9. Salaries Expense 10. Income Taxes Expense
c. The unadjusted trial balance reports dividends of $1,000. As of December 31, 2011, have these dividends been paid? Explain.
Mate Ease is an Internet dating service. All members pay in advance to be listed in the database.
Advance payments are credited to an account entitled Unearned Member Dues. Adjusting entries are performed on a monthly basis. An unadjusted trial balance dated December 31, 2011, follows.
(Bear in mind that adjusting entries have already been made for the first 11 months of 2011, but not for December.)
PROBLEM 4.6B Preparing Adjusting Entries and
Determining Account Balances
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Problem Set B 185
MATE EASE
UNADJUSTED TRIAL BALANCE DECEMBER 31, 2011
Cash . . . $169,500 Unexpired insurance. . . 12,800 Prepaid rent . . . 14,600 Office supplies . . . 2,160 Computer equipment . . . 108,000
Accumulated depreciation: computer equipment . . . $ 54,000 Accounts payable . . . 4,300 Notes payable. . . 90,000 Interest payable . . . 6,750 Income taxes payable. . . 7,500 Unearned member dues . . . 36,000 Capital stock . . . 40,000 Retained earnings. . . 28,000 Client fees earned . . . 508,450 Advertising expense . . . 17,290
Insurance expense . . . 35,200 Rent expense . . . 80,300 Office supplies expense . . . 18,400 Internet connection expense. . . 24,000 Depreciation expense: computer equipment . . . 33,000 Salaries expense . . . 239,000 Interest expense . . . 6,750 Income taxes expense . . . 14,000
$775,000 $775,000
Other Data
1. Records show that $21,000 of cash receipts originally recorded as unearned member dues had been earned as of December 31, 2011.
2. The company purchased a six-month insurance policy on October 1, 2011, for $19,200.
3. On November 1, 2011, the company paid $21,900 for rent through January 31, 2012.
4. Office supplies on hand at December 31 amount to $440.
5. All computer equipment was purchased when the business first formed. The estimated life of the equipment at that time was three years (or 36 months).
6. On March 1, 2011, the company borrowed $90,000 by signing a 12-month, 10 percent note payable. The entire note, plus 12 months’ accrued interest, is due on March 1, 2012.
7. Accrued but unrecorded salaries at December 31 amount to $10,500.
8. Estimated income taxes expense for the entire year totals $16,000. Taxes are due in the first quarter of 2012.
Instructions
a. For each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b. Determine that amount at which each of the following accounts will be reported in the com- pany’s balance sheet dated December 31, 2011:
1. Cash 7. Accounts Payable
2. Unexpired Insurance 8. Notes Payable
3. Prepaid Rent 9. Salaries Payable
4. Offi ce Supplies 10. Interest Payable
5. Computer Equipment 11. Income Taxes Payable
6. Accumulated Depreciation: Computer Equipment 12. Unearned Member Dues c. Why doesn’t the company immediately record advance payments from customers as revenue?
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Clint Stillmore operates a private investigating agency called Stillmore Investigations. Some cli- ents pay in advance for services; others are billed after services have been performed. Advance payments are credited to an account entitled Unearned Retainer Fees. Adjusting entries are per- formed on a monthly basis. An unadjusted trial balance dated December 31, 2011, follows. (Bear in mind that adjusting entries have already been made for the first 11 months of 2011, but not for December.)
Other Data
1. Accrued but unrecorded client fees earned at December 31 amount to $1,500.
2. Records show that $2,500 of cash receipts originally recorded as Unearned Retainer Fees had been earned as of December 31.
3. Office supplies on hand at December 31 amount to $110.
4. The company purchased all of its office equipment when it first began business. At that time, the equipment’s estimated useful life was six years (or 72 months).
5. On October 1, 2011, the company renewed its rental agreement paying $1,800 cash for six months’ rent in advance.
6. On March 1 of the current year, the company paid $1,080 cash to renew its 12-month insur- ance policy.
7. Accrued but unrecorded salaries at December 31 amount to $1,900.
8. On June 1, 2011, the company borrowed money from the bank by signing a $9,000, 8 percent, 12-month note payable. The entire note, plus 12 months’ accrued interest, is due on May 31, 2012.
9. The company’s CPA estimates that income taxes expense for the entire year is $7,500.
PROBLEM 4.7B Preparing Adjusting Entries from a Trial Balance
STILLMORE INVESTIGATIONS UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . $ 40,585 Accounts receivable . . . 2,000 Office supplies . . . 205 Prepaid rent . . . 1,200 Unexpired insurance. . . 270 Office equipment. . . 54,000
Accumulated depreciation: office equipment . . . $ 35,250 Accounts payable . . . 1,400 Interest payable . . . 360 Income taxes payable. . . 1,750 Note payable. . . 9,000 Unearned retainer fees . . . 3,500 Capital stock . . . 30,000 Retained earnings. . . 8,000 Dividends . . . 1,000
Client fees earned. . . 60,000 Office supplies expense . . . 605
Depreciation expense: office equipment. . . 8,250 Rent expense . . . 5,775 Insurance expense . . . 1,010 Salaries expense . . . 27,100 Interest expense . . . 360 Income taxes expense . . . 6,900
Totals . . . $149,260 $149,260 P
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Problem Set B 187
Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b. Prepare the company’s adjusted trial balance dated December 31, 2011.
c. Using figures from the adjusted trial balance prepared in b, compute net income for the year ended December 31, 2011.
d. How much was the company’s average monthly rent expense in January through September of 2011? Explain your answer.
e. How much was the company’s average monthly insurance expense in January and February of 2011? Explain your answer.
f. If the company purchased all of its office equipment when it first began operations, for how many months has it been in business? Explain your answer.
g. Indicate the effect of each adjusting entry prepared in part a on the major elements of the com- pany’s income statement and balance sheet. Organize your answer in tabular form using the column headings shown. Use the symbols I for increase, D for decrease, and NE for no effect.
The answer for adjusting entry number 1 is provided as an example.
Total Total Net Total Total Owners’
Error Revenue Expenses Income Assets Liabilities Equity a. Recorded a declared but unpaid
dividend by debiting dividends and crediting cash.
b. Recorded a receipt of an account receivable as a debit to cash and a credit to fees earned.
c. Recorded depreciation expense twice.
d. Recorded the sale of capital stock as a debit to cash and a credit to revenue.
e. Purchased equipment and debited supplies expense and credited cash.
f. Failed to record expired portion of prepaid advertising.
g. Failed to record accrued and unpaid interest expense.
Stephen Corporation recently hired Tom Waters as its new bookkeeper. Waters is very inexperi- enced and has made seven recording errors during the last accounting period. The nature of each error is described in the following table.
Instructions
Indicate the effect of the following errors on each of the financial statement elements described in the column headings in the table. Use the following symbols: O ⫽ overstated, U ⫽ understated, and NE ⫽ no effect
PROBLEM 4.8B Understanding the Effects of Various Errors
Income Statement Balance Sheet
Adjusting Net Owners’
Entry Revenue ⫺ Expenses ⫽ Income Assets ⫽ Liabilities ⫹ Equity
1 I NE I I NE I
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Property Management Professionals provides building management services to owners of office buildings and shopping centers. The company closes its accounts at the end of the calendar year.
The manner in which the company has recorded several transactions occurring during 2011 is described as follows:
a. On September 1, received advance payment from a shopping center for property manage- ment services to be performed over the three-month period beginning September 1. The entire amount received was credited directly to a revenue account.
b. On December 1, received advance payment from the same customer described in part a for services to be rendered over the three-month period beginning December 1. This time, the entire amount received was credited to an unearned revenue account.
c. Rendered management services for many customers in December. Normal procedure is to record revenue on the date the customer is billed, which is early in the month after the services have been rendered.
d. On December 15, made full payment for a one-year insurance policy that goes into effect on January 2, 2012. The cost of the policy was debited to Unexpired Insurance.
e. Numerous purchases of equipment were debited to asset accounts, rather than to expense accounts.
f. Payroll expense is recorded when employees are paid. Payday for the last two weeks of December falls on January 2, 2012.
Instructions
For each item above, explain whether an adjusting entry is needed at December 31, 2011 , and state the reasons for your answer. If you recommend an adjusting entry, explain the effects this entry would have on assets, liabilities, owners’ equity, revenue, and expenses in the 2011 financial statements.
The concept of materiality is one of the most basic principles underlying financial accounting.
a. Answer the following questions:
1. Why is the materiality of a transaction or an event a matter of professional judgment?