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Copy of Chap004 1.doc
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,
Copy of Chap004 1.doc-Chapter 04 - ...
Copy_of_Chap004_1.doc-Chapter 04 - Adjustments, Financial Statements,
Page 70
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–6.
(continued)
Transaction (c):
1.
This transaction will directly affect Carey’s financial statements for two years, with
the expense incurred in 2013 and the cash payment in 2014.
2.
The $7,500 should be reported as wage expense in the 2013 income statement
and as a liability on the 2013 balance sheet.
On January 5, 2014, the liability will
be paid.
Therefore, the 2014 balance sheet will reflect a reduced cash balance and
reduced liability balance.
The transaction will not directly affect the 2014 income
statement (unless the adjusting entry was not made).
3.
Yes, an adjusting entry must be made to (a) record the $7,500 as an expense in
2013 (matching principle) and (b) to record the liability which will be paid in 2014.
December 31, 2013--Adjusting entry:
Wage expense (+E,
SE)
.................................
7,500
Wages payable (+L)
..............................
7,500
Note:
On January 5, 2014, the liability, Wages Payable, of $7,500 will be paid. Wage
expense for 2014 will not include this $7,500.
The 2014 related entry will debit
(decrease) Wages Payable, and credit (decrease) Cash, $7,500.
Transaction (d):
1.
Yes, service revenue of $45,000 (i.e., $60,000 x 3/4) should be recorded as earned
by Carey in conformity with the revenue principle.
Service revenue is recognized
as the service is performed.
2.
Recognition of revenue earned but not collected by the end of 2013 requires an
adjusting entry.
This adjusting entry is necessary to (a) record the revenue earned
(to be reported on the 2013 income statement) and (b) record the related account
receivable (an asset to be reported on the 2013 balance sheet).
The adjusting
entry on December 31, 2013 is:
Accounts receivable (+A)
.............................................
45,000
Service revenue (+R, +SE)
...............................
45,000
($60,000 total price x 3/4 completed)
3.
February 15, 2014--Completion of the last phase of the service contract and cash
collected in full:
Cash (+A)
....................................................................
60,000
Accounts receivable (
A)
...................................
45,000
Service revenue (+R, +SE)
...............................
15,000
4-70
Page 71
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–7.
Req. 1
Adjusting entries:
(a)
Expenses (insurance) (+E,
SE)
.........................................
1
Prepaid insurance (
A)
..............................................
1
To adjust for expired insurance.
(b)
Rent receivable (+A)
...........................................................
2
Revenues (rent) (+R, +SE)
........................................
2
To adjust for rent revenue earned but not yet collected.
(c)
Expenses (depreciation) (+E,
SE)
.....................................
11
Accumulated depreciation (+XA,
A)
.........................
11
To adjust for annual depreciation.
(d)
Expenses (wages) (+E,
SE)
..............................................
3
Wages payable (+L)
.................................................
3
To adjust for wages earned but not recorded or paid.
(e)
Income tax expense (+E,
SE)
...........................................
5
Income taxes payable (+L)
.......................................
5
To adjust for income tax expense.
(f)
Unearned rent revenue (
L)
.................................................
3
Revenues (rent) (+R, +SE)
........................................
3
To adjust for rent revenue collected but unearned.
Req. 2
Closing entry
(from the adjusted trial balance):
Revenues (
R)
......................................................................
103
Retained earnings (+SE)
...............................................
15
Expenses (
E)
.................................................................
83
Income tax expense (
E)
................................................
5
To close the temporary accounts to Retained Earnings for
2011.
4-71
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