Problem Set A

Problem 3-1A Identifying adjusting entries with explanations

 
For each of the following journal entries 1 through 12, enter the letter of the explanation that
most closely describes it in the space beside each entry. (You can use letters more than once.)
A. To record receipt of unearned revenue.
B. To record this period’s earning of prior 
unearned revenue.
C. To record payment of an accrued expense.
D. To record receipt of an accrued revenue.
E. To record an accrued expense.
F. To record an accrued revenue.
G. To record this period’s use of a prepaid expense.
H. To record payment of a prepaid expense.
I. To record this period’s depreciation expense.
Problem 3-2A Preparing adjusting and subsequent journal entries
Arnez Company’s annual accounting period ends on December 31, 2017. The following
information concerns the adjusting entries to be recorded as of that date. (Entries can draw from
the following partial chart of accounts: Cash; Rent Receivable; Office Supplies; Prepaid
Insurance; Building; Accumulated Depreciation—Building; Salaries Payable; Unearned Rent;
Rent Earned; Salaries Expense; Office Supplies Expense; Insurance Expense; Depreciation
Expense—Building.)

a. The Office Supplies account started the year with a $4,000 balance. During 2017, the
company purchased supplies for $13,400, which was added to the Office Supplies account.
The inventory of supplies available at December 31, 2017, totaled $2,554.
b. An analysis of the company’s insurance policies provided the following facts. 

a. The total premium for each policy was paid in full (for all months) at the purchase date,
and the Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries
for Prepaid Insurance were properly recorded in all prior years.)
b. The company has 15 employees, who earn a total of $1,960 in salaries each working day.
They are paid each Monday for their work in the five-day workweek ending on the previous
Friday. Assume that December 31, 2017, is a Tuesday, and all 15 employees worked the first
two days of that week. Because New Year’s Day is a paid holiday, they will be paid salaries
for five full days on Monday, January 6, 2018.
c. The company purchased a building on January 1, 2017. It cost $960,000 and is expected
to have a $45,000 salvage value at the end of its predicted 30-year life. Annual depreciation
is $30,500.
d. Since the company is not large enough to occupy the entire building it owns, it rented
space to a tenant at $3,000 per month, starting on November 1, 2017. The rent was paid on
time on November 1, and the amount received was credited to the Rent Earned account.
However, the tenant has not paid the December rent. The company has worked out an
agreement with the tenant, who has promised to pay both December and January rent in full
on January 15. The tenant has agreed not to fall behind again.
e. On November 1, the company rented space to another tenant for $2,800 per month. The
tenant paid five months’ rent in advance on that date. The payment was recorded with a
credit to the Unearned Rent account.
Required
1. Use the information to prepare adjusting entries as of December 31, 2017.
2. Prepare journal entries to record the first subsequent cash transaction in 2018 for
parts c and e.
Check (1b) Dr. Insurance Expense, $7,120
(1d) Dr. Depreciation Expense, $30,500

Problem 3-3A Preparing adjusting entries, adjusted trial balance, and financial

statements
Wells Technical Institute (WTI), a school owned by Tristana Wells, provides training to
individuals who pay tuition directly to the school. WTI also offers training to groups in off-site
locations. Its unadjusted trial balance as of December 31, 2017, follows. Descriptions of
items a through h that require adjusting entries on December 31, 2017, follow.
Additional Information Items
a. An analysis of WTI’s insurance policies shows that $2,400 of coverage has expired.
b. An inventory count shows that teaching supplies costing $2,800 are available at year-end
2017.
c. Annual depreciation on the equipment is $13,200.
d. Annual depreciation on the professional library is $7,200.
e. On November 1, WTI agreed to do a special six-month course (starting immediately) for
a client. The contract calls for a monthly fee of $2,500, and the client paid the first five
months’ fees in advance. When the cash was received, the Unearned Training Fees account
was credited. The fee for the sixth month will be recorded when it is collected in 2018.
f. On October 15, WTI agreed to teach a four-month class (beginning immediately) for an
individual for $3,000 tuition per month payable at the end of the class. The class started on
October 15, but no payment has yet been received. (WTI’s accruals are applied to the nearest
half-month; for example, October recognizes one-half month accrual.)
g. WTI’s two employees are paid weekly. As of the end of the year, two days’ salaries have
accrued at the rate of $100 per day for each employee.
h. The balance in the Prepaid Rent account represents rent for December.
Required
1. Prepare T-accounts (representing the ledger) with balances from the unadjusted trial
balance.
2. Prepare the necessary adjusting journal entries for items a through h and post them to the
T-accounts. Assume that adjusting entries are made only at year-end.
3. Update balances in the T-accounts for the adjusting entries and prepare an adjusted trial
balance.
4. Prepare Wells Technical Institute’s income statement and statement of owner’s equity for
the year 2017 and prepare its balance sheet as of December 31, 2017.
Check (2e) Cr. Training Fees Earned, $5,000
(2f ) Cr. Tuition Fees Earned, $7,500
(3) Adj. trial balance totals, $345,700
(4) Net income, $49,600; Ending T. Wells, Capital, $89,600
Problem 3-4A Interpreting unadjusted and adjusted trial balances,
and preparing financial statements 
A six-column table for JKL Company follows. The first two columns contain the unadjusted
trial balance for the company as of July 31, 2017. The last two columns contain the adjusted
trial balance as of the same date.

Required
Analysis Component
1. Analyze the differences between the unadjusted and adjusted trial balances to determine
the eight adjustments that likely were made. Show the results of your analysis by inserting
these adjustment amounts in the table’s two middle columns. Label each adjustment with a
letter a through h and provide a short description of each.
Preparation Component
2. Use the information in the adjusted trial balance to prepare the company’s (a)
income statement and its statement of owner’s equity for the year ended July 31, 2017
[Note: J. Logan, Capital at July 31, 2016, was $40,000, and the current-year withdrawals
were $5,000], and (b) the balance sheet as of July 31, 2017.
Problem 3-5A Preparing financial statements from the adjusted trial balance and
computing profit margin
The adjusted trial balance for Chiara Company as of December 31, 2017, follows.

Required
1. Use the information in the adjusted trial balance to prepare (a) the income statement for
the year ended December 31, 2017; (b) the statement of owner’s equity for the year ended
December 31, 2017; and (c) the balance sheet as of December 31, 2017.
2. Compute the profit margin for year 2017 (use total revenues as the denominator).
Check (1) Total assets, $600,000
Problem 3-6AA Recording prepaid expenses and unearned revenues
Gomez Co. had the following transactions in the last two months of its year ended December
31. (Entries can draw from the following partial chart of accounts: Cash; Prepaid Insurance;
Prepaid Advertising; Prepaid Consulting Fees; Unearned Service Fees; Services Fees Earned;
Insurance Expense; Advertising Expense; Consulting Fees Expense.)

Nov.   1 Paid $1,800 cash for future newspaper advertising.

Paid $2,460 cash for 12 months of insurance through October 31 of the next
  1 year.
30 Received $3,600 cash for future services to be provided to a customer.
Paid $3,000 cash for a consultant’s services to be received over the next three
Dec.   1 months.
15 Received $7,950 cash for future services to be provided to a customer.
31 Of the advertising paid for on November 1, $1,200 worth is not yet used.
A portion of the insurance paid for on November 1 has expired. No adjustment
31 was made in November to Prepaid Insurance.
Services worth $1,500 are not yet provided to the customer who paid on
31 November 30.
One-third of the consulting services paid for on December 1 have been
31 received.
The company has performed $3,300 of services that the customer paid for on
31 December 15.

Required
1. Prepare entries for these transactions under the method that initially records prepaid
expenses as assets and records unearned revenues as liabilities. Also prepare adjusting
entries at the end of the year.
2. Prepare entries for these transactions under the method that initially records prepaid
expenses as expenses and records unearned revenues as revenues. Also prepare adjusting
entries at the end of the year.
Analysis Component
3. Explain why the alternative sets of entries in requirements 1 and 2 do not result in
different financial statement amounts.
Problem Set B
Problem 3-1B Identifying adjusting entries with explanations
For each of the following journal entries 1 through 12, enter the letter of the explanation that
most closely describes it in the space beside each entry. (You can use letters more than once.)
A. To record payment of a prepaid expense.
B. To record this period’s use of a prepaid expense.
C. To record this period’s depreciation expense.
D. To record receipt of unearned revenue.
E. To record this period’s earning of prior unearned revenue.
F. To record an accrued expense.
G. To record payment of an accrued expense.
H. To record an accrued revenue.
I. To record receipt of accrued revenue.
Problem 3-2B Preparing adjusting and subsequent journal entries
Natsu Company’s annual accounting period ends on October 31, 2017. The following
information concerns the adjusting entries that need to be recorded as of that date. (Entries can
draw from the following partial chart of accounts: Cash; Rent Receivable; Office Supplies;
Prepaid Insurance; Building; Accumulated Depreciation—Building; Salaries Payable; Unearned
Rent; Rent Earned; Salaries Expense; Office Supplies Expense; Insurance Expense;
Depreciation Expense—Building.)

a. The Office Supplies account started the fiscal year with a $600 balance. During the fiscal
year, the company purchased supplies for $4,570, which was added to the Office Supplies
account. The supplies available at October 31, 2017, totaled $800.
b. An analysis of the company’s insurance policies provided the following facts.

a. The total premium for each policy was paid in full (for all months) at the purchase date,
and the Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries
for Prepaid Insurance were properly recorded in all prior fiscal years.)
b. The company has four employees, who earn a total of $1,000 for each workday. They are
paid each Monday for their work in the five-day workweek ending on the previous Friday.
Assume that October 31, 2017, is a Monday, and all four employees worked the first day of
that week. They will be paid salaries for five full days on Monday, November 7, 2017.
c. The company purchased a building on November 1, 2014, that cost $175,000 and is
expected to have a $40,000 salvage value at the end of its predicted 25-year life. Annual
depreciation is $5,400.
d. Since the company does not occupy the entire building it owns, it rented space to a tenant
at $1,000 per month, starting on September 1, 2017. The rent was paid on time on September
1, and the amount received was credited to the Rent Earned account. However, the October
rent has not been paid. The company has worked out an agreement with the tenant, who has
promised to pay both October and November rent in full on November 15. The tenant has
agreed not to fall behind again.
e. On September 1, the company rented space to another tenant for $725 per month. The
tenant paid five months’ rent in advance on that date. The payment was recorded with a
credit to the Unearned Rent account.
Required
1. Use the information to prepare adjusting entries as of October 31, 2017.
2. Prepare journal entries to record the first subsequent cash transaction in November 2017
for parts c and e.
Check (1b) Dr. Insurance Expense, $4,730
(1d) Dr. Depreciation Expense, $5,400

Problem 3-3B Preparing adjusting entries, adjusted trial balance, and financial

statements 
Following is the unadjusted trial balance for Alonzo Institute as of December 31, 2017. The
Institute provides one-on-one training to individuals who pay tuition directly to the business and
offers extension training to groups in off-site locations. Shown after the trial balance are
items a through h that require adjusting entries as of December 31, 2017.
Additional Information Items
a. An analysis of the Institute’s insurance policies shows that $9,500 of coverage has
expired.
b. An inventory count shows that teaching supplies costing $20,000 are available at year-
end 2017.
c. Annual depreciation on the equipment is $5,000.
d. Annual depreciation on the professional library is $2,400.
e. On November 1, the Institute agreed to do a special five-month course (starting
immediately) for a client. The contract calls for a $14,300 monthly fee, and the client paid
the first two months’ fees in advance. When the cash was received, the Unearned Training
Fees account was credited. The last three months’ fees will be recorded when collected in
2018.
f. On October 15, the Institute agreed to teach a four-month class (beginning immediately)
to an individual for $2,300 tuition per month payable at the end of the class. The class
started on October 15, but no payment has yet been received. (The Institute’s accruals are
applied to the nearest half-month; for example, October recognizes one-half month accrual.)
g. The Institute’s only employee is paid weekly. As of the end of the year, three days’
salaries have accrued at the rate of $150 per day.
h. The balance in the Prepaid Rent account represents rent for December.
Required
1. Prepare T-accounts (representing the ledger) with balances from the unadjusted trial
balance.
2. Prepare the necessary adjusting journal entries for items a through h, and post them to the
T-accounts. Assume that adjusting entries are made only at year-end.
3. Update balances in the T-accounts for the adjusting entries and prepare an adjusted trial
balance.
4. Prepare the company’s income statement and statement of owner’s equity for the year
2017, and prepare its balance sheet as of December 31, 2017.

Check (2e) Cr. Training Fees Earned, $28,600

(2f) Cr. Tuition Fees Earned, $5,750
(3) Adj. trial balance totals, $344,600
(4) Net income, $54,200; Ending C. Alonzo, Capital, $105,700

Problem 3-4B Interpreting unadjusted and adjusted trial balances, and preparing

financial statements 

A six-column table for Yan Consulting Company follows. The first two columns contain the
unadjusted trial balance for the company as of December 31, 2017, and the last two columns
contain the adjusted trial balance as of the same date.
Required
Analysis Component
1. Analyze the differences between the unadjusted and adjusted trial balances to determine
the eight adjustments that likely were made. Show the results of your analysis by inserting
these adjustment amounts in the table’s two middle columns. Label each adjustment with a
letter a through h and provide a short description of each.
Preparation Component
2. Use the information in the adjusted trial balance to prepare this company’s (a)
income statement and its statement of owner’s equity for the year ended December 31, 2017
[Note: Z. Yan, Capital at December 31, 2016, was $80,200, and the current-year
withdrawals were $20,000], and (b) the balance sheet as of December 31, 2017.
Check (2) Net income, $9,110; Z. Yan, Capital (12/31/17), $69,310; Total assets, $222,260
Problem 3-5B Preparing financial statements from the adjusted trial balance and
computing profit margin 
The adjusted trial balance for Speedy Courier as of December 31, 2017, follows.
Required
1. Use the information in the adjusted trial balance to prepare (a) the income statement for
the year ended December 31, 2017, (b) the statement of owner’s equity for the year ended
December 31, 2017, and (c) the balance sheet as of December 31, 2017.
Check (1) Total assets, $663,000
2. Compute the profit margin for year 2017 (use total revenues as the denominator).
Required
1. Use the information in the adjusted trial balance to prepare (a) the income statement for
the year ended December 31, 2017, (b) the statement of owner’s equity for the year ended
December 31, 2017, and (c) the balance sheet as of December 31, 2017.
Check (1) Total assets, $663,000
2. Compute the profit margin for year 2017 (use total revenues as the denominator).

Problem 3-6BA Recording prepaid expenses and unearned revenues 

Tremor Co. had the following transactions in the last two months of its fiscal year ended May
31. (Entries can draw from the following partial chart of accounts: Cash; Prepaid Insurance;
Prepaid Advertising; Prepaid Consulting Fees; Unearned Service Fees; Services Fees Earned;
Insurance Expense; Advertising Expense; Consulting Fees Expense.)

Apr.   1 Paid $2,450 cash to an accounting firm for future consulting services.
Paid $3,600 cash for 12 months of insurance through March 31 of the next
  1 year.
30 Received $8,500 cash for future services to be provided to a customer.
May   1 Paid $4,450 cash for future newspaper advertising.
23 Received $10,450 cash for future services to be provided to a customer.
Of the consulting services paid for on April 1, $2,000 worth has been
31 performed.
A portion of the insurance paid for on April 1 has expired. No adjustment was
31 made in April to Prepaid Insurance.
Services worth $4,600 are not yet provided to the customer who paid on April
31 30.
31 Of the advertising paid for on May 1, $2,050 worth is not yet used.
The company has performed $5,500 of services that the customer paid for on
31 May 23.
Required
1. Prepare entries for these transactions under the method that initially records prepaid
expenses and unearned revenues in balance sheet accounts. Also prepare adjusting entries at
the end of the year.
2. Prepare entries for these transactions under the method that initially records prepaid
expenses and unearned revenues in income statement accounts. Also prepare adjusting
entries at the end of the year.
Analysis Component
3. Explain why the alternative sets of entries in parts 1 and 2 do not result in different
financial statement amounts.