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Exam 3: Adjusting Accounts and Preparing Financial Statements

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Question 51

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In general journal form, record the December 31 adjusting entries for the following transactions and events. Assume that December 31 is the end of the annual accounting period. a. The Prepaid Insurance account shows a debit balance of $2,340, representing the cost of a three-year fire insurance policy that was purchased on October 1 of the current year. b. The Office Supplies account has a debit balance of $400; a year-end inventory count reveals $80 of supplies still on hand. c. On November 1 of the current year, Rent Earned was credited for $1,500. This amount represented the rent earned for a three-month period beginning November 1. d. Estimated depreciation on office equipment is $600. e. Accrued salaries amount to $400.

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Question 52

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The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received.

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Question 53

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Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated.

If accrued salaries were recorded on December 31 with a credit to Salaries Payable, the entry to record payment of these wages on the following January 5 would include:

Adjusting entries:

Financial statements are typically prepared in the following order:

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called:

On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is:

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

Given the table below, indicate the impact of the following errors made during the adjusting entry process. Use a "+" followed by the amount for overstatements, a "-" followed by the amount for understatements, and a "0" for no effect. The first one is done as an example. Ex. Failed to recognize that $600 of unearned revenues, previously recorded as liabilities, had been earned by year-end. 1. Failed to accrue salaries expense of $1,200. 2. Forgot to record $2,700 of depreciation on office equipment. 3. Failed to accrue $300 of interest on a note receivable.

On March 31, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-year subscription for five different magazines. The subscriptions started immediately. What amount should appear in the Prepaid Subscription account for Phoenix Company after adjustments on December 31 each year assuming Phoenix using a calendar reporting period?

The adjusting entry to record an accrued revenue is:

On November 1, Jay Company loaned an affiliate $100,000 at a 9.0% interest rate. The note receivable plus interest will not be collected until March 1 of the following year. The company's annual accounting period ends on December 31. The adjusting entry needed on December 31 is:

The adjusted trial balance must be prepared before the adjusting entries are made.

Using the information presented below, prepare a statement of owner's equity and balance sheet from the adjusted trial balance of Hanson Storage. Ms. Hanson's capital account balance of $40,340 consists of a $30,340 beginning-year balance plus a $10,000 investment during the current year.

The entry to record a cash receipt from a customer when the service to be provided has not yet been performed involves a debit to an unearned revenue account.

A company paid $9,000 for a six-month insurance policy. The policy coverage began on February 1. On February 28, $150 of insurance expense must be recorded. Expense = $9,000/6 = $1,500

The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called:

Accrued expenses reflect transactions where cash is paid before a related expense is recognized.

Using the table below, indicate the impact of the following errors made during the adjusting entry process. Use a "+" for overstatements, a "-" for understatements, and a "0" for no effect. The first one is provided as an example