Week Two Exercise Assignment
Revenue and Expenses
1. Recognition of concepts.
Ron Carroll operates a small company that books enterÂtainers for theaters,
parties, conventions, and so forth. The companyâs fiscal year ends on June 30.
Consider the following items and classify each as either (1) preÂpaid expense,
(2) unearned revenue, (3) accrued expense, (4) accrued revenue, or (5) none of
the foregoing.
a. Amounts paid on June 30 for a
1-year insurance policy
b. Professional fees earned but not
billed as of June 30
c. Repairs to the firmâs copy
machine, incurred and paid in June
d. An advance payment from a client
for a performance next month at a convention
e. The payment in part (d) from the
clientâs point of view
f. Interest owed on the companyâs
bank loan, to be paid in early July
g. The bank loan payable in part
(f)
h. Office supplies on hand at
year-end
2. Analysis of prepaid account
balance. The following information relates to Action Sign Company for 20X2:
Insurance expense
$4,350
Prepaid insurance, December 31, 20X2
1,900
Cash outlays for insurance during 20X2
6,200
Compute the balance in the Prepaid Insurance account on
January 1, 20X2.
3. Understanding the closing process. Examine the
following list of accounts:
Interest Payable
Accumulated Depreciation: Equipment
Alex Kenzy, Drawing
Accounts Payable
Service Revenue
Cash
Accounts Receivable
Supplies Expense
Interest Expense
Which of the preceding accounts
a. appear on a post-closing trial
balance?
b. are commonly known as temporary,
or nominal, accounts?
c. generate a debit to Income Summary
in the closing process?
d. are closed to
the capital account in the closing process?
4. Adjusting entries and
financial statements. The following information pertains to Fixation
Enterprises:
·
The company previously collected $1,500 as an
advance payment for services to be rendered in the future. By the end of
December, one third of this amount had been earned.
·
Fixation provided $2,500 of services to Artech Corporation;
no billing had been made by December 31.
·
Salaries owed to employees at year-end amounted
to $1,650.
·
The Supplies account revealed a balance of
$8,800, yet only $3,300 of supplies were actually on hand at the end of the
period.
·
The company paid $18,000 on October 1 of the
current year to Vantage Property Management. The payment was for 6 monthsâ rent
of Fixationâs headquarters, beginning on November 1.
Fixationâs accounting year ends on December 31.
Instructions
Analyze the five preceding cases individually and determine
the following:
a. The typeof
adjusting entry needed at year-end (Use the following codes: A, adjustÂment of
a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to
record an accrued expense; or D, adjustment to record an accrued revenue.)
b. The year-end
journal entry to adjust the accounts
c. The income
statement impact of each adjustment (e.g., increases total revenues by $500)
5. Adjusting entries. You
have been retained to examine the records of Kathyâs Day Care Center as of
December 31, 20X3, the close of the current reporting period. In the course of
your examination, you discover the following:
·
On January 1, 20X3, the Supplies account had a
balance of $2,350. During the year, $5,520 worth of supplies was purchased, and
a balance of $1,620 remained unused on December 31.
·
Unrecorded interest owed to the center totaled
$275 as of December 31.
·
All clients pay tuition in advance, and their
payments are credited to the Unearned Tuition Revenue account. The account was
credited for $75,500 on August 31. With the exception of $15,500 all amounts
were for the current semester ending on December 31.
·
Depreciation on the schoolâs van was $3,000 for
the year.
·
On August 1, the center began to pay rent in
6-month installments of $21,000. Kathy wrote a check to the owner of the
building and recorded the check in PreÂpaid Rent, a new account.
·
Two salaried employees earn $400 each for a
5-day week. The employees are paid every Friday, and December 31 falls on a
Thursday.
·
Kathyâs Day Care paid insurance premiums as
follows, each time debiting PreÂpaid Insurance:
Date
Paid
Policy
No.
Length
of Policy
Amount
Feb. 1,
20X2
1033MCM19
1 year
$540
Jan. 1,
20X3
7952789HP
1 year
912
Aug. 1,
20X3
XQ943675ST
2 years
840
Instructions
The centerâs accounts were last
adjusted on December 31, 20X2.
Prepare the adjusting entries necessary under the accrual basis of accounting.
6. Bank reconciliation and
entries. The following information was taken from the accounting records of
Palmetto Company for the month of January:
Balance per bank
$6,150
Balance per company records
3,580
Bank service charge for January
20
Deposits in transit
940
Interest on note collected by bank
100
Note collected by bank
1,000
NSF check returned by the bank with the bank statement
650
Outstanding checks
3,080
Instructions:
a.
Prepare Palmettoâs January bank reconciliation.
b.
Prepare any necessary journal entries for Palmetto.
7. Direct write-off method.
Harrisburg Company, which began business in early 20X7, reported $40,000 of
accounts receivable on the December 31, 20X7, balance sheet. Included in this
amount was $550 for a sale made to Tom
Mattingly in July. On January 4, 20X8, the company learned that Mattingly had
filed for personal bankruptcy. Harrisburg uses the direct write-off method to
account for uncollectibles.
a. Prepare the journal entry needed
to write off Mattinglyâs account.
b. Comment on the ability of the direct write-off method to value
receivables on the year-end balance sheet.
8.Allowance
method: estimation and balance sheet disclosure.
The following pre-Âadjusted information for the Maverick Company is available
on December 31:
·
Accounts receivable $107,000
·
Allowance for uncollectible accounts 5,400 (credit balance)
·
Credit sales 250,000
a.
Prepare the journal entries necessary to record Maverickâs uncollectible
accounts expense under each of the following assumptions:
(1)
Uncollectible accounts are estimated to be 5% of Credit Sales.
(2)
Uncollectible accounts are estimated to be 14% of Accounts Receivable.
b.
How would Maverickâs Accounts Receivable appear on the December 31 balance
sheet under assumption (1) of part (a)?
c. How would Maverickâs Accounts
Receivable appear on the December 31 balance sheet under assumption (2) of part
(a)?
9. Direct write-off and
allowance methods: matching approach. The December 31, 20X2, year-end trial
balance of Targa Company revealed the following account information:
Debits
Credits
Accounts Receivable
$252,000
Allowance for Uncollectible Accounts
$ 3,000
Sales
855,000
Instructions
a. Determine the adjusting entry
for bad debts under each of the following condiÂtions:
(1) An aging
schedule indicates that $12,420 of accounts receivable will be uncollectible.
(2) Uncollectible
accounts are estimated at 2% of net sales.
b. On January 19, 20X3, Targa
learned that House Company, a customer, had declared bankruptcy. Present the
proper entry to write off Houseâs $950 balance using the allowance method.
c. Repeat the requirement in part
(b), using the direct write-off method.
d. In light of the House
bankruptcy, examine the allowance and direct write-off methods in terms of
their ability to properly match revenues and expenses.
10. Allowance method: analysis
of receivables. At a January 20X2 meeting, the presiÂdent of Sonic Sound
directed the sales staff âto move some product this year.â The president noted
that the credit evaluation department was being disbanded beÂcause it had
restricted the companyâs growth. Credit decisions would now be made by the
sales staff.
By the end of the year, Sonic had
generated significant gains in sales, and the president was very pleased. The
following data were provided by the accounting department:
20X2
20X1
Sales
$23,987,000
$8,423,000
Accounts Receivable, 12/31
12,444,000
1,056,000
Allowance for Uncollectible Accounts, 12/31
?
23,000 cr.
The $12,444,000 receivables balance was aged as follows:
Age of Receivable
Amount
Percentage of Accounts Expected to Be Collected
Under 31 days
$5,321,000
99%
31260 days
3,890,000
90
61290 days
1,067,000
80
Over 90 days
2,166,000
60
Assume
that no accounts were written off during 20X2.
Instructions
a. Estimate
the amount of Uncollectible Accounts as of December 31, 20X2.
b. What is
the companyâs Uncollectible Accounts expense for 20X2?
c. Compute
the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.
d. Compute the net realizable value at
the end of 20X1 and 20X2 as a percentage of respective year-end receivables
balances. Analyze your findings and comment on the presidentâs decision to
close the credit evaluation department.