Chapter 3 Exercises

Exercises
Exercise 3-1 Determining assets and expenses for accrual and cash

accounting
On March 1, 2015, a company paid an $18,000 premium on a 36-month insurance

policy for coverage beginning on that date. Refer to that policy and fill in the
blanks in the following table.
Check 2017 insurance expense: Accrual, $6,000; Cash, $0.

Dec. 31, 2017, asset: Accrual, $1,000; Cash, $0.
Exercise 3-2 Classifying adjusting entries
In the blank space beside each adjusting entry, enter the letter of the
explanation A through F that most closely describes the entry.
A. To record this period’s depreciation expense.
B. To record accrued salaries expense.
C. To record this period’s use of a prepaid
expense.
D. To record accrued interest revenue.
E. To record accrued interest expense.
F. To record the earning of previously unearned income.
Exercise 3-3 Adjusting and paying accrued wages
Pablo Management has five part-time employees, each of whom earns $250 per
day. They are normally paid on Fridays for work completed Monday through
Friday of the same week. Assume that December 28, 2017, was a Friday, and that
they were paid in full on that day. The next week, the five employees worked only
four days because New Year’s Day was an unpaid holiday.
a. Assuming that December 31, 2017, was a Monday, prepare the adjusting
entry for wages expense that would be recorded at the close of that day.
b. Assuming that January 4, 2018, was a Friday, prepare the journal entry that
would be made to record payment of the employees’ wages for that week.
Exercise 3-4 Determining cost flows through accounts

Exercise 3-5 Adjusting and paying accrued expenses
The following three separate situations require adjusting journal entries to prepare
financial statements as of April 30. For each situation, present both:
 The April 30 adjusting entry.

 The subsequent entry during May to record payment of the accrued
expenses.
Entries can draw from the following partial chart of accounts: Cash; Accounts
Receivable; Prepaid Interest; Salaries Payable; Interest Payable; Legal Services
Payable; Unearned Revenue; Revenue; Salaries Expense; Interest Expense; Legal
Services Expense; Depreciation Expense.
a. On April 1, the company retained an attorney for a flat monthly fee of

$3,500. Payment for April legal services was made by the company on May 12.
b. A $900,000 note payable requires 12% annual interest, or $9,000, to be paid
at the 20th day of each month. The interest was last paid on April 20 and the
next payment is due on May 20. As of April 30, $3,000 of interest expense has
accrued.
c. Check (b) May 20 Dr. Interest Expense, $6,000
d. Total weekly salaries expense for all employees is $10,000. This amount is
paid at the end of the day on Friday of each five-day workweek. April 30
falls on a Tuesday, which means that the employees had worked two days
since the last payday. The next payday is May 3.
Exercise 3-6 Preparing adjusting entries
Prepare adjusting journal entries for the year ended (date of) December 31, 2017,
for each of these separate situations. (Entries can draw from the following partial
chart of accounts: Cash; Accounts Receivable; Supplies; Prepaid Insurance;
Equipment; Accumulated Depreciation—Equipment; Wages Payable; Unearned
Revenue; Revenue; Wages Expense; Supplies Expense; Insurance Expense;
Depreciation Expense—Equipment.)
a. Depreciation on the company’s equipment for 2017 is computed to be

$18,000.
b. The Prepaid Insurance account had a $6,000 debit balance at December 31,
2017, before adjusting for the costs of any expired coverage. An analysis of the
company’s insurance policies showed that $1,100 of unexpired insurance
coverage remains.
c. The Office Supplies account had a $700 debit balance on December 31,
2016; and $3,480 of office supplies were purchased during the year. The
December 31, 2017, physical count showed $300 of supplies available.
Check (c) Dr. Supplies Expense, $3,880
d. Two-thirds of the work related to $15,000 of cash received in advance was
performed this period.
e. The Prepaid Insurance account had a $6,800 debit balance at December 31,
2017, before adjusting for the costs of any expired coverage. An analysis of
insurance policies showed that $5,800 of coverage had expired.
(e) Dr. Insurance Expense, $5,800
f. Wage expenses of $3,200 have been incurred but are not paid as of
December 31, 2017.
Exercise 3-7 Preparing adjusting entries
For each of the following separate cases, prepare adjusting entries required of
financial statements for the year ended (date of) December 31, 2017. (Entries can
draw from the following partial chart of accounts: Cash; Interest Receivable;
Supplies; Prepaid Insurance; Equipment; Accumulated Depreciation—Equipment;
Wages Payable; Interest Payable; Unearned Revenue; Interest Revenue; Wages
Expense; Supplies Expense; Insurance Expense; Interest Expense; Depreciation
Expense—Equipment.)
a. Wages of $8,000 are earned by workers but not paid as of December 31,
2017.
b. Depreciation on the company’s equipment for 2017 is $18,000.
c. The Office Supplies account had a $240 debit balance on December 31,
2016. During 2017, $5,200 of office supplies are purchased. A physical count
of supplies at December 31, 2017, shows $440 of supplies available.
d. The Prepaid Insurance account had a $4,000 balance on December 31, 2016.
An analysis of insurance policies shows that $1,200 of unexpired insurance
benefits remain at December 31, 2017.
Check (d) Dr. Insurance Expense, $2,800
e. The company has earned (but not recorded) $1,050 of interest from
investments in CDs for the year ended December 31, 2017. The interest revenue
will be received on January 10, 2018.
(e) Cr. Interest Revenue, $1,050
f. The company has a bank loan and has incurred (but not recorded) interest
expense of $2,500 for the year ended December 31, 2017. The company must
pay the interest on January 2, 2018.
Exercise 3-8 Analyzing and preparing adjusting entries
Following are two income statements for Alexis Co. for the year ended December
31. The left number column is prepared before any adjusting entries are recorded,
and the right column includes the effects of adjusting entries. The middle column
identifies the income statement effect of the eight adjusting entries (the balance
sheet part of the entries is not shown here). Analyze the statements and prepare the
eight adjusting entries a through g that likely were recorded. Note: Answer
for a has two entries (i) the $7,000 adjustment for Fees Earned, 30% (or $2,100)
has been earned but not billed, and (ii) the other 70% (or $4,900) has been earned
by performing services that were paid for in advance.
Exercise 3-9 Preparing adjusting entries—accrued revenues and expenses
Prepare year-end adjusting journal entries for M&R Company as of December 31,
2017, for each of the following separate cases. (Entries can draw from the
following partial chart of accounts: Cash; Accounts Receivable; Interest
Receivable; Equipment; Wages Payable; Salary Payable; Interest Payable; Lawn
Services Payable; Unearned Revenue; Revenue; Interest Revenue; Wages
Expense; Salary Expense; Supplies Expense; Lawn Services Expense; Interest
Expense.)
a. M&R Company provided $2,000 in services to customers that are expected

to pay the company sometime in January following the company’s year-end.
b. Wage expenses of $1,000 have been incurred but are not paid as of
December 31.
c. M&R Company has a $5,000 bank loan and has incurred (but not recorded)
8% interest expense of $400 for the year ended December 31. The company
will pay the $400 interest in cash on January 2 following the company’s year-
end.
d. M&R Company hired a firm to provide lawn services at a monthly fee of
$500 with payment occurring on the 15th of the following month. Payment for
December services will occur on January 15 following the company’s year-end.
e. M&R Company has earned $200 in interest revenue from investments for
the year ended December 31. The interest revenue will be received on January
15 following the company’s year-end.
f. Salary expenses of $900 have been earned by supervisors but not paid as of
December 31.
Exercise 3-10 Computing and interpreting profit margin
Use the following information to compute profit margin for each separate
company a through e.
Net Income Net Sales

a. $ 4,361 $ 44,500
b
. 97,706 398,800
c. 111,281 257,000
d
. 65,646 1,458,800
e. 80,132 435,500
Net Income Net Sales
Which of the five companies is the most profitable according to the profit margin
ratio? Interpret the profit margin ratio for company c.
Exercise 3-11A Adjusting for prepaids recorded as expenses and unearned

revenues recorded as revenues
Ricardo Construction began operations on December 1. In setting up its accounting

procedures, the company decided to debit expense accounts when it prepays its
expenses and to credit revenue accounts when customers pay for services in
advance. Prepare journal entries for items a through d and the adjusting entries as
of its December 31 period-end for items e through g. (Entries can draw from the
following partial chart of accounts: Cash; Accounts Receivable; Interest
Receivable; Supplies; Prepaid Insurance; Unearned Remodeling Fees; Remodeling
Fees Earned; Supplies Expense; Insurance Expense; Interest Expense.)
a. Supplies are purchased on December 1 for $2,000 cash.
b. The company prepaid its insurance premiums for $1,540 cash on December
2.
c. On December 15, the company receives an advance payment of $13,000
cash from a customer for remodeling work.
d. On December 28, the company receives $3,700 cash from another customer
for remodeling work to be performed in January.
e. A physical count on December 31 indicates that the Company has $1,840 of
supplies available.
f. An analysis of the insurance policies in effect on December 31 shows that
$340 of insurance coverage had expired.
Check (f) Cr. Insurance Expense, $1,200
g. As of December 31, only one remodeling project has been worked on and
completed. The $5,570 fee for this project had been received in advance and
recorded as remodeling fees earned.
(g) Dr. Remodeling Fees Earned, $11,130
Exercise 3-12A Recording and reporting revenues received in advance

Costanza Company experienced the following events and transactions during July.
The company has the following partial chart of accounts: Cash; Accounts
Receivable; Unearned Fees; Fees Earned.
Jul Received $3,000 cash in advance of performing work for Vivian

y 1 Solana.
6 Received $7,500 cash in advance of performing work for Iris Haru.
12 Completed the job for Solana.
Received $8,500 cash in advance of performing work for Amina
18 Jordan.
27 Completed the job for Haru.
31 None of the work for Jordan has been performed.
a. Prepare journal entries (including any adjusting entries as of the end of the
month) to record these events using the procedure of initially crediting the
Unearned Fees account when payment is received from a customer in advance
of performing services.
b. Prepare journal entries (including any adjusting entries as of the end of the
month) to record these events using the procedure of initially crediting the Fees
Earned account when payment is received from a customer in advance of
performing services.
c. Under each method, determine the amount of earned fees reported on the
income statement for July and the amount of unearned fees reported on the
balance sheet as of July 31.
Check (c) Fees Earned–using entries from part b, $10,500
Exercise 3-13 Preparing a balance sheet following IFRS
Adidas Group reported the following balance sheet accounts in a recent year

(euros in millions). Prepare the balance sheet for this company, following usual
IFRS practices. Assume the balance sheet is reported as of December 31, 2014.

Chapter 3 Exercises

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Chapter 3 Exercises

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What are the steps involved in adjusting entries?

What are the steps involved in adjusting entries?

What are the key differences between accrual and cash basis accounting?

What are the key differences between accrual and cash basis accounting?

Exercises

Exercise 3-1 Determining assets and expenses for accrual and cash

On March 1, 2015, a company paid an $18,000 premium on a 36-month insurance

Check 2017 insurance expense: Accrual, $6,000; Cash, $0.

Exercise 3-2 Classifying adjusting entries

Exercise 3-4 Determining cost flows through accounts

 The April 30 adjusting entry.

a. On April 1, the company retained an attorney for a flat monthly fee of

Exercise 3-6 Preparing adjusting entries

a. Depreciation on the company’s equipment for 2017 is computed to be

Exercise 3-7 Preparing adjusting entries

Exercise 3-8 Analyzing and preparing adjusting entries

a. M&R Company provided $2,000 in services to customers that are expected

Exercise 3-10 Computing and interpreting profit margin

Net Income Net Sales

Exercise 3-11A Adjusting for prepaids recorded as expenses and unearned

Ricardo Construction began operations on December 1. In setting up its accounting

Exercise 3-12A Recording and reporting revenues received in advance

Jul Received $3,000 cash in advance of performing work for Vivian

Exercise 3-13 Preparing a balance sheet following IFRS

Adidas Group reported the following balance sheet accounts in a recent year

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