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Department
Administrative Studies
Course
ADMS 2511
Professor
Songlan Peng
Semester
Fall

Description
CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM MULTIPLE CHOICE —Conceptual Answer No. Description d 1. Purpose of an accounting system. d 2. Criteria for recording events. c 3. Purpose of trial balance. b 4. Trial balance d 5. Book of original entry. a 6. Transaction analysis. a 7. Definition of transaction. c 8. Event recording. d 9. Purpose of income summary account. c 10. Purpose of adjusting entries. d 11. Limitations of trial balance. d 12. Purpose of adjusting entries. c 13. Matching principle. c 14. Special journals. b 15. Special journals. b 16. Cash-basis of accounting. d 17. Definition of accrued expense. c 18. Adjusting entry for accrued expense. d 19. Factors to consider in estimating depreciation. c 20. Timing of financial statements. d 21. Effect of adjusting entries. b 22. Prepaid expense and the matching principle. c 23. Accrued revenue and the matching principle. b 24. Unearned revenue and the matching principle. d 25. Identification of a real account. b 26. Identification of a temporary account. c 27. Effect of understating ending inventory. c 28. Recordable transactions. d 29. Limitations of trial balance. d *30. Identification of reversing entries. d *31. Identification of reversing entries. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 2 Test Bank for Intermediate Accounting, Ninth Canadian Edition MULTIPLE CHOICE —Computational Answer No. Description b 32. Determine adjusting entry. a 33. Determine adjusting entry. d 34. Determine adjusting entry. c 35. Adjusting entry for bad debts. b 36. Adjusting entry for bad debts. b 37. Unearned rent adjustment. b 38. Calculate cash received for interest. b 39. Calculate cash paid for salaries. d 40. Calculate cash paid for insurance. c 41. Calculate insurance expense. c 42. Calculate interest revenue. c 43. Calculate salary expense. c 44. Adjusting entry for interest receivable. d 45. Calculate property tax adjustment. a *46. Determine reversing entry. a *47. Determine year-end adjustment. MULTIPLE CHOICE —CPA Adapted Answer No. Description c 48. Determine accrued interest payable. b 49. Determine balance of unearned revenues. b 50. Calculate prepaid insurance. c 51. Determine interest receivable. a 52. Calculate sales adjustment. b 53. Calculate accrued salaries. a 54. Calculate royalty revenue. a 55. Calculate payroll adjustment. *This topic is dealt with in an Appendix to the chapter. EXERCISES Item Description E3-56 Definitions. E3-57 Terminology. E3-58 Accrued and deferred items. E3-59 Adjusting entries. E3-60 Adjusting entries. E3-61 Accrual basis. E3-62 Accrual basis. E3-63 Accrual basis. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 3 PROBLEMS Item Description *P3-64 Adjusting and reversing entries. P3-65 Closing entries. P3-66 Adjusting entries. P3-67 Adjusting entries and account classifications. P3-68 Adjusting entries. P3-69 Adjusting and closing entries. P3-70 Eight-column work sheet. P3-71 Cash to accrual accounting. P3-72 Accrual accounting. P3-73 Multi step income statement P3-74 Adjusting and closing entries P3-75 Journal entry P3-76 Trial balance correction Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 4 Test Bank for Intermediate Accounting, Ninth Canadian Edition MULTIPLE CHOICE —Conceptual 1. Factors that shape an accounting information system include the a. nature of the business. b. size of the firm. c. volume of data to be handled. d. all of these. 2. Which of the following criteria must be met before an event or item should be recorded for accounting purposes? a. The event or item can be measured objectively in financial terms. b. The event or item is relevant and reliable. c. The event or item is an element. d. All of these must be met. 3. A trial balance a. is a list of accounts at a specific point in time. b. can be used for the preparation of financial statements. c. is best described by (a.) and (b.) d. is none of the above. 4. A post-closing trial balance. a. includes temporary accounts only. b. includes permanent accounts only. c. includes both temporary and permanent accounts. d. may include expenses. 5. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called the a. ledger. b. account. c. trial balance. d. none of these. 6. The debit and credit analysis of a transaction normally takes place a. before an entry is recorded in a journal. b. when the entry is posted to the ledger. c. when the trial balance is prepared. d. at some other point in the accounting cycle. 7. An example of a transaction is a. the receipt of cash from a customer prior to performing the service. b. the recording of depreciation. c. the accrual of salaries owed. d. all of these. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 5 8. Some events are not recorded in the accounting information system because a. the amounts are not material. b. the service has not been provided yet although the cash has been received. c. the problems measuring them are too complex. d. all of these. 9. The income summary account a. is used only at year-end. b. is used to record dividends. c. is used to bring temporary accounts to zero. d. is best described by (a) and (c). 10. Which of the following best describes adjustments: a. adjustments ensure proper matching. b. they are used to record external events. c. (a) and (d). d. they are usually prepared at the end of the accounting period. 11. A trial balance may prove that debits and credits are equal, but a. an amount could be entered in the wrong account. b. a transaction could have been entered twice. c. a transaction could have been omitted. d. all of these. 12. Adjusting entries are necessary to a. obtain a proper matching of revenue and expense. b. achieve an accurate statement of assets and equities. c. adjust assets and liabilities to their fair market value. d. both a and b. 13. Why are certain costs of doing business capitalized when incurred and then amortized over subsequent accounting cycles? a. To reduce the income tax liability b. To aid management in cash-flow analysis c. To match the costs of production with revenues as earned d. To adhere to the accounting constraint of conservatism 14. A payment that is received would most likely be recorded directly in that company's: a. general ledger. b. cash disbursements journal. c. cash receipts journal. d. trial balance. 15. A cheque that is issued would most likely be recorded directly in that company's: a. expense journal. b. cash disbursements journal. c. cash receipts journal. d. none of the above. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 6 Test Bank for Intermediate Accounting, Ninth Canadian Edition 16. Consider a cheque received in payment for revenues that have not yet been earned. Assuming that company uses the cash-basis of accounting, how would that payment be recorded? a. it would be recorded as unearned revenue until it is actually earned. b. the entire amount would be recognized as revenue in the current period. c. it would be recorded as a prepaid expense. d. none of the above. 17. An accrued expense can best be described as an amount a. paid and currently matched with earnings. b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings. 18. If, during an accounting period, an expense item has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve a. a liability account and an asset account. b. an asset or contra-asset and an expense account. c. a liability account and an expense account. d. a receivable account and a revenue account. 19. Which of the following must be considered in estimating depreciation on an asset for an accounting period? a. The original cost of the asset b. Its useful life c. The decline of its fair market value d. Both the original cost of the asset and its useful life. 20. Which of the following statements best describes the frequency of when financial statements are issued? a. financial statements should only be issued at the end of the year. b. financial statements should only be issued quarterly. c. financial can be issued anytime during the year. d. none of the above. 21. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries? a. Expiration of prepaid insurance b. Depreciation of long-lived assets c. Accrued wages payable d. All of these 22. A prepaid expense can best be described as an amount a. paid and currently matched with revenues. b. paid and not currently matched with revenues. c. not paid and currently matched with revenues. d. not paid and not currently matched with revenues. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 7 23. An accrued revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses. 24. An unearned revenue can best be described as an amount a. collected and currently matched with expenses. b. collected and not currently matched with expenses. c. not collected and currently matched with expenses. d. not collected and not currently matched with expenses. 25. Which of the following is a real (permanent) account? a. Goodwill b. Sales c. Accounts Receivable d. Both Goodwill and Accounts Receivable 26. Which of the following is a nominal (temporary) account? a. Unearned Revenue b. Salary Expense c. Inventory d. Retained Earnings 27. If the inventory account at the end of the year is understated, the effect will be to a. overstate the gross profit on sales. b. understate the net purchases. c. overstate the cost of goods sold. d. overstate the goods available for sale. 28. Which of the following items should be journalized? a. a letter advising an employee of a pay raise. b. a customer's pending bankruptcy (assuming an adequate allowance for doubtful accounts has already been set up). c. a customer's pending bankruptcy (assuming an adequate allowance for doubtful accounts has not already been set up). d. (a) and (b). 29. Below are several statements about the trial balance. Which of these statements is not correct? a. debits and credits must balance. b. the equality of credits and debits ensures that no errors were made. c. the post-closing trial balance includes temporary accounts only. d. (b) and (c). Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 8 Test Bank for Intermediate Accounting, Ninth Canadian Edition *30. Adjusting entries that should be reversed include those for prepaid or unearned items that a. create an asset or a liability account. b. were originally entered in a revenue or expense account. c. were originally entered in an asset or liability account. d. create an asset or a liability account and were originally entered in a revenue or expense account. *31. Adjusting entries that should be reversed include a. all accrued revenues. b. all accrued expenses. c. those that debit an asset or credit a liability. d. all of these. Multiple Choice Answers— Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. d 6. a 11. d 16. b 21. d 26. b *31. d 2. d *7. a 12. d 17. d 22. b 27. c 3. c *8. c 13. c 18. c 23. c 28. c 4. b *9. d 14. c 19. d 24. b *29. d 5. d 10. c 15. b 20. c 25. d *30. d Solutions to those Multiple Choice questions for which the answer is “none of these.” 5. journal. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 9 MULTIPLE CHOICE —Computational 32. Jackson Company made the annual lease payment of $9,000 for its fleet of delivery trucks. The payment was made on September 1, 2010 and covered the period September 1, 2010 to August 31, 2011. Assuming the entire amount had originally been charged to lease expense, the required adjustment on December 31, 2010 is a. debit lease expense and credit prepaid lease $6,000. b. debit prepaid lease and credit lease expense $6,000. c. debit prepaid lease and credit lease expense $9,000. d. debit lease expense and credit prepaid lease $9,000. 33. Penny Resources determines that it has not yet recorded the accrual for 2010 interest revenue to be received in 2011. Assuming the amount to be recorded for 2010 is $8,000, the required adjustment on December 31, 2010 is a. debit interest receivable and credit interest revenue $8,000. b. debit interest revenue and credit interest receivable $8,000. c. debit interest payable and credit interest revenue $8,000. d. no entry required. 34. Scott Company purchased equipment on November 1, 2010 and gave a 3-month, 9 percent note with a face value of $50,000. The December 31, 2010 adjusting entry is a. debit Interest Expense and credit Interest Payable, $4,500. b. debit Interest Expense and credit Interest Payable, $3,750. c. debit Interest Expense and credit Cash, $750. d. debit Interest Expense and credit Interest Payable, $750. 35. Blue Company's account balances at December 31, 2010 for Accounts Receivable and the related Allowance for Doubtful Accounts are $284,000 debit and $1,000 credit, respectively. From an aging of accounts receivable, it is estimated that $10,000 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for a. $8,500. b. $10,000. c. $9,000. d. $1,000. 36. Breg Company's account balances at December 31, 2010 for Accounts Receivable and the Allowance for Doubtful Accounts are $860,000 debit and $1,200 credit. Sales during 2010 were $3,000,000. It is estimated that 2 percent of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for a. $17,176 b. $60,000. c. $17,200. d. $18,000. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 10 Test Bank for Intermediate Accounting, Ninth Canadian Edition 37. Perez Corporation received cash of $12,000 on August 1, 2010 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2010 adjusting entry is a. debit Rent Revenue and credit Unearned Rent, $5,000. b. debit Rent Revenue and credit Unearned Rent, $7,000. c. debit Unearned Rent and credit Rent Revenue, $5,000. d. debit Cash and credit Unearned Rent, $7,000. Use the following information for questions 38 through 40: The income statement of Carsen Corporation for 2010 included the following items: Interest revenue $75,500 Salaries expense 65,000 Insurance expense 9,600 The following balances have been excerpted from Carsen Corporation's balance sheets: December 31, 2010 December 31, 2009 Accrued interest receivable $9,100 $7,500 Accrued salaries payable 8,900 4,200 Prepaid insurance 1,100 1,500 38. The cash received for interest during 2010 was a. $66,400. b. $73,900. c. $75,500. d. $77,100. 39. The cash paid for salaries during 2010 was a. $69,700. b. $60,300. c. $60,800. d. $73,900. 40. The cash paid for insurance premiums during 2010 was a. $8,500. b. $8,100. c. $10,000. d. $9,200. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 11 Use the following information for questions 41 through 43: Poole Company paid or collected during 2010 the following items: Insurance premiums paid $ 12,400 Interest collected 25,900 Salaries paid 125,200 The following balances have been excerpted from Poole's balance sheets: December 31, 2010 December 31, 2009 Prepaid insurance $ 1,200 $ 1,500 Interest receivable 3,700 2,900 Salaries payable 12,300 10,600 41. The insurance expense on the income statement for 2010 was a. $9,700. b. $12,100. c. $12,700. d. $15,100. 42. The interest revenue on the income statement for 2010 was a. $19,300. b. $25,100. c. $26,700. d. $32,500. 43. The salary expense on the income statement for 2010 was a. $102,300. b. $123,500. c. $126,900. d. $148,100. 44. Perry Corporation loaned $78,000 to another corporation on December 1, 2010 and received a three-month, 9 percent interest-bearing note with a face value of $78,000. What adjusting entry should Rice make on December 31, 2010? a. Debit Interest Receivable and credit Interest Revenue, $900. b. Debit Cash and credit Interest Revenue, $585. c. Debit Interest Receivable and credit Interest Revenue, $585. d. Debit Cash and credit Interest Receivable, $1,755. *45. Digger Oil & Gas has received its invoice in the amount of $85,000 for property taxes for the year 2010. The invoice was received and paid in June 2010 and the entire amount was debited to property tax expense. Assuming Digger does NOT prepare interim financial statements, the required adjustment on December 31, 2010 is a. debit property tax expense and credit prepaid property tax $49,583. b. debit prepaid property tax and credit property tax expense $49,583. c. debit property tax expense and credit prepaid property tax $35,417. d. no entry required. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 12 Test Bank for Intermediate Accounting, Ninth Canadian Edition 46. At December 31, 2010, Patula Corporation has not yet received its December invoice for utilities. On December 31, 2010 it accrues an estimate of $10,000. On January 15, 2011 Patula receives the invoice in the amount of $11,000. Assuming the accrual had already been reversed, the entry on January 15, 2011 is a. debit utilities expense and credit cash $11,000. b. debit cash and credit utilities expense $11,000. c. debit utilities expense and credit cash $1,000. d. debit cash and credit utilities expense $1,000. *47. On December 10, 2010 Copeta Inc. received a cheque in the amount of $50,000 from a customer for services that Copeta had yet to perform. By December 31, 2010 it had earned $20,000 of that amount. Assuming the appropriate year end adjustments were made, the 2010 balance in Copeta's unearned revenue account will be a. $30,000. b. $20,000. c. $50,000. d. Zero. Multiple Choice Answers— Computational Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 32. b 35. c 38. b 41. c 44. c 47. a 33. a 36. b 39. b 42. c 45. d 34. d 37. b 40. d 43. c 46. a Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 13 MULTIPLE CHOICE —CPA Adapted 48. On September 1, 2009 Calmex Corp. issued a note payable to National Bank in the amount of $900,000, bearing interest at 8 percent, and payable in three equal annual principal payments of $300,000. On this date, the bank's prime rate was 7 percent. The first payment for interest and principal was made on September 1, 2010. At December 31, 2010, Calmex should record accrued interest payable of a. $24,000. b. $21,000. c. $16,000. d. $14,000. 49. Denny Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenues. This account had a balance of $1,100,000 at December 31, 2010 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $325,000 at December 31, 2010. Service contracts still outstanding at December 31, 2010 expire as follows: During 2011 $170,000 During 2012 250,000 During 2013 110,000 What amount should be reported as Unearned Service Revenues in Denny's December 31, 2010 balance sheet? a. $775,000. b. $530,000. c. $250,000. d. $325,000. 50. Fischer Consulting paid $18,000 on December 1, 2010 for a three-year insurance policy (December 1, 2010 to November 30, 2013) and recorded the entire amount as prepaid insurance. The December 31, 2010 adjustment should be recorded as follows: a. debit prepaid insurance and credit insurance expense $500. b. debit insurance expense and credit prepaid insurance $500. c. debit insurance expense and credit prepaid insurance $17,500. d. debit prepaid insurance and credit insurance expense $17,500. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 14 Test Bank for Intermediate Accounting, Ninth Canadian Edition 51. On June 1, 2010, Mays Corp. loaned Farr $500,000 on a 12% note, payable in five annual instalments of $100,000 beginning January 2, 2011. In connection with this loan, Farr was required to deposit $6,000 in a non-interest-bearing escrow account. The amount held in escrow is to be returned to Farr after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2010. Farr made timely payments through November 1, 2010. On January 2, 2011, Mays received payment of the first principal instalment plus all interest due. At December 31, 2010, Mays' interest receivable on the loan to Farr should be a. $0. b. $5,000. c. $10,000. d. $15,000. 52. Moreno Inc. reviews its December 31, 2010 unadjusted trial balance and determines that a sale in the amount of $15,000 had been incorrectly recorded as a debit to sales and a credit to receivables. The adjusting entry at December 31, 2010 is: a. debit receivables and credit sales $30,000. b. credit receivables and debit sales $30,000. c. debit receivables and credit sales $15,000. d. credit receivables and debit sales $15,000. 53. Cole Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Cole accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2010 are as follows: Last payroll was paid on Dec/26/2010, for the two-week period ended Dec/26/2010. Overtime pay earned in the two-week period ended Dec/26/2010 was $5,000. Remaining work days in 2010 were December 29, 30, 31, on which days therewas no overtime. The recurring biweekly salaries total $80,000. Assuming a five-day work week, Cole should record a liability at December 31, 2010 for accrued salaries of a. $24,000. b. $29,000. c. $48,000. d. $53,000. 54. Meswell Corp.'s trademark was licensed to McCall Co. for royalties of 12 percent of sales of the trademarked items. Royalties are payable semi-annually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Meswell received the following royalties from McCall: March 15 September 15 2009 $6,000 $8,000 2010 7,000 9,000 McCall estimated that sales of the trademarked items would total $75,000 for July through December 2010. In Meswell’s 2010 income statement, the royalty revenue should be a. $18,000. b. $16,000. c. $9,000. d. $20,000. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 15 55. The Controller of Cavendish Financial is reviewing her payroll accruals for December 2010. Salaries for the month of December amounted to $165,000 and will be paid on January 14, 2011. Assuming year end accruals were reversed on January 1, the entry to record the January 14 payment to employees is: a. debit salaries expense and credit cash $165,000. b. debit cash and credit salaries expense $165,000. c. debit accrued payables and credit cash $165,000. d. none of the above. Multiple Choice Answers— CPA Adapted Item Ans. Item Ans. Item Ans. Item Ans. 48. c 50. b 52. a 54. a 49. b 51. c 53. b 55. a Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 16 Test Bank for Intermediate Accounting, Ninth Canadian Edition DERIVATIONS — Computational No. Answer Derivation 32. b $9,000 – (9,000 x 4/12) = $6,000. 33. a 34. d 2/12 × 9% × 50,000 = $750. 35. c $10,000 – $1,000= $9,000. 36. b $3,000,000 × 2% = $60,000. 37. b 7/12 × $12,000 = $7,000. 38. b $7,500 + $75,500 – $9,100 = $73,900. 39. b $4,200 + $65,000 – $8,900 = $60,300. 40. d $9,600 – $1,500 + $1,100 = $9,200. 41. c $12,400 + $300 = $12,700. 42. c $25,900 – $2,900 + $3,700 = $26,700. 43. c $125,200 – $10,600 + $12,300 = $126,900. 44. c 1/12 × 9% × $78,000 = $585. *45. d 46. a *47. a $50,000 - $20,000 = $30,000. DERIVATIONS — CPA Adapted No. Answer Derivation 48. c ($900,000 – $300,000) × 8% × 4/12 = $16,000. 49. b $170,000 + $250,000 + $110,000 = $530,000. 50. b $18,000 x 1/36 = $500 51. c $500,000 × 12% × 2/12 = $10,000. 52. a $15,000 + $15,000 = $30,000. 53. b $5,000 + ($80,000 ÷ 10 × 3) = $29,000. 54. a $9,000 + ($75,000 × 12%) = $18,000. 55. a Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 17 EXERCISES Ex. 3-56—Definitions. Define the following terms: 1. Special Journal 2. Work sheet 3. Permanent accounts 4. Temporary accounts 5. Income summary 6. General ledger Solution 3-56 1. Special journals are used to record transactions that have similar characteristics. Examples include the cash receipts journal and the cash disbursements journal. 2. Work sheets are used as informal tools to help accountants prepare financial statements. 3. Permanent accounts (also called real accounts) are assets, liability and equity accounts. Unlike temporary accounts, permanent accounts are NOT closed. 4. Temporary accounts are revenue and expense accounts. Unlike permanent accounts, they are periodically closed. 5. The income summary is an account that is used as part of the closing process. It facilitates the closing of the temporary accounts at year end. 6. A general ledger is a collection of all accounts and may include subsidiary ledgers for specific accounts Ex. 3-57 - The accounting cycle Summarize the steps in the accounting cycle Solution 3-57 The accounting cycle may be summarized in 9 steps as follows: 1. Journalization of current period's entries into journals 2. Posting of journals to the general ledger 3. Preparation of trial balance (unadjusted) 4. Preparation and posting of adjusting entries 5. Preparation of trial balance (adjusted) 6. Preparation of financial statements 7. Preparation and posting of closing entries 8. Preparation of trial balance (post-closing) 9. Preparation and posting of reversing entries Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 18 Test Bank for Intermediate Accounting, Ninth Canadian Edition Ex. 3-58 - Recordable events Before transactions are entered into a company's accounting system, the underlying event must be analyzed, to determine how (and if at all), it should be recorded. The situations below relate to Maxwell Corporation. Required: indicate whether the items below are recordable events. 1. A new mortgage contract for its new factory building is signed. 2. The first mortgage payment is made. 3. Wages for the current month are paid. 4. A new secretary is hired. 5. Property taxes are paid. 6. GST collections for the current month are forwarded to the CRA. Solution 3-58 1. Not recordable 2. Recordable 3. Recordable 4. Not recordable 5. Recordable 6. Recordable Ex. 3-59—Adjusting entries. Present, in journal form, the adjustments that would be made on July 31, 2010, the end of the fiscal year, for each of the following. 1. The supplies inventory on August 1, 2009 was $8,350. Supplies costing $16,650 were acquired during the year and charged to the supplies inventory. A count on July 31, 2010 indicated supplies on hand of $6,810. 2. On April 30, a ten-month, 8 percent note for $20,000 was received from a customer. 3. On March 1, $8,400 was collected as rent for one year and a nominal account was credited. Solution 3-59 1. Supplies Expense ......................................................18,190......... Supplies Inventory ........................................................ 18,190 2. Interest Receivable ......................................................400.......... Interest Revenue ........................................................... 400 3. Rent Revenue ...........................................................4,900........... Unearned Revenue ....................................................... 4,900 Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 19 Ex. 3-60—Adjusting entries. Yago Co. wishes to enter receipts and payments in such a manner that adjustments at the end of the period will not require reversing entries at the beginning of the next period. Instructions Record the following transactions in the desired manner and give the adjusting entry on December 31, 2010. (Two entries for each part.) 1. An insurance policy for two years was acquired on April 1, 2010 for $4,800. 2. Rent of $4,200 for six months for a portion of the building was received on November 1, 2010. Solution 3-60 1. Unexpired Insurance....................................................4,800........ Cash.............................................................................4,800 Insurance Expense.....................................................1,800.......... Unexpired Insurance...................................................... 1,800 2. Cash...................................................................4,200.................. Unearned Rent............................................................... 4,200 Unearned Rent.........................................................1,400............ Rent Revenue................................................................ 1,400 Ex. 3-61—Accrual basis. Sales salaries paid during 2010 were $90,000. Advances to salesmen were $1,300 on January 1, 2010, and $800 on December 31, 2010. Sales salaries accrued were $1,300 on January 1, 2010, and $1,400 on December 31, 2010. Instructions Show the calculation of sales salaries on an accrual basis for 2010. Solution 3-61 $90,000 + $1,300 – $800 – $1,300 + $1,400 = $90,600. Ex. 3-62—Accrual basis. The records for Jay Inc. showed the following for 2010: Jan. 1 Dec. 31 Accrued expenses $2,000 $3,600 Prepaid expenses 900 800 Cash paid during the year for expenses, $55,000. Instructions Show the calculation of the amount of expense that should be reported on the income statement. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 20 Test Bank for Intermediate Accounting, Ninth Canadian Edition Solution 3-62 $55,000 – $2,000 + $3,600 + $900 – $800 = $56,700. Ex. 3-63—Accrual basis. The records for Hanibal Company showed the following for 2010: Jan. 1 Dec. 31 Unearned revenue $3,000 $3,400 Accrued revenue 1,400 1,100 Cash collected during the year for revenue, $85,000. Instructions Show the calculation of the amount of revenue that should be reported on the income statement. Solution 3-63 $85,000 + $3,000 – $3,400 – $1,400 + $1,100 = $84,300 Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 21 PROBLEMS Pr. 3-64 - Adjusting entries. The information shown below relates to Flegel Corporation. At December 31, 2010 Flegel's general ledger shows the following balances: Prepaid lease $6,000 Debit Prepaid insurance $900 Debit Unearned revenue $78,000 Credit In addition, the following information is available: 1. The entire amount shown as prepaid lease has expired. 2. One third of the amount shown as prepaid insurance has expired. 3. Half of the amount shown as unearned revenue has now been earned. Instructions Prepare all adjusting entries that are required at December 31, 2010 Solution 3-64 1. Lease Expense.......................................................6,000.............. Prepaid Lease..............................................................6,000. 2. Insurance Expense.....................................................300............ Prepaid Insurance............................................................300 ($900 x 1/3 = $300) 3. Unearned Revenue..................................................39,000........... Revenue...................................................................39,000.... ($78,000 x 1/2 = $39,000) Pr. 3-65 - Closing Entries Below is a selection of account balances for Hausman Ltd. at December 31, 2010: Sales $856,000 Sales returns $20,000 Cost of goods sold $456,000 Advertising expense $42,000 Salaries expense $112,000 Depreciation expense $29,000 Insurance expense $9,000 Administrative expense $10,000 Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 22 Test Bank for Intermediate Accounting, Ninth Canadian Edition Instructions Prepare all necessary closing entries at December 31, 2010 Solution 3-65 Sales.............................................................................. 856,000 Income summary................................................ 178,000 Administrative expense...................................... 10,000 Advertising expense ......................................... 42,000 Depreciation expense......................................... 29,000 Cost of goods sold ............................................. 456,000 Insurance expense............................................. 9,000 Salaries expense................................................ 112,000 Sales returns...................................................... 20,000 Income summary....................................................178,000 Retained earnings....................................... 178,000 Pr. 3-66—Adjusting entries. Part I – The Maison Company has reported income of $400,000 for 2010, before considering the 5 items below. Prepare the adjusting entries needed at December 31, 2010 in order to correctly state the 2010 net income. If no entry is needed, write NONE. 1. Interest on a $19,500, 8 percent, six-year note payable was last paid on September 1, 2010. 2. On May 31, 2010, Maison entered into a contract to provide services to a customer for eighteen months beginning June 1. The customer paid the $16,000 fee in full on June 1 and Maison credited it to Service Revenue. 3. On August 1, 2010, Maison paid a year’s rent in advance on a warehouse, and debited the $38,000 payment to Prepaid Rent. 4. Depreciation on office equipment for 2010 is $11,000. 5. On December 18, 2010, Maison paid the local newspaper $600 for an advertisement to be run in January of 2011, charging it to Prepaid Advertising. Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited The Accounting Information System 3 - 23 Pr. 3-66—Adjusting entries (continued) Part II – Show the effect of each adjusting entry in Part I on reported net income, and indicate the correct amount of net income. Reported 2010 net income $400,000 Add (deduct) Item (1) (2) (3) (4) (5) ________ Correct 2010 net income $ Solution 3-66 Part I 1. Interest Expense....................................................520......... Interest Payable....................................................... 520 2. Service Revenue...................................................9,778........ Unearned Service Fees............................................ 9,778 3. Rent Expense.....................................................15,833.......... Prepaid Rent............................................................ 15,833 4. Depreciation Expense.............................................11,000..... Accumulated Depreciation....................................... 11,000 5. None. Part II Reported 2010 net income $400,000 Add (deduct) Item (1) (520) (2) (9,778) (3) (15,833) (4) (11,000) (5) Correct 2010 net income $362,869 Test Bank Chapter 3 Copyright © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited 3 - 24 Test Bank for Intermediate Accounting, Ninth Canadia
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