Financial Accounting: A Critical Approach 3e _ Chapter 3 Answers

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14 Apr 2011
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CHAPTER 3
The Accounting Cycle
EXERCISES
E3–1.
a.adjusting entry
b. transactional entry
c.no entry or adjusting (allowed by IFRS)
d. adjusting entry
e.no entry
f. transactional entry
g. adjusting entry
h. transactional entry
i.transactional entry
j.transactional entry
k. no entry
E3–3.
a.
Retained
Earnings
RevenueExpenses
Balance before closing entry on
December 31, 2014 17,500,000 3,750,000
(2,900,000
)
Closing entry 3,750,000
(3,750,000
)
Closing entry (2,900,000) 2,900,000
Balance after closing entry on
December 31, 2014 18,350,000 0 0
b.
Dr. Revenue 3,750,000
Cr. Expenses2,900,000
Cr. Retained earnings 850,000
c.The primary purposes of closing entries are to reset the balances in the temporary (income
statement) accounts to zero and to transfer the amounts in those accounts to retained
earnings. The closing entry is prepared at the end of a reporting period when financial
statements must be prepared.
d. Net income for 2015 would be overstated by $850,000 because all revenues and expenses
from 2014 would be included in 2015 revenues and expenses.
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
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E3–5.
a.No impact (cash increases, land decreases)
b. Increase assets, increase liabilities
c.Increase assets, increase retained earnings (increase in revenue)
d. Decrease assets, decrease liabilities
e.No impact (cash decreases, prepaid rent increases)
f. Increase assets, increase liabilities (unearned revenue)
g. Increase assets, increase common shares
h. No impact (cash increases, accounts receivable decreases)
i.Decrease assets, decrease retained earnings
E3–7.
a.Accrued expense/accrued liability – since the expense must be recognized before the cash is
paid.
b. Accrued revenue/accrued asset – since the revenues must be recognized before the cash is
received.
c.Deferred revenue – since cash was received before the revenue is recognized.
d. Accrued expense/accrued liability – since the expense must be recognized before the cash is
paid.
e.Deferred expense/prepaid expense – since the cash was paid before the expense will be
recognized. The adjusting entry would be needed to depreciate the computers over their
useful lives.
f. Accrued revenue/accrued asset – since the revenues must be recognized before the cash is
received.
g. Deferred expense/prepaid expense – since the cash was paid before the expense will be
recognized.
E3–9.
Tran
s DR CR
aFurniture and fixtures 100,000
Cash 100,000
bFurniture and fixtures 18,000
Cash 10,000
Accounts payable8,000
cSupplies 900
Cash 900
dBank loan 5,000
Cash 5,000
eCash 55,000
Common shares55,000
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
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fAdvertising expense 500
Cash 500
gCash 32,000
Sales32,000
Cost of Sales 15,000
Inventory 15,000
hAccounts receivable 8,000
Sales8,000
Cost of sales 5,200
Inventory 5,200
iCash 5,000
Accounts receivable5,000
jPrepaid expenses 4,500
Cash 4,500
CashAccounts receivableSupplies
a100,000 h 8,000 c900
b 10,000 i5,000
c900
d 5,000
e55,000
f500
g 32,000
h 8,000
i5,000
j4,500
Prepaid expenses Inventory Furniture and fixtures
j4,500 g 15,000 a100,000
h 5,200 b 18,000
Bank loan Accounts payable Common shares
d 5,000 b 8,000 e55,000
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
3
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