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Exam 2: Accounting for Accruals and Deferrals

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Question 1

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An adjusting entry that decreases unearned revenue and increases service revenue is a claims exchange transaction.

A) True
B) False

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Question 2

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What effect does the recording of revenue normally have on total assets?

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The recording of revenue normally has the effect of increasing total assets (usually cash or accounts receivable). Explanation: If revenue is earned at the same time cash is collected, cash is increased. If revenue is earned on account, and a customer is billed, accounts receivable is increased. A less common situation involves earning revenue after cash was received in advance, in which case assets are unaffected (liabilities decrease and equity increases).

Question 3

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Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase }=\mathrm{I} \quad \text { Decrease }=\mathrm{D} \quad \text { No Effect }=\mathrm{N}$ Sparta Co. provided $1,600 of services for a customer who paid $1,000 cash immediately and promised to pay an additional $600 one month later. $\begin{array} {| l| l| l| l| l| l| l| }\text { Assets}&\text { Liabilities }&\text {Equity}&\text { Revenues}&\text { Expenses }&\text { Net Income }&\text { Cash }\\\hline &&&&&\end{array}$

The entry to recognize work completed on unearned revenue involves which of the following?

The accounting principle that guides accountants, when faced with a recognition dilemma, to choose the alternative that produces the lowest net income is referred to as

Revenue on account amounted to $4,000. Cash collections of accounts receivable amounted to $2,300. Expenses for the period were $2,100. The company paid dividends of $450. Net income for the period was

The following transactions apply to Kent Company. 1) Issued common stock for $21,000 cash 2) Provided services to customers for $28,000 on account 3) Purchased land for $18,000 cash 4) Incurred $9,000 of operating expenses on account 5) Collected $15,000 cash from customers for services provided in event #2 6) Paid $7,000 on accounts payable 7) Paid $2,500 dividends to stockholders Required: a) Identify the effect on the Statement of Cash Flows, if any, for each of the above transactions. Indicate whether each transaction involves operating, investing, or financing activities and the amount of increase or decrease. b) Classify the above accounting events into one of four types of transactions (asset source, asset use, asset exchange, claims exchange).

Patterson Company was founded in 2013 and engaged in the following transactions: 1. issued common stock for cash 2. purchased supplies on account 3. collected cash from a customer for services to be provided over a period of 1 year 4. paid a cash dividend to stockholders 5. purchased a 2-year fire insurance policy 6. provided services to customers on account 7. collected cash from accounts receivable 8. paid cash for various operating expenses 9. paid rent in advance for 3 months at a time Required: a) Which of the above transactions would require adjusting entries at year end? b) Why are adjusting entries required before financial statements can be prepared.

Jerry Mathers started his business by issuing $4,000 of common stock on January 1, 2013. Jerry performed $8,500 of service on account in 2013, and he collected $6,200 of this amount by year end. He paid operating expenses of $6,900 and paid a $900 dividend to the stockholders. Required: a) What is the amount of total assets at the end of 2013? b) What is the amount of cash on hand at the end of 2013? c) What is net income for 2013? d) Prepare a balance sheet for 2013.

James Company paid $1,800 for one year's rent in advance beginning on October 1, 2013. James's 2013 income statement would report rent expense, and its statement of cash flows would report cash outflow for rent, respectively, of

Recognition of revenue may be accompanied by which of the following?

Classify each of the following transactions for the purpose of the statement of cash flows as operating activities (OA), investing activities (IA), financing activities (FA), or not reported on the statement of cash flows (NA). 1) _____ Made adjusting entry to accrue salary expense at the end of the year 2) _____ Borrowed funds from the bank 3) _____ Paid rent for the month 4) _____ Paid cash to settle accounts payable 5) _____ Issued common stock for $30,000 cash 6) _____ Collected accounts receivable 7) _____ Paid cash to acquire land

Tocca Co. collected a $5,000 cash advance from a customer on November 1, 2013 for work to be performed over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect on Tocca's 2013 financial statements?

Whetstone Co. performed services for a customer on account. Indicate whether each of the following statements about this transaction is true or false. _____ a) Assets and equity both increase when the revenue is recognized. _____ b) This transaction did not affect cash flows. _____ c) The company recorded an increase in revenue and a decrease in accounts receivable. _____ d) Recognition of revenue would be delayed until cash was received. _____ e) This transaction is an example of an asset source transaction.

In the closing process, the amounts in temporary accounts are moved to retained earnings, a permanent account.

A company may recognize a revenue or expense without a corresponding cash collection or payment in the same accounting period.

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase }=\mathrm{I} \quad \text { Decrease }=\mathrm{D} \quad \text { No Effect }=\mathrm{N}$ Jenkins Co. performed services for customers on account. $\begin{array} {| l| l| l| l| l| l| l| }\text { Assets}&\text { Liabilities }&\text {Equity}&\text { Revenues}&\text { Expenses }&\text { Net Income }&\text { Cash }\\\hline &&&&&\end{array}$

The following account balances were drawn from the 2013 financial statements of Gunn Company Based on the above information, what is the balance of Common Stock for Gunn Company?

Adkins Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on ABC's statements?

The following data were taken from the accounting records of Lorenzo Company. Except where indicated, the balances are as of December 31, 2013 before closing entries have been made. $\begin{array}{|l|r|}\hline \text { Service revenue } & \$ 83,000 \\\hline \text { Retained earnings } & 47,500 \\\hline \text { Accounts receivable } & 13,250 \\\hline \text { Salaries expense } & 44,000 \\\hline \text { Operating expense } & 7,700 \\\hline \text { Accounts payable } & 11,400 \\\hline \text { Supplies expense } & 380 \\\hline \text { Prepaid rent } & 2,000 \\\hline \text { Common stock } & 45,000 \\\hline \text { Supplies } & 200 \\\hline \text { Dividends } & 1,200 \\\hline \text { Insurance expense } & 800 \\\hline \text { Rent expense } & 10,000 \\\hline \text { Unearned revenue } & 765 \\\hline\end{array}$ Required: a) List the accounts that should be closed at the end of 2013. b) Prepare an income statement for Lorenzo Company for 2013. c) What is the balance in retained earnings after closing entries have been made?