabilitieswillbeunderstatedbecausetheliabilityaccountbalancewillbe
toolow.
8. c. Someofthe$10,000advancehasbeenearnedandmustberecognized,so
thecompanyneedstorecordanAJEtotransferthatamountfrom
UnearnedRevenuetoRevenue.Withoutthisentrynotenoughrevenuewill
havebeenrecognizedsonetincomewillbeunderstated.Liabilitieswillbe
overstatedbecausethebalanceinUnearnedRevenueistoohigh.

Section5PREPAID(DEFERRED)EXPENSES

1. a. Atyearend,thebalanceintheSuppliesOnHandassetaccountmust
show$6,000forthesuppliesthatwillbeusedinthefuture.Atthesame
timethe$21,000insuppliesusedupmustberecognizedasanexpense
incurredthisyear.
2. d. 3monthsofinsurancehasbeenusedup:$15,000/123=$3,750.
3. b. Atyearend,yourcompanyhasincurredonly$5,000ofexpense($20,000
25%),so$9,000mustbetransferredtoaprepaidaccounttobeusedup
inthefuture.

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4. b. Atyearend,$2,000ofservice($1,000amonth2months)hasbeenusedup.
5. c. Atyearend,$4,000ofservice($12,000/12months4months)hasbeenusedup.
6. b. Yourcompanymustrecognizethatamountofinsuranceusedupduringthe
year.ThisrequiresanAJEthatdebitsInsuranceExpenseandthencredits
PrepaidInsurancetoreducethisassetaccountbythesameamount.The
balanceinPrepaidInsurancewillthenshowtheamountofinsurancetobe
usedupinthefuture.Withoutthisentry,netincomewillbeoverstated
becausetoolittleexpensewasrecognizedandassetswillbeoverstated
becausetheportionusedupduringtheyearisstillintheaccount.
7. d. Becauseonlysomerenthasbeenusedup,anAJEisrequiredthatdebits
PrepaidRentfortheamountfortheamounttobeusedupinthefuture
andcreditsRentExpensetoreducethebalancetotheamountofexpense
incurredthisyear.
8. a. Someinsurancehasbeenusedup,soAJEisrequiredthatdebits
InsuranceExpensefortheamountofexpenseincurredandcredits
PrepaidInsurance,anassetaccount,fortheamountthatisnolonger
availabletobeusedupinthefuture.Withoutthisentry,bothnetincome
andassetswillbeoverstated.
9. a. SomerenthasbeenusedupatyearendsoanAJEisrequiredtodebitRent
Expensetorecognizetheamountofrentusedup,andcreditsPrepaidRent
toreducethisassettotheamountstillavailabletobeusedupinthefuture.
Withoutthisentry,bothnetincomeandassetswillbeoverstated.
10. a. $3,600paid/36months=$100ofinsurancepermonth,$1005months=
$500insuranceexpenseincurredfor20X8.

Section6OTHERENDOFPERIODENTRIES

1. b. $121,875originalcost$15,000residualvalue=$106,875depreciable
base/9years=$11,875depreciationexpenseperyear.
2. a. $300,000originalcost$25,000residualvalue=$275,000depreciablebase
10years=$27,500depreciationexpenseayear.Landcannotbe
depreciated.
3. c. $610,000creditsalesfortheyear2%uncollectable=$12,200baddebt
expensefortheyear.
4. c. TheendingbalanceintheAllowanceaccountmustbe$46,000($920,000
A/R5%uncollectable).Currently,theAllowanceaccounthasacredit
balanceof$34,000.Toincreasethebalanceto$46,000,weneedtocredit
theAllowanceaccountforanadditional$12,000.
5. a. TheAllowanceaccountneedstoendtheyearwithacreditbalanceof
$21,000.Butcurrentlythereisadebit(negative)balanceof$7,000.This
requiresacredittotheaccount$28,000$7,000toremovethedebit
balance=$21,000tocreatetherequiredcreditbalance.
6. a. TheendingbalanceintheAllowanceaccountneedstobe$18,000butis
currentlyonly$15,000,soanAJEisrequiredtodebitBadDebtExpense
andcredittheAllowanceaccountfor$3,000.Withoutthisentry,expenses

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willbetoolowsonetincomewillbeoverstatedandassetswillbe
overstatedbecausethenetrealizablevalueofA/Rwillalsobetoolow.
7. a. $95,000originalcost$13,000salvagevalue/8years=$10,250
depreciationexpenseperyear.
8. c. $152,000originalcost$22,000residualvalue/5years=$26,000
depreciationexpenseperyear.
9. d. $73,000originalcost$8,000residualvalue/6years=$10,833
depreciationexpenseperyear.
10. b. $31,000originalcost$4,000residualvalue/9years=$3,000
depreciationexpenseperyear.
11. a. $223,000originalcost$40,000residualvalue/7years=$26,143
depreciationexpenseperyear.
12. c. $286,000creditsales2%=$5,720uncollectable.Whenyouestimatebad
debtexpenseasapercentageofcreditsales,theAllowanceaccountis
irrelevant.
13. a. $159,000creditsales3%=$4,770uncollectable.Whenyouestimatebad
debtexpenseasapercentageofcreditsales,theAllowanceaccountis
irrelevant.
14. a. WithoutanadjustmenttoDepreciationExpense,expenseswillbetoo
low,sonetincomewillbeoverstated.AccumulatedDepreciationwillalso
beunderstatedwhichmeansAssetswillbeoverstated.
15. a. WithoutanAJE,baddebtexpensewillbetoolowandifexpensesaretoo
low,netincomewillbeoverstated.TheAllowanceAccountwillalsobe
understated,sothenetrealizablevalueofA/Rwillbetoohighandassets
willbeoverstated.
16. a. WithoutthisAJE,therewillbenodebittoBadDebtExpensesoexpenses
willbetoolowandnetincomewillbeoverstated.Ifwedontcreditthe
Allowanceaccount,thenetrealizablevalueofA/Rwillbetoohigh,so
assetswillbeoverstated.

Section7FROMUNADJUSTEDTRIALBALANCETOFINANCIALSTATEMENTS
and
Section8APPLYINGYOURKNOWLEDGETOTHETRIALBALANCE

1. d.
2. a.
3. b.
4. a.
5. c.
6. d. ThesequenceisusuallyAssets,Liabilities,Equity,Revenueand
Expense.
7. d.
8. d. AccumulatedDepreciationshowsthereductionintherelatedassetaccount
andthereforehasanormalcreditbalance.UnearnedRevenueisaliability
accountsoitalsohasanormalcreditbalance.

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9. d.
10. a.
11. b. $4,000unadjustedbalanceinWageExpense+$1,000adjustment=
$5,000adjustedbalance.
12. d. $1,500unadjustedbalanceinSuppliesExpense$600adjustment=
$900adjustedbalance.
13. c. $50,000A/R4%=$2,000requiredbalanceinBadDebtExpense.Before
adjustmentAllowanceaccounthasa$2,000debitbalance.
14. c. $20,000loanpayable10%annualinterest=$2,000accruedannualinterest.

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