EX 3-26 Adjusting entries from trial balances

The unadjusted and adjusted trial balances for McWay Services Co. on August 31, 2012,
are shown below.

McWay Services Co.

Trial Balance

August 31, 2012

                                                                          Unadjusted                         Adjusted
                                                                       Debit      Credit                  Debit     Credit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8                                        8
Accounts Receivable. . . . . . . . . . . . . . . . . . .    19                                      21
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6                                        5
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . .  10                                        6
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13                                      13
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 20                                     20
Accumulated Depreciation—Equipment . . . . . .                   4                                     5
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . ..13                                 13
Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0                                   1
Chad McWay, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 46                                  46
Chad McWay, Drawing . . . . . . . . . . . . . . . . . . .4                                        4
Fees Earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  37                                  39
Wages Expense . . . . . . . . . . . . . . . . . . . . 12                                        13
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . 4                                          4
Insurance Expense . . . . . . . . . . . . . . . . . . . .0                                           4
Utilities Expense . . . . . . . . . . . . . . . . . . . . . 2                                          2
Depreciation Expense . . . . . . . . . . . . . . . . . 0                                            1
Supplies Expense. . . . . . . . . . . . . . . . . . . .  0                                           1
Miscellaneous Expense . . . . . . . . . . . . . . . .2                                            2
                                                                     100             100                    104      104
Journalize the five entries that adjusted the accounts at August 31, 2012. None of the
accounts were affected by more than one adjusting entry.

Answer:
1. Accounts Receivable .................................................... 2
                          Fees Earned.............................................................. 2
                                     Accrued fees earned.

2. Supplies Expense.......................................................... 1
                         Supplies .................................................................... 1
                                   Supplies used.

3. Insurance Expense........................................................ 4
                          Prepaid Insurance .................................................... 4
                                   Insurance expired.

4. Depreciation Expense................................................... 1
                          Accumulated Depreciation—Equipment................ 1
                                    Equipment depreciation.

5. Wages Expense ............................................................. 1
                           Wages Payable ......................................................... 1
                                      Accrued wages.

EX 3-28 Vertical analysis of income statement

The following data (in millions) are taken from the financial statements of Nike Inc. for
the years ending May 31, 2009 and 2008:
                                                                        2009                   2008
Net sales (revenues)                                      $19,176               $18,627
Net income                                                    1,487                     1,883
a. Determine the amount of change (in millions) and percent of change in net income
for 2009. Round to one decimal place.
b. Determine the percentage relationship between net income and net sales (net income
divided by net sales) for 2009 and 2008. Round to one decimal place.
c. What conclusions can you draw from your analysis?

Answer:
a. $396 million decrease ($1,487 – $1,883)
    21.0% ($396 ÷ $1,883) decrease

b. 2009: 7.8% ($1,487 ÷ $19,176)
 2008: 10.1% ($1,883 ÷ $18,627)

c. The net income decreased during 2009 by $396 million, or 21.0%, from 2008,
an unfavorable trend. The percent of net income to net sales also decreased.

EX 3-29 Vertical analysis of income statement

The following income statement data (in millions) for Dell Inc. and Hewlett-Packard Company
(HP) were taken from their recent annual reports:
                                                                        Dell                         Hewlett-Packard
Net sales                                                     $ 61,101                            $118,364
Cost of goods sold (expense)                       (50,144)                              (89,592)
Operating expenses                                        (7,767)                              (17,970)
Operating income (loss)                                 $ 3,190                              $ 10,802
a. Prepare a vertical analysis of the income statement for Dell. Round to one decimal
place.
b. Prepare a vertical analysis of the income statement for HP. Round to one decimal
place.
c. Based on (a) and (b), how does Dell compare to HP?

Answer:
a. Dell Inc.
                                                                          Amount          Percent 
 Net sales................................................   $ 61,101         100.0%
 Cost of goods sold ...................................     (50,144)           82.1
 Operating expenses .................................       (7,767)             12.7
 Operating income (loss) ..........................        $ 3,190            5.2%

b. Hewlett-Packard Company (HP)
                                                                         Amount            Percent 
 Net sales................................................ $118,364           100.0%
 Cost of goods sold ...................................    (89,592)             75.7
 Operating expenses .................................     (17,970)             15.2
 Operating income (loss) ..........................     $ 10,802              9.1%

c. Hewlett-Packard (HP) is more profitable than Dell. Specifically, HP’s cost of
goods sold of 75.7% is significantly less (6.4%) than Dell’s cost of goods sold
of 82.1%. This is partially offset by HP’s higher operating expenses of 15.2%
as compared to Dell’s operating expenses of 12.7%. The net result is that HP
generates an operating income of 9.1% of sales, while Dell generates operating income of 5.2% of sales. Dell must improve its operations if it is to remain
competitive with HP.

EX 3-25 Adjusting entries for depreciation; effect of error

On December 31, a business estimates depreciation on equipment used during the first
year of operations to be $14,500.
a. Journalize the adjusting entry required as of December 31.
b. If the adjusting entry in (a) were omitted, which items would be erroneously stated on
(1) the income statement for the year and (2) the balance sheet as of December 31?

Answer:
a. Depreciation Expense................................................... 14,500
                      Accumulated Depreciation—Equipment................ 14,500
                                  Depreciation on equipment.


b.  (1) Depreciation expense would be understated. Net income would be overstated.
     (2) Accumulated depreciation would be understated, and total assets would
          be overstated. Owner’s equity would be overstated.

EX 3-24 Effects of errors on financial statements

If the net income for the current year had been $240,000 in Exercise 3-23, what would
have been the correct net income if the proper adjusting entries had been made?

Answer:
$255,000 ($240,000 + $18,000 – $3,000)

EX 3-23 Effects of errors on financial statements

The accountant for Hallmark Medical Co., a medical services consulting firm, mistakenly
omitted adjusting entries for (a) unearned revenue earned during the year ($18,000) and
(b) accrued wages ($3,000). Indicate the effect of each error, considered individually, on
the income statement for the current year ended May 31. Also indicate the effect of each
error on the May 31 balance sheet. Set up a table similar to the following, and record
your answers by inserting the dollar amount in the appropriate spaces. Insert a zero if
the error does not affect the item.

                                                                        Error (a)                            Error (b)
                                                             Overstated Understated          Over   Under
1. Revenue for the year would be           $ ____             $ ____              $ ____  $ ____
2. Expenses for the year would be         $ ____              $ ____              $ ____  $ ____
3. Net income for the year would be      $ ____             $ ____               $ ____  $ ____
4. Assets at May 31 would be              $ ____              $ ____               $ ____  $ ____
5. Liabilities at May 31 would be           $ ____             $ ____                $ ____  $ ____
6. Owner’s equity at May 31 would be  $ ____            $ ____                $ ____   $ ____

Answer:
                                                                      Error (a)                             Error (b) 
                                                                  Over-   Under-                     Over-    Under- 
1. Revenue for the year would be..............   $ 0     $18,000                      $ 0          $ 0
2. Expenses for the year would be ............      0           0                              0         3,000
3. Net income for the year would be..........     0     18,000                      3,000           0
4. Assets at May 31 would be ....................   0            0                             0             0
5. Liabilities at May 31 would be................ 18,000      0                             0          3,000
6. Owner’s equity at May 31 would be.......   0       18,000                      3,000           0

EX 3-22 Effects of errors on financial statements

For a recent year, the balance sheet for The Campbell Soup Company includes accrued
expenses of $579 million. The income before taxes for The Campbell Soup Company for
the year was $1,079 million.
a. Assume the adjusting entry for $579 million of accrued expenses was not recorded at
the end of the year. By how much would income before taxes have been misstated?
b. What is the percentage of the misstatement in (a) to the reported income of $1,079
million? Round to one decimal place.

Answer:
a. $579 million

b. 53.7% ($579 / $1,079)

EX 3-21 Effects of errors on financial statements

For a recent period, the balance sheet for Costco Wholesale Corporation reported accrued
expenses of $1,720 million. For the same period, Costco reported income before income
taxes of $1,714 million. Assume that the adjusting entry for $1,720 million of accrued
expenses was not recorded at the end of the current period. What would have been the
income (loss) before income taxes?

Answer:
Income: $3,434 million ($1,714 + $1,720)

EX 3-20 Book value of fixed assets

In a recent balance sheet, Microsoft Corporation reported Property, Plant, and Equipment
of $15,082 million and Accumulated Depreciation of $7,547 million.
a. What was the book value of the fixed assets?
b. Would the book value of Microsoft Corporation’s fixed assets normally approximate
their fair market values?

Answer:
a. $7,535 million ($15,082 – $7,547)

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 3-19 Determining fixed asset’s book value

The balance in the equipment account is $750,000, and the balance in the accumulated
depreciation—equipment account is $425,000.
a. What is the book value of the equipment?
b. Does the balance in the accumulated depreciation account mean that the equipment’s
loss of value is $425,000? Explain.

Answer:
a. $325,000 ($750,000 – $425,000)

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 3-18 Adjustment for depreciation

The estimated amount of depreciation on equipment for the current year is $2,900. Journalize
the adjusting entry to record the depreciation.

Answer:
Depreciation Expense ................................................... 2,900
                           Accumulated Depreciation—Equipment................ 2,900
                                          Depreciation on equipment.

EX 3-17 Adjusting entries for prepaid and accrued taxes

Andular Financial Services was organized on April 1 of the current year. On April 2,
Andular prepaid $9,000 to the city for taxes (license fees) for the next 12 months and
debited the prepaid taxes account. Andular is also required to pay in January an annual
tax (on property) for the previous calendar year. The estimated amount of the property
tax for the current year (April 1 to December 31) is $34,500.
a. Journalize the two adjusting entries required to bring the accounts affected by the two
taxes up to date as of December 31, the end of the current year.
b. What is the amount of tax expense for the current year?

Answer:
a. Taxes Expense............................................................... 6,750
                          Prepaid Taxes........................................................... 6,750
                                Prepaid taxes expired [($9,000/12) × 9 months].

 Taxes Expense............................................................... 34,500
                      Taxes Payable .......................................................... 34,500
                                  Accrued taxes.
 
b. $41,250 = ($6,750 + $34,500)

EX 3-16 Effect of omitting adjusting entry

Assume that the error in Exercise 3-15 was not corrected and that the accrued salaries
were included in the first salary payment in January. Indicate which items will be erroneously
stated, because of failure to correct the initial error, on (a) the income statement
for the month of January and (b) the balance sheet as of January 31.

Answer:
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, owner’s equity is correct.

EX 3-15 Effect of omitting adjusting entry

Accrued salaries owed to employees for December 30 and 31 are not considered in preparing
the financial statements for the year ended December 31. Indicate which items will
be erroneously stated, because of the error, on (a) the income statement for the year and
(b) the balance sheet as of December 31. Also indicate whether the items in error will be
overstated or understated.

Answer:
a. Salary expense (or expenses) will be understated. Net income will be overstated.
b. Salaries payable (or liabilities) will be understated. Owner’s equity will be
overstated.

EX 3-14 Determining wages paid

The wages payable and wages expense accounts at January 31, after adjusting entries have
been posted at the end of the first month of operations, are shown in the following T accounts:

            Wages Payable                                              Wages Expense
                        Bal. 3,750                                     Bal. 41,250
Determine the amount of wages paid during the month.

Answer:
$37,500 = ($41,250 – $3,750)

EX 3-13 Adjusting entries for accrued salaries

Torrey Realty Co. pays weekly salaries of $9,375 on Friday for a five-day workweek ending
on that day. Journalize the necessary adjusting entry at the end of the accounting period
assuming that the period ends (a) on Tuesday and (b) on Thursday.

Answer:
a. Salary Expense .............................................................. 3,750
                          Salaries Payable....................................................... 3,750
                                      Accrued salaries [($9,375/5 days) × 2 days].

b. Salary Expense .............................................................. 7,500
                          Salaries Payable....................................................... 7,500
                                       Accrued salaries [($9,375/5 days) × 4 days].

EX 3-12 Effect of omitting adjusting entry

The adjusting entry for accrued fees was omitted at July 31, the end of the current year.
Indicate which items will be in error, because of the omission, on (a) the income statement
for the current year and (b) the balance sheet as of July 31. Also indicate whether
the items in error will be overstated or understated.

Answer:
a. Fees earned (or revenues) will be understated. Net income will be understated.
b. Accounts (fees) receivable (or assets) will be understated. Owner’s equity will
be understated.

EX 3-11 Adjusting entries for unearned and accrued fees

The balance in the unearned fees account, before adjustment at the end of the year,
is $96,000. Of these fees, $78,500 have been earned. In addition, $23,600 of fees have
been earned but have not been billed. Journalize the adjusting entries (a) to adjust the
unearned fees account and (b) to record the accrued fees.

Answer:
a. Unearned Fees............................................................... 78,500
                      Fees Earned.............................................................. 78,500
                                Unearned fees earned during year.


b. Accounts Receivable .................................................... 23,600
                    Fees Earned.............................................................. 23,600
                                Accrued fees earned.

EX 3-10 Adjusting entry for accrued fees

At the end of the current year, $12,300 of fees have been earned but have not been
billed to clients.
a. Journalize the adjusting entry to record the accrued fees.
b. If the cash basis rather than the accrual basis had been used, would an adjusting entry
have been necessary? Explain.

a. Accounts Receivable .................................................... 12,300
                       Fees Earned.............................................................. 12,300
                                  Accrued fees.

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 3-9 Effect of omitting adjusting entry

At the end of October, the first month of the business year, the usual adjusting entry
transferring rent earned to a revenue account from the unearned rent account was omitted.
Indicate which items will be incorrectly stated, because of the error, on (a) the income
statement for October and (b) the balance sheet as of October 31. Also indicate whether
the items in error will be overstated or understated.

Answer:
a. Rent revenue (or revenues) will be understated. Net income will be understated.
b. Unearned rent (liabilities) will be overstated. Owner’s equity at the end of the
period will be understated.

EX 3-8 Adjusting entries for unearned fees

The balance in the unearned fees account, before adjustment at the end of the year, is $45,000. Journalize
the adjusting entry required if the amount of unearned fees at the end of the year is $9,000.

Answer:
Unearned Fees............................................................... 36,000
                 Fees Earned.............................................................. 36,000
                                  Fees earned ($45,000 – $9,000).

EX 3-7 Adjusting entries for prepaid insurance

The prepaid insurance account had a balance of $4,800 at the beginning of the year. The
account was debited for $15,000 for premiums on policies purchased during the year.
Journalize the adjusting entry required at the end of the year for each of the following
situations: (a) the amount of unexpired insurance applicable to future periods is $5,000;
(b) the amount of insurance expired during the year is $14,800.

Answer:
a. Insurance Expense........................................................ 14,800
                    Prepaid Insurance .................................................... 14,800
                              Insurance expired ($4,800 + $15,000 – $5,000).

b. Insurance Expense........................................................ 14,800
                      Prepaid Insurance .................................................... 14,800
                               Insurance expired.

EX 3-6 Adjusting entries for prepaid insurance

The balance in the prepaid insurance account, before adjustment at the end of the year, is
$14,800. Journalize the adjusting entry required under each of the following alternatives for
determining the amount of the adjustment: (a) the amount of insurance expired during the
year is $11,200; (b) the amount of unexpired insurance applicable to future periods is $3,600.

Answer:
a. Insurance Expense........................................................ 11,200
                  Prepaid Insurance .................................................... 11,200
                            Insurance expired.

b. Insurance Expense........................................................ 11,200
                   Prepaid Insurance .................................................... 11,200
                            Insurance expired ($14,800 – $3,600).

EX 3-5 Effect of omitting adjusting entry

At August 31, the end of the first month of operations, the usual adjusting entry transferring
prepaid insurance expired to an expense account is omitted. Which items will be incorrectly
stated, because of the error, on (a) the income statement for August and (b) the balance sheet
as of August 31? Also indicate whether the items in error will be overstated or understated.

Answer:
a. Insurance expense (or expenses) will be understated. Net income will be overstated.
b. Prepaid insurance (or assets) will be overstated. Owner’s equity will be overstated.

EX 3-4 Determining supplies purchased

The supplies and supplies expense accounts at December 31, after adjusting entries have
been posted at the end of the first year of operations, are shown in the following T accounts:
                    Supplies                                              Supplies Expense
            Bal. 900                                                 Bal. 2,750
Determine the amount of supplies purchased during the year.

Answer:
$3,650 = ($900 + $2,750)

EX 3-3 Adjusting entry for supplies

The balance in the supplies account, before adjustment at the end of the year, is $3,915.
Journalize the adjusting entry required if the amount of supplies on hand at the end of the
year is $1,750.

Answer:
Supplies Expense.......................................................... 2,165
                 Supplies.................................................................... 2,165
                           Supplies used ($3,915 – $1,750).

EX 3-2 Classifying adjusting entries

The following accounts were taken from the unadjusted trial balance of Orion Co., a congressional
lobbying firm. Indicate whether or not each account would normally require
an adjusting entry. If the account normally requires an adjusting entry, use the following
notation to indicate the type of adjustment:
AE—Accrued Expense
AR—Accrued Revenue
PE—Prepaid Expense
UR—Unearned Revenue

To illustrate, the answer for the first account is shown below.
       Account                                                  Answer
Accounts Receivable                  Normally requires adjustment (AR).
Cash
Interest Expense
Interest Receivable
Johann Atkins, Capital
Land
Office Equipment
Prepaid Rent
Supplies
Unearned Fees
Wages Expense

Answer:
       Account                                                           Answer 
Accounts Receivable ..........................Normally requires adjustment (AR).
Cash ..................................................Does not normally require adjustment.
Interest Expense..................................Normally requires adjustment (AE).
Interest Receivable..............................Normally requires adjustment (AR).
Johann Atkins, Capital....................... Does not normally require adjustment.
Land..................................................Does not normally require adjustment.
Office Equipment ............................. Does not normally require adjustment.
Prepaid Rent .....................................Normally requires adjustment (PE).
Supplies ........................................... Normally requires adjustment (PE).
Unearned Fees................................. Normally requires adjustment (UR).
Wages Expense................................ Normally requires adjustment (AE).

EX 3-1 Classifying types of adjustments

Classify the following items as (a) prepaid expense, (b) unearned revenue, (c) accrued
revenue, or (d) accrued expense.
1. A three-year premium paid on a fire insurance policy.
2. Fees earned but not yet received.
3. Fees received but not yet earned.
4. Salary owed but not yet paid.
5. Subscriptions received in advance by a magazine publisher.
6. Supplies on hand.
7. Taxes owed but payable in the following period.
8. Utilities owed but not yet paid.

Answer:
1. Prepaid expense
2. Accrued revenue
3. Unearned revenue
4. Accrued expense
5. Unearned revenue
6. Prepaid expense
7. Accrued expense
8. Accrued expense

PE 3-10B Vertical analysis

Two income statements for Bradford Company are shown below.

Bradford Company

Income Statements

For Years Ended December 31

                                                                           2012                       2011
Fees earned                                                    $825,000                 $700,000
Operating expenses                                           684,750                   602,000
Operating income                                            $140,250                 $ 98,000
a. Prepare a vertical analysis of Bradford Company’s income statements.
b. Does the vertical analysis indicate a favorable or unfavorable trend?

Answer:
a.

Bradford Company 

Income Statements 

For Years Ended December 31 

                                                                     2012                                     2011
                                                          Amount      Percent                Amount      Percent
Fees earned....................                  $825,000      100%               $700,000      100%
Operating expenses ......                     684,750        83                     602,000        86
Operating income..........                   $140,250        17%                 $ 98,000       14%

b. A favorable trend of decreasing operating expenses and increasing operating
income is indicated.

PE 3-10A Vertical analysis

Two income statements for Fortson Company are shown below.

Fortson Company

Income Statements

For Years Ended December 31

                                                                    2012                             2011
Fees earned                                              $425,000                       $375,000
Operating expenses                                    263,500                          225,000
Operating income                                     $161,500                        $150,000
a. Prepare a vertical analysis of Fortson Company’s income statements.
b. Does the vertical analysis indicate a favorable or unfavorable trend?

Answer:
a.

Fortson Company 

Income Statements 

For Years Ended December 31 

                                                          2012                                     2011
                                              Amount           Percent             Amount          Percent
Fees earned....................      $425,000         100%              $375,000          100%
Operating expenses ......         263,500           62                   225,000             60
Operating income..........       $161,500          38%               $150,000             40%

b. An unfavorable trend of increasing operating expenses and decreasing operating income is indicated.

PE 3-9B Effect of errors on adjusted trial balance

For each of the following errors, considered individually, indicate whether the error
would cause the adjusted trial balance totals to be unequal. If the error would cause the
adjusted trial balance totals to be unequal, indicate whether the debit or credit total is
higher and by how much.
a. The adjustment for accrued wages of $3,600 was journalized as a debit to Wages
Expense for $3,600 and a credit to Accounts Payable for $3,600.
b. The entry for $1,480 of supplies used during the period was journalized as a debit to
Supplies Expense of $1,480 and a credit to Supplies of $1,840.

Answer:
a. The totals are equal even though the credit should have been to Wages Payable instead of Accounts Payable.
b. The totals are unequal. The credit total is higher by $360 ($1,840 – $1,480).

PE 3-9A Effect of errors on adjusted trial balance

For each of the following errors, considered individually, indicate whether the error
would cause the adjusted trial balance totals to be unequal. If the error would cause the
adjusted trial balance totals to be unequal, indicate whether the debit or credit total is
higher and by how much.
a. The adjustment of $17,520 for accrued fees earned was journalized as a debit to
Accounts Receivable for $17,520 and a credit to Fees Earned for $17,250.
b. The adjustment of depreciation of $4,000 was omitted from the end-of-period adjusting
entries.

Answer:
a. The totals are unequal. The debit total is higher by $270 ($17,520 – $17,250).
b. The totals are equal since the adjusting entry was omitted.

PE 3-8B Effect of omitting adjustments

For the year ending June 30, 2012, Aspen Medical Services Co. mistakenly omitted adjusting
entries for (1) $2,100 of supplies that were used, (2) unearned revenue of $13,900 that
was earned, and (3) insurance of $12,000 that expired. Indicate the combined effect of the
errors on (a) revenues, (b) expenses, and (c) net income for the year ended June 30, 2012.

Answer:
a. Revenues were understated by $13,900.
b. Expenses were understated by $14,100 ($2,100 + $12,000).
c. Net income was overstated by $200 ($14,100 – $13,900).

PE 3-8A Effect of omitting adjustments

For the year ending January 31, 2012, Balboa Medical Co. mistakenly omitted adjusting
entries for (1) depreciation of $7,200, (2) fees earned that were not billed of $33,300, and
(3) accrued wages of $6,000. Indicate the combined effect of the errors on (a) revenues,
(b) expenses, and (c) net income for the year ended January 31, 2012.

Answer:
a. Revenues were understated by $33,300.
b. Expenses were understated by $13,200 ($7,200 + $6,000).
c. Net income was understated by $20,100 ($33,300 – $13,200).

PE 3-7B Adjustment for depreciation

The estimated amount of depreciation on equipment for the current year is $3,800. Journalize
the adjusting entry to record the depreciation.

Answer:
Depreciation Expense ................................................... 3,800
                       Accumulated Depreciation—Equipment................ 3,800
                                 Depreciation on equipment.

PE 3-7A Adjustment for depreciation

The estimated amount of depreciation on equipment for the current year is $11,500.
Journalize the adjusting entry to record the depreciation.

Answer:
Depreciation Expense ................................................... 11,500
                       Accumulated Depreciation—Equipment................ 11,500
                                      Depreciation on equipment.

PE 3-6B Adjustment for accrued expense

ABC Realty Co. pays weekly salaries of $34,500 on Monday for a six-day workweek ending
the preceding Saturday. Journalize the necessary adjusting entry at the end of the
accounting period assuming that the period ends on Wednesday.

Answer:
Salaries Expense ........................................................... 17,250
                     Salaries Payable....................................................... 17,250
                               Accrued salaries [($34,500/6 days) × 3 days].

PE 3-6A Adjustment for accrued expense

Stress Free Realty Co. pays weekly salaries of $18,000 on Friday for a five-day workweek
ending on that day. Journalize the necessary adjusting entry at the end of the accounting
period assuming that the period ends on Thursday.

Answer:
Salaries Expense ........................................................... 14,400
                     Salaries Payable....................................................... 14,400
                                  Accrued salaries [($18,000/5 days) × 4 days].

PE 3-5B Adjustment for accrued revenues

At the end of the current year, $21,750 of fees have been earned but have not been billed
to clients. Journalize the adjusting entry to record the accrued fees.

Answer:
Accounts Receivable .................................................... 21,750
                   Fees Earned.............................................................. 21,750
                                  Accrued fees.

PE 3-5A Adjustment for accrued revenues

At the end of the current year, $11,600 of fees have been earned but have not been billed
to clients. Journalize the adjusting entry to record the accrued fees.

Answer:
Accounts Receivable .................................................... 11,600
                                Fees Earned.............................................................. 11,600
                                               Accrued fees.

PE 3-4B Adjustment for unearned revenue

On August 1, 2012, Treadwell Co. received $10,500 for the rent of land for 12 months.
Journalize the adjusting entry required for unearned rent on December 31, 2012.

Answer:
Unearned Rent ............................................................... 4,375
                          Rent Revenue ........................................................... 4,375
                                        Rent earned [($10,500/12) × 5 months].

PE 3-4A Adjustment for unearned revenue

The balance in the unearned fees account, before adjustment at the end of the year, is
$178,900. Journalize the adjusting entry required assuming the amount of unearned fees
at the end of the year is $18,650.

Answer:
Unearned Fees............................................................... 160,250
              Fees Earned.............................................................. 160,250
                    Fees earned ($178,900 – $18,650).

PE 3-3B Adjustment for prepaid expense

The prepaid insurance account had a beginning balance of $7,200 and was debited for
$4,800 of premiums paid during the year. Journalize the adjusting entry required at the
end of the year assuming the amount of unexpired insurance related to future periods
is $8,000.

Answer:
Insurance Expense........................................................ 4,000
                            Prepaid Insurance .................................................... 4,000
                                        Insurance expired ($7,200 + $4,800 – $8,000).

PE 3-3A Adjustment for prepaid expense

The supplies account had a beginning balance of $2,400 and was debited for $3,975 for
supplies purchased during the year. Journalize the adjusting entry required at the end of
the year assuming the amount of supplies on hand is $1,375.

Answer:
Supplies Expense.......................................................... 5,000
                            Supplies.................................................................... 5,000
                                      Supplies used ($2,400 + $3,975 – $1,375).

PE 3-2B Type of adjustment

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued
revenue, or (4) accrued expense.
a. Cash received for use of land next month
b. Fees earned but not received
c. Rent expense owed but not yet paid
d. Supplies on hand

Answer:
a. Unearned revenue
b. Accrued revenue
c. Accrued expense
d. Prepaid expense

PE 3-2A Type of adjustment

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued
revenue, or (4) accrued expense.
a. Cash received for services not yet rendered
b. Insurance paid
c. Rent revenue earned but not received
d. Salaries owed but not yet paid

Answer:
a. Unearned revenue
b. Prepaid expense

c. Accrued revenue 

d. Accrued expense 

PE 3-1B Accounts requiring adjustment

Indicate with a Yes or No whether or not each of the following accounts normally requires
an adjusting entry.

a. Building
b. Cash
c. Interest Expense
d. Miscellaneous Expense
e. Pam Ingersoll, Capital
f. Prepaid Insurance

Answer:
a. No
b. No
c. Yes
d. No
e. No
f. Yes

PE 3-1A Accounts requiring adjustments

Indicate with a Yes or No whether or not each of the following accounts normally requires
an adjusting entry.
a. Accumulated Depreciation
b. Albert Stucky, Drawing
c. Office Equipment
d. Salaries Payable
e. Supplies
f. Unearned Rent

Answer:
a. Yes
b. No
c. No
d. Yes
e. Yes
f. Yes