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Copy of Chap004 1.doc
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Copy of Chap004 1.doc-Chapter 04 - Adjustments, Fi...
Copy_of_Chap004_1.doc-Chapter 04 - Adjustments, Financial Statements,
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Copy_of_Chap004_1.doc-Chapter 04 - Adjustments, Financial Statements,
Page 15
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–3.
Req. 1
The annual reporting period for this company is January 1 through December 31, 2011.
Req. 2 (Adjusting entries)
Both transactions are accruals because revenue has been earned and expenses
incurred but no cash has yet been received or paid.
(a)
1.
Wages expense is incurred.
2.
Cash will be paid in the next period to employees who worked in the
current period – an accrued expense needs to be recorded.
3.
Amount:
$7,000 given
Adjusting entry –
Wages expense (+E,
SE)
.............................
7,000
Wages payable (+L)
...............................
7,000
(b)
1.
Interest revenue is now earned.
2.
Cash will be received in the future – an accrued revenue needs to be
recorded.
3.
Amount:
$2,000 given
Adjusting entry –
Interest receivable (+A)
.................................
2,000
Interest revenue (+R, +SE)
....................
2,000
Req. 3
Adjusting entries are necessary at the end of the accounting period to ensure that all
revenues earned and expenses incurred and the related assets and liabilities are
measured properly.
The entries above are accruals; entry (a) is an accrued expense
(incurred but not yet recorded) and entry (b) is an accrued revenue (earned but not yet
recorded).
In applying the accrual basis of accounting, revenues should be recognized
when earned and measurable and expenses should be recognized when incurred in
generating revenues.
4-15
Page 16
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
E4–4.
Req. 1
Prepaid Insurance is a deferred expense that needs to be adjusted each period for the
amount used during the period.
The amount of expense is computed as follows:
$3,600 x 3/24 = $450 used
Adjusting entry:
Insurance expense (+E,
SE)
......................................
450
Prepaid insurance (
A)
......................................
450
Req. 2
Shipping Supplies is a deferred expense that needs to be adjusted at the end of the
period for the amount of supplies used during the period.
The amount is computed as follows:
Beginning balance
$11,000
Supplies purchased
60,000
Supplies on hand at end
(20,000)
Supplies used
$51,000
Adjusting entry:
Shipping supplies expense (+E,
SE)
..........................
51,000
Shipping supplies (
A)
.......................................
51,000
Req. 3
Prepaid Insurance
Insurance Expense
10/1
3,600
AJE
450
AJE
450
End.
3,150
End.
450
Shipping Supplies
Shipping Supplies Expense
Beg.
11,000
Purch. 60,000
AJE
51,000
AJE
51,000
End.
20,000
End.
51,000
2011 Income statement:
Insurance expense
$
450
Shipping supplies expense
$51,000
Req. 4
2011 Balance sheet:
Prepaid insurance
$
3,150
Shipping supplies
$20,000
4-16
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