Exam 3: The Adjusting Process

In cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when they are paid.

A business hired a repair service to overhaul its plumbing system. The repair service began work on September 15 and intends to complete it on October 15. The business will pay the repair service $4,000 when the work is completed. As of September 30, the work was 50% complete. Provide the adjusting entry to accrue repair expense by the end of September. (Ignore explanation).

The accountant of Peyton Financial Services failed to make an adjusting entry to record $7,000 of depreciation expense. Which of the following statements is true?

In the case of deferred revenue, the cash is received first, and the revenue is earned later.

The unadjusted trial balance of Burton Business Services at December 31, 2018, and the data for the adjustments follow: Burton Business Services Unadjusted Trial Balance December 31,2018 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Balance }$ Account Title Debit Credit Cash \ 20,000 Accounts Receivable 14,000 Equipment 50,000 Accumulated Depreciation - Equipment \ 17,500 Accounts Payable 10,000 Unearned Revenue 9,000 Common Stock 30,000 Retained Earnings 5,000 Dividends 5,000 Service Revenue 49,000 Advertising Expense 4,000 Depreciation Expense - Equipment 8,000 Insurance Expense 4,500 Salaries Expense \1 20,500 \ 120,500 Adjustment data at December 31 follows: a. Depreciation for the equipment is $4,000. b. As of December 31, 2018, Burton had performed services for Wilson Company for $3,000. The invoice will be sent on January 5, 2019 and payment is due on January 15, 2019. c. On August 31, 2018, Burton agreed to provide consulting services to Allen Company for 6 months, beginning on September 1, 2018, at $1,500 per month. Allen paid $9,000 on August 31, 2018. Burton treats deferred revenues initially as liabilities. Burton is preparing financial statements for the year ending December 31, 2018. Requirements 1. Journalize the adjusting entries on December 31, 2018. 2. Prepare the December 31, 2018 adjusted trial balance. Use a proper heading.

The accounting period used for the annual financial statements is called the fiscal year.

Wentfield Services, Inc. records deferred expenses as expenses when payment is made in advance and deferred revenues as revenues when the payment is received in advance. At the end of the year, Wentfield Services, Inc. makes the necessary adjustments based on accrual basis accounting. On July 1, it paid rent for an office in the amount of $24,000 for the period July 1 through June 30 of the following year. Prepare the year-end adjusting entry on December 31. Omit explanation.

On December 15, 2018, Donald Services, Inc. collected revenue of $3,000 in advance from a new client, and agreed to provide services to the client for the period of December 15 through January 15 of the following year. Assume that the company records deferred revenues using the alternative treatment. Prepare the December 15, 2018 journal entry. Omit explanation.

Under cash basis accounting, an expense is recorded only when cash is paid.

The accountant of Newton Legal Services failed to make an adjusting entry for supplies that had been used for the year. Assume the supplies were initially recorded as an asset. Which of the following statements is true?

What is the difference between cash basis accounting and accrual basis accounting?

A contra account's normal balance (debit or credit) is the opposite of the normal balance of the related account.

Financial statements can be prepared from the unadjusted trial balance.

A depreciable asset's cost minus accumulated depreciation is called ________.

The expected value of a depreciable asset at the end of its useful life is called ________.

Which of the following statements is true of accrual basis accounting?

For each of the following statements, indicate whether it applies to: the cash basis of accounting (cash basis) the accrual basis of accounting (accrual basis) both the cash and accrual basis of accounting (both) neither the cash nor the accrual basis of accounting (neither). Your response should be cash basis, accrual basis, both, or neither. Statement Applies to Does a good job of tracking a business's cash flows It is irrelevant when cash is received or paid May require a company to prorate a prepayment of rent

Adjusting entries record revenues in the period in which cash is received and expenses in the period when cash is paid.

On November 27, 2018, Metro Delivery Service Company signs a contract with Brooklyn Financial Services Company. Metro Delivery Service will provide 3 months of local delivery services for $5,000 per month. Brooklyn pays $15,000 cash to Metro on November 27, 2018. Delivery services will begin on December 1, 2018. Complete the following requirements for Metro Delivery Services. (1) Prepare the journal entries for November 27, 2018 and December 31, 2018 (the end of Metro's fiscal year). Make proper journal entries (omit explanations). (2) If Metro fails to record the December 31, 2018 adjusting entry, what is the effect on net income, income statement account(s) and balance sheet account(s)? (3) Why is it important for companies to record adjusting entries?

Improvements, a home improvement magazine, collected $960,000 in subscription revenue on June 30. Each subscriber will receive an issue of the magazine in each of the next 12 months, beginning with the July issue. The company uses the accrual method of accounting. What is the amount of Subscription Revenue that has been earned by the end of December? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.)