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ch04Solutions
CHAPTER4
AccrualAccountingConcepts
StudyObjectives
1.Explaintherevenuerecognitionprincipleandthematchingprinciple.
2.Differentiatebetweenthecashbasisandtheaccrualbasisofaccounting.
3.Explainwhyadjustingentriesareneeded,andidentifythemajortypesofadjustingentries.
4.Prepareadjustingentriesfordeferrals.
5.Prepareadjustingentriesforaccruals.
6.Describethenatureandpurposeoftheadjustedtrialbalance.
7.Explainthepurposeofclosingentries.
8.Describetherequiredstepsintheaccountingcycle.
9.Understandthecausesofdifferencesbetweennetincomeandcashprovidedby
operatingactivities.
10.Describethepurposeandthebasicformofaworksheet.
SummaryofQuestionsbyStudyObjectivesandBloom’sTaxonomy
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Item
SO
BT
Questions
1.
1
C
9.
4
C
16.
5
K
23.
6
C
30.
7
K
2.
1
K
10.
4
C
17.
5
AN
24.
2
C
31.
8
K
3.
1
C
11.
4
K
18.
5
AP
25.
6
C
32.
8
K
4.
1
AP
12.
4
K
19.
4,5
K
26.
7
K
33.
8
C
5.
3
C
13.
1
C
20.
4,5
K
27.
7
C
34.
8
C
6.
3
C
14.
1
AN
21.
5
C
28.
7
C
35.
10*
K
7.
3
C
15.
5
C
22.
5
C
29.
7
K
36.
10*
K
8.
4
K
BriefExercises
1.
2,9
C
4.
4
AP
7.
4
AP
10.
6
AP
13.
7
K
2.
3
C
5.
4
AP
8.
5
AP
11.
6
AP
14.
7
AP
3.
3
AN
6.
4
AP
9.
6
AN
12.
6
K
15.
8
K
DoIt!
ReviewExercises
1.
4
AP
2.
5
AP
3.
6
C
4.
7
AP
Exercises
1.
1
C
5.
2,9
AP
9.
4,5
AP
13.
1,4,5,6
AN
17.
6
AP
2.
1
K
6.
2,4,
5,9
AP
10.
4,5
AP
14.
7
AP
18.
7
AP
3.
1
C
7.
2,3,9
C
11.
4,5
AP
15.
4,5,6
AN
4.
2,4,
5,9
AP
8.
3,4,
5
AN
12.
1,4,5,6
AP
16.
4,5,
6
AP
SummaryofQuestionsbyStudyObjectivesandBloom’sTaxonomy（Continued）
Problems:
SetA
1.
2,4,
9
AP
3.
4,5,
6,7
AP
5.
4,5
AP
7.
4,5,
6
AP
8.
4,5,6,7,
8
AP
2.
4,5,
6
AP
4.
4,5,
6,7
AP
6.
4,5
AN
Problems:
SetB
1.
2,4,
9
AP
3.
4,5,
6,7
AP
5.
4,5
AP
7.
4,5,
6
AP
8.
4,5,6,7,
8
AP
2.
4,5,
6
AP
4.
4,5,
6,7
AP
6.
4,5
AN
ASSIGNMENTCHARACTERISTICSTABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted（min.）
1A
Recordtransactionsonaccrualbasis;convertrevenuetocashreceipts.
Simple
20–30
2A
Prepareadjustingentries,posttoledgeraccounts,andprepareanadjustedtrialbalance.
Simple
40–50
3A
Prepareadjustingentries,adjustedtrialbalance,and
financialstatements.
Simple
50–60
4A
Prepareadjustingentriesandfinancialstatements;identifyaccountstobeclosed.
Moderate
40–50
5A
Prepareadjustingentries.
Moderate
30–40
6A
Prepareadjustingentriesandacorrectedincome
statement.
Moderate
30–40
7A
Journalizetransactionsandfollowthroughaccounting
cycletopreparationoffinancialstatements.
Moderate
60–70
8A
Completeallstepsinaccountingcycle.
Moderate
70–80
1B
Recordtransactionsonaccrualbasis;convertrevenuetocashreceipts.
Simple
20–30
2B
Prepareadjustingentries,posttoledgeraccounts,andprepareadjustedtrialbalance.
Simple
40–50
3B
Prepareadjustingentries,adjustedtrialbalance,and
financialstatements.
Simple
50–60
4B
Prepareadjustingentriesandfinancialstatements;
identifyaccountstobeclosed.
Moderate
40–50
5B
Prepareadjustingentries.
Moderate
30–40
6B
Prepareadjustingentriesandacorrectedincome
statement.
Moderate
30–40
7B
Journalizetransactionsandfollowthroughaccounting
cycletopreparationoffinancialstatements.
Moderate
60–70
8B
Completeallstepsinaccountingcycle.
Moderate
70–80
ANSWERSTOQUESTIONS
1.（a）Underthetimeperiodassumption,anaccountantisrequiredtodeterminetheeffectofeachaccountingtransactiononspecificaccountingperiods.
（b）Anaccountingtimeperiodthatisoneyearinlengthisreferredtoasafiscalyear.
2.Thetwogenerallyacceptedaccountingprinciplesthatpertaintoadjustingtheaccountsare:
Therevenuerecognitionprinciple,whichstatesthatrevenueshouldberecognizedinthetime
periodinwhichitisearned.
Thematchingprinciplewhichstatesthatefforts（expenses）bematchedwithaccomplishments（revenues）thattheyhelpedgenerate.
3.ThelawfirmshouldrecognizetherevenueinApril.Therevenuerecognitionprinciplestatesthatrevenueshouldberecognizedintheaccountingperiodinwhichitisearned.
4.Expensesof$4,500shouldbedeductedfromtherevenuesinApril.Underthematchingprincipleefforts（expenses）shouldbematchedwithaccomplishments（revenues）.
5.No,adjustingentriesarerequiredbytherevenuerecognitionandmatchingprinciples.
6.Thefinancialinformationinatrialbalancemaynotbeup-to-datebecause:
（1）Someeventsarenotjournalizeddailybecauseitisnotusefulorefficienttodoso.
（2）Theexpirationofsomecostsoccurswiththepassageoftimeratherthanasaresultof
recurringdailytransactions.
（3）Someitemsmaybeunrecordedbecausethetransactiondataarenotknown.
7.Thetwocategoriesofadjustingentriesaredeferralsandaccruals.Deferralsconsistofrevenuesandexpensespaidbeforetheyareearnedorincurred.Accrualsconsistofrevenuesandexpensesearnedorincurredpriortopayment.
8.Inaprepaidexpenseadjustingentry,expensesaredebitedandassetsarecredited.
9.No.Depreciationistheprocessofallocatingthecostofanassettoexpenseoveritsusefullife.
Depreciationresultsinthepresentationofthebookvalueoftheasset,notitsmarketvalue.
10.Depreciationexpenseisanexpenseaccountwhosenormalbalanceisadebit.Thisaccountshowsthecostthathasexpiredduringthecurrentaccountingperiod.Accumulateddepreciationisacontraassetaccountwhosenormalbalanceisacredit.Thebalanceinthisaccountisthedepreciationthathasbeenrecognizedfromthedateofacquisitiontothebalancesheetdate.
11.Equipment$15,000
Less:
AccumulatedDepreciation9,000$6,000
12.Inanunearnedrevenueadjustingentry,liabilitiesaredebitedandrevenuesarecredited.
13.Thesaleofathree-yearmaintenancecontractonDecember29,2009willhavenoeffectonthe2009incomestatementbutreceiptof$100,000onDecember29,2009willincreaseanasset,cash,andaliability,unearnedrevenue.AsComputerTechnologiesprovidesservicetoits
customerduring2010,2011,and2012,theliabilitywilldecreaseandrevenuewillberecognized.Accrualaccountingrulesrequirethatrevenueberecognizedasitisearnedratherthanwhencashisreceived.
QuestionsChapter4（Continued）
14.Thispromotionplansoundslikeabadideafortworeasons.
（1）GAAPrequiresthatthesaleofagiftcardberecordedasunearnedrevenue（aliability）ratherthansalesrevenue.Revenuerecognitionisdelayeduntilthegiftcardisusedorexpires.Mickey’splanwillnothelpthecompanymeetitstargetrevenueunlesscustomersusethecardsbyyear-end.
（2）Sellinga$50cardfor$40willprobablynothelpthecompanymeetitstargetnetincome.
Althoughthispromotionmayresultinadditionalsalesrevenueasthecardsareused,the
incomeresultingfromthecardswillbemuchlessthanusualsincetheyeliminate$10ofnormalgrossprofit.
15.Assetandrevenue.Anassetisdebitedandrevenueiscredited.
16.Expenseandliability.Anexpenseisdebitedandaliabilityiscredited.
17.Netincomewasunderstated$300becausepriortoadjustmentrevenuesareunderstatedby$800andexpensesareunderstatedby$500.Thedifferenceinthiscaseis$300（$800–$500）.
18.Theentryis:
Jan.9SalariesPayable1,100
SalariesExpense4,900
Cash6,000
19.（a）Accruedrevenues.（d）Accruedexpensesorprepaidexpenses.
（b）Unearnedrevenues.（e）Prepaidexpenses.
（c）Accruedexpenses.（f）Accruedrevenuesorunearnedrevenues.
20.（a）SalariesPayable.（d）SuppliesExpense.
（b）AccumulatedDepreciation.（e）ServiceRevenue.
（c）InterestExpense.（f）ServiceRevenue.
21.Disagree.Anadjustingentryaffectsonlyonebalancesheetaccountandoneincomestatement
account.
22.TootsieRollreportsAccountsReceivable.Thissuggeststhatitrecordsrevenuewhenithasdeliveredgoods,eventhoughithasn’treceivedpayment.Ifitusedacashbasisitwouldn’trecordrevenueuntilcashwasreceived,anditwouldthereforenotestablishreceivables.
23.Financialstatementscanbepreparedfromanadjustedtrialbalancebecausethebalancesofallaccountshavebeenadjustedtoshowtheeffectsofallfinancialeventsthathaveoccurredduringtheaccountingperiod.
24.（a）Informationpresentedonanaccrualbasisisusefulbecauseitrevealsimportantinformationabouttherelationshipbetweeneffortsandresults.Thisinformationisusefulinpredictingfutureresults.Trendsinrevenuesandexpensesarethusmoremeaningful.
（b）Informationpresentedonacashbasisisusefulforpredictingthefutureavailabilityofcash.Cashbasisfinancialstatementsprovideusefulinformationaboutacompany’ssourcesandusesofcash.
25.Theamountshownintheadjustedtrialbalancecolumnforanaccountequalstheaccount
balanceintheledgerafteradjustingentrieshavebeenjourna
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