Deck 4: The Accounting Cycle: Accruals and Deferrals

Question 1

Preparing Adjusting Entries
The Georgia Gun Club adjusts its accounts monthly and closes its accounts annually.lub members pay their annual dues in advance by January 4.he entire amount is initially credited to Unearned Membership Dues.t the end of each month, an appropriate portion of this amount is credited to Membership Dues Earned.uests of the club normally pay their fees before being allowed to use the facilities.he amounts collected are credited to Guest Fee Revenue at the time of receipt.ertain guests, however, are billed at the end of the month.he following information is available as a source for preparing adjusting entries at December 31:
1.alaries earned by the club's employees that have not yet been recorded or paid amount to $13,600.
2.he Georgia State Police used the club's facilities for target practice on December 30 of the current year.t December 31 , the $3,200 owed by the state police for guest fees had not yet been recorded or billed.
3.embership dues earned in December, for collections received at the beginning of the year, amount to $140,000.
4.epreciation of the furniture and fixtures in the clubhouse is based on an estimated life of eight years.hese items had originally been purchased for $120,000.he straight-line method is used.
( Note: The clubhouse building was constructed in 1956 and is fully depreciated.)
5. 12-month bank loan in the amount of $60,000 had been obtained by the club on October 4.nterest is computed at anannual rate of 8 percent.he entire $60,000, plus all of the interest accrued over the 12-month life of the loan, is due in full on September 30 of the upcoming year.henecessary adjusting entry was made on November 30 to record the first two months of accrued interest expense.owever, no adjustment has been made to record interest expense accrued in December.
6. one-year property insurance policy had been purchased on April 30.he entire premium of $10,800 was initially recorded as Unexpired Insurance.
7.n December, the club entered into an agreement to host the annual tournament of the Georgia Junior Rifle Association.he club expects to generate guest fees of $7,200 from this event.
8.nrecorded Income Taxes Expense accrued in December amounts to $12,600.his amount will not be paid until January 22.
Instructions
a.or each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).f no adjusting entry is required, explain why.
b.our types of adjusting entries are described at the beginning of the chapter.sing these descriptions, identify the type of each adjusting entry prepared in part a above.
c.lthough the clubhouse building is fully depreciated, it is in excellent physical condition.xplain how this can be.

Answer 1

A). Adjusting entries: Note:
# No entry is required since, cash flows were not occurred and it was just an agreement only.
B). Adjustments used in the above part:
1. Accruing unpaid expense
2. Accruing uncollected revenue
3. Accruing uncollected revenue
4. Converting asset to expenses
5. Accruing unpaid expense
6. Converting asset to expenses
8. Accruing unpaid expense
C). Depreciation:
Depreciation reduces a buildings economic value and has to relationship to its physical condition. For example if a build a company may own a building which is in perfect condition, however the build was built 60 years ago, and has since has lost its economic value as a result of depreciation.

Question 2

On January 2, 2010, Hagen Corporation purchased equipment costing $144,000.agen performs adjusting entries monthly.
a.ecord this equipment's depreciation expense on December 31, 2015, assuming its estimated life was eight years on January 2, 2010.
b.etermine the amount of the equipment's accumulated depreciation reported in the balance sheet dated December 31, 2015.

Answer 2

Adjusting entries:
Adjusting entries are the entries passed at the year end. These are passed to adjust the accounts to make them follow matching principle. The adjusting entries are also passed to adjust the accounts to bring the balances of respective accounts with their actual balance at the end of a particular period.a) Explanation: Depreciation is the cost of using plant, property and equipment. Original cost of equipment is expensed off as Depreciation over its useful life. At the end of the period depreciation is expensed (debited) off and equipment is reduced (credited) though contra asset account - Accumulated Depreciation account b)By the end of 31 Dec 2015, equipment will be depreciated for 6 years (2 Jan 2010 to 31 Dec 2015) So, accumulated depreciation of equipment that will appear in balance sheet as on 31 Dec 2015 will be $ 108,000

Question 3

Alpine Expeditions operates a mountain climbing school in Colorado.ome clients pay in advance for services; others are billed after services have been performed.dvance payments are credited to an account entitled Unearned Client Revenue.djusting entries are performed on a monthly basis.n unadjusted trial balance dated December 31, 2015, follows.Bear in mind that adjusting entries have already been made for the first 11 months of 2015, but not for December.)

Other Data
1.ccrued but unrecorded fees earned as of December 31 amount to $6,400.
2.ecords show that $6,600 of cash receipts originally recorded as unearned client revenue had been earned as of December 31.
3.he company purchased a 12-month insurance policy on June 1, 2015, for $36,000.
4.n December 1, 2015, the company paid $2,200 for numerous advertisements in several climbing magazines.alf of these advertisements have appeared in print as of December 31.
5.limbing supplies on hand at December 31 amount to $2,000.
6.ll climbing equipment was purchased when the business first formed.he estimated life of the equipment at that time was four years (or 48 months).
7.n October 1, 2015, the company borrowed $10,000 by signing an eight-month, 9 percent note payable.he entire note, plus eight months' accrued interest, is due on June 1, 2016.
8.ccrued but unrecorded salaries at December 31 amount to $3,100.
9.stimated income taxes expense for the entire year totals $14,000.axes are due in the first quarter of 2016.
Instructions
a.or each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.etermine that amount at which each of the following accounts will be reported in the company's balance sheet dated December 31, 2015:
1.ash
2.ccounts Receivable
3.nexpired Insurance
4.repaid Advertising
5.limbing Supplies
6.limbing Equipment
7.ccumulated Depreciation: Climbing Equipment
8.alaries Payable
9.otes Payable
10.nterest Payable
11.ncome Taxes Payable
12.nearned Client Revenue
c.hich of the accounts listed in part b represent deferred expenses Explain.

Answer 3

Adjusted Trial Balance
In an accounting cycle, the transactions are first journalized, posted into respective ledgers, and then an unadjusted trial balance is prepared. To adjust the transactions which are either missed out or require any kind of adjustments, an end-of-period spreadsheet is prepared in which the necessary adjustments are recorded to arrive at the adjusted/final trial balance.
The adjustments are recorded in the form of journal entries in the books so as to make the books of accounts appropriate as per the accrual basis accounting. These adjustments are then incorporated in the unadjusted trial balance, post which the adjusted trial balance is prepared.(a)Prepare journals to record the following adjusting entries as provided below: Workings:
1. Insurance for 12 months can be calculated as: 2. Depreciation for equipment can be calculated as: 3. Interest per month can be calculated as: (b)Calculate the balance of the following accounts to report in the balance sheet as at December 31, 2015: (c)Deferred expenses are those expenses which are already expended (paid) in advance, however would be recognised in the books only in the period for which it pertains to.
The following accounts represent the deferred expenses:
• Climbing Supplies
• Climbing Equipment
• Unexpired Insurance
• Prepaid Advertising

Question 4

Would a $1,000 expenditure be considered material to all businesses Explain.

Question 5

The purpose of adjusting entries is to:
a.djust the Retained Earnings account for the revenue, expense, and dividends recorded during the accounting period.
b.djust daily the balances in asset, liability, revenue, and expense accounts for the effects of business transactions.
c.pply the realization principle and the matching principle to transactions affecting two or more accounting periods.
d.repare revenue and expense accounts for recording the transactions of the next accounting period.

Question 6

Visit Hershey 's home page at:
www.hersheys.com
From Hershey 's home page, access its most recent annual report (follow "Corporate Information" to the "Investor Relations" link).xamine the company's balance sheet and identify the accounts most likely to have been involved in the end-of-year adjusting entry process.
Internet sites are time and date sensitive.t is the purpose of these exercises to have you explore the Internet.ou may need to use the Yahoo! search engine www.yahoo.com (or another favorite search engine) to find a company's current web address.

Question 7

Mate Ease is an Internet dating service.ll members pay in advance to be listed in the database.dvance payments are credited to an account entitled Unearned Member Dues.djusting entries are performed on a monthly basis.n unadjusted trial balance dated December 31, 2015, follows.Bear in mind that adjusting entries have already been made for the first 11 months of 2015, but not for December.)

Other Data
1.ecords show that $21,000 of cash receipts originally recorded as unearned member dues had been earned as of December 31, 2015.
2.he company purchased a six-month insurance policy on October 1, 2015, for $19,200.
3.n November 1, 2015, the company paid $21,900 for rent through January 31, 2016.
4.ffice supplies on hand at December 31 amount to $440.
5.ll computer equipment was purchased when the business first formed.he estimated life of the equipment at that time was three years (or 36 months).
6.n March 1, 2015, the company borrowed $90,000 by signing a 12-month, 10 percent note payable.he entire note, plus 12 months' accrued interest, is due on March 1, 2016.
7.ccrued but unrecorded salaries at December 31 amount to $10,500.
8.stimated income taxes expense for the entire year totals $16,000.axes are due in the first quarter of 2016.
Instructions
a.or each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.etermine that amount at which each of the following accounts will be reported in the company's balance sheet dated December 31, 2015:
1.ash
2.nexpired Insurance
3.repaid Rent
4.ffice Supplies
5.omputer Equipment
6.ccumulated Depreciation: Computer Equipment
7.ccounts Payable
8.otes Payable
9.alaries Payable
10.nterest Payable
11.ncome Taxes Payable
12.nearned Member Dues
c.hy doesn't the company immediately record advance payments from customers as revenue

Question 8

The following information was reported in a recent balance sheet issued by Microsoft Corporation :
1.he book value of property and equipment is listed at $90 billion (net of depreciation).elated notes to the financial statements reveal that accumulated depreciation on property and equipment totals $12 billion.
2.ccrued compensation of $2.9 billion is listed as a liability.
3.hort-term unearned revenue is reported at $18 billion, whereas long-term unearned revenue is reported at $1.5 billion.he short-term figure will be converted to revenue within a year.he long-term figure will be converted to revenue over several years.elated notes to the financial statements reveal that the company engages in multiyear leasing of its software products.
a.etermine the original historical cost of the property and equipment reported in Microsoft Corporation 's balance sheet.
b.our types of adjusting entries are illustrated in Exhibit 4-1 (page 144).xplain which type of adjusting entry resulted in the company's accrued compensation figure.
c.xplain why Microsoft Corporation reports unearned revenue in its balance sheet.hy might the company report short-term unearned revenue separately from long-term unearned revenue

Question 9

On February 1, Watson Storage agreed to rent Hillbourne Manufacturing warehouse space for $300 per month.illbourne Manufacturing paid the first three months' rent in advance.
a.repare the necessary adjusting entry for Hillbourne Manufacturing on February 28, assuming it recorded the expenditure on February 1 as Prepaid Rent.
b.repare the necessary adjusting entry for Watson Storage on February 28, assuming it recorded Hillbourne Manufacturing's payment as Unearned Rent Revenue.

Question 10

Why does the purchase of a one-year insurance policy four months ago give rise to insurance expense in the current month

Question 11

Milford Corporation pays its employees on the fifteenth of each month.ccrued, but unpaid, salaries on December 31, 2015, totaled $175,000.alaries earned by Milford's employees from January 1 through January 15, 2016, totaled $180,000.
a.repare the necessary adjusting entry for salaries expense on December 31, 2015.
b.ecord the company's payment of salaries on January 15, 2016.

Question 12

List various accounts in the balance sheet that represent deferred expenses.

Question 13

The Concept of Materiality
The concept of materiality is one of the most basic principles underlying financial accounting.
a.nswer the following questions:
1.hy is the materiality of a transaction or an event a matter of professional judgment
2.hat criteria should accountants consider in determining whether a transaction or an event is material
3.oes the concept of materiality mean that financial statements are not precise, down to the last dollar Does this concept make financial statements less useful to most users
b.vis Rent-a-Car purchases a large number of cars each year for its rental fleet.he cost of any individual automobile is immaterial to Avis, which is a very large corporation.ould it be acceptable for Avis to charge the purchase of automobiles for its rental fleet directly to expense, rather than to an asset account Explain

Question 14

Royal Caribbean is one of the world's largest cruise line companies.ts printing costs for brochures are initially recorded as Prepaid Advertising and are later charged to Advertising Expense when they are mailed.assenger deposits for upcoming cruises are considered unearned revenue and are recorded as Customer Deposits as cash is received.eposited amounts are later converted to Cruise Revenue as voyages are completed.
a.here in its financial statements does Royal Caribbean report Prepaid Advertising Where in its financial statements does it report Customer Deposits
b.repare the adjusting entry necessary when brochures costing $2 million are mailed.
c.n its most recent annual report, Royal Caribbean reported Customer Deposits of $1.5 billion.repare the adjusting entry necessary in the following year as $40 million of this amount is earned.
d.onsider the entire adjusting process at Royal Caribbean.hich adjusting entry do you think results in the most significant expense reported in the company's income statement

Question 15

Briefly explain the concept of materiality.f an item is not material, how is the item treated for financial reporting purposes

Question 16

Listed below are seven corporations that receive cash from customers prior to earning revenue:
America West Corporation (airline)
The New York Times Company (newspaper)
Royal Caribbean (cruise company)
Devry, Inc.for-profit technical college)
Clear Channel Communications, Inc.radio broadcasting)
AFLAC Incorporated (health insurance)
Bally Total Fitness Corporation (fitness club)
a.isted below are the accounts used by these corporations to report unearned revenue:

Match each corporation with the account title it uses to report unearned revenue.
b.pply the realization principle to explain when each of these corporations converts unearned revenue to earned revenue.

Question 17

Do adjusting entries affect income statement accounts, balance sheet accounts, or both Explain.

Question 18

Campus Theater adjusts its accounts every month.he company's unadjusted trial balance dated August 31, 2015, is on page 176.dditional information is provided for use in preparing the company's adjusting entries for the month of August.Bear in mind that adjusting entries have already been made for the first seven months of 2015, but not for August.)

Other Data
1.ilm rental expense for the month is $15,200.owever, the film rental expense for several months has been paid in advance.
2.he building is being depreciated over a period of 20 years (240 months).
3.he fixtures and equipment are being depreciated over a period of five years (60 months).
4.n the first of each month, the theater pays the interest that accrued in the prior month on its note payable.t August 31, accrued interest payable on this note amounts to $1,500.
5.he theater allows the local YMCA to bring children attending summer camp to the movies on any weekday afternoon for a fixed fee of $500 per month.n June 28, the YMCA made a $1,500 advance payment covering the months of July, August, and September.
6.he theater receives a percentage of the revenue earned by Tastie Corporation, the concessionaire operating the snack bar.or snack bar sales in August, Tastie owes Campus Theater $2,250, payable on September 10.o entry has yet been made to record this revenue.Credit Concessions Revenue.)
7.alaries earned by employees, but not recorded or paid as of August 31, amount to $1,700.o entry has yet been made to record this liability and expense.
8.ncome taxes expense for August is estimated at $4,200.his amount will be paid in the September 15 installment payment.
9.tilities expense is recorded as monthly bills are received.o adjusting entries for utilities expense are made at month-end.
Instructions
a.or each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.efer to the balances shown in the unadjusted trial balance at August 31.ow many months of expense are included in each of the following account balances (Remember, Campus Theater adjusts its accounts monthly.hus, the accounts shown were last adjusted on July 31, 2015.)
1.tilities Expense
2.epreciation Expense
3.ccumulated Depreciation: Building
c.ssume the theater has been operating profitably all year.lthough the August 31 trial balance shows substantial income taxes expense, income taxes payable is a much smaller amount.his relationship is quite normal throughout much of the year.xplain.

Question 19

Sweeney Allen, a large marketing firm, adjusts its accounts at the end of each month.he following information is available for the year ending December 31, 2015:
1. bank loan had been obtained on December 1.ccrued interest on the loan at December 31 amounts to $1,500.o interest expense has yet been recorded.
2.epreciation of the firm's office building is based on an estimated life of 30 years.he building was purchased in 2011 for $450,000.
3.ccrued, but unbilled, revenue during December amounts to $75,000.
4.n March 1, the firm paid $2,400 to renew a 12-month insurance policy.he entire amount was recorded as Prepaid Insurance.
5.he firm received $15,000 from King Biscuit Company in advance of developing a six-month marketing campaign.he entire amount was initially recorded as Unearned Revenue.t December 31, $9,000 had actually been earned by the firm.
6.he company's policy is to pay its employees every Friday.ince December 31 fell on a Wednesday, there was an accrued liability for salaries amounting to $1,900.
a.ecord the necessary adjusting journal entries on December 31, 2015.
b.y how much did Sweeney Allen's net income increase or decrease as a result of the adjusting entries performed in part a (Ignore income taxes.)

Question 20

How is deferred revenue reported in the balance sheet

Question 21

Effects of Adjusting Entries
Security Service Company adjusts its accounts at the end of the month.n November 30, adjusting entries are prepared to record:
a.epreciation expense for November.
b.nterest expense that has accrued during November.
c.evenue earned during November that has not yet been billed to customers.
d.alaries, payable to company employees, that have accrued since the last payday in November.
e.he portion of the company's prepaid insurance that has expired during November.
f.arning a portion of the amount collected in advance from a customer, Harbor Restaurant.
Indicate the effect of each of these adjusting entries on the major elements of the company's income statement and balance sheet-that is, on revenue, expenses, net income, assets, liabilities, and owners' equity.rganize your answer in tabular form, using the column headings shown and the symbols I for increase, D for decrease, and NE for no effect.he answer for adjusting entry a is provided as an example.

Question 22

The Off-Campus Playhouse adjusts its accounts every month.elow is the company's unadjusted trial balance dated September 30, 2015.dditional information is provided for use in preparing the company's adjusting entries for the month of September.Bear in mind that adjusting entries have already been made for the first eight months of 2015, but not for September.)

Other Data
1.ostume rental expense for the month is $600.owever, the costume rental expense for several months has been paid in advance.
2.he building is being depreciated over a period of 25 years (300 months).
3.he fixtures and equipment are being depreciated over a period of five years (60 months).
4.n the first of each month, the theater pays the interest which accrued in the prior month on its note payable.t September 30, accrued interest payable on this note amounts to $1,062.
5.he playhouse allows local nursing homes to bring seniors to the plays on any weekday performance for a fixed price of $500 per month.n August 31, a nursing home made a $1,500 advance payment covering the months of September, October, and November.
6.he theater receives a percentage of the revenue earned by Sweet Corporation, the concessionaire operating the snack bar.or snack bar sales in September, Sweet owes Off-Campus Playhouse $4,600, payable on October 14.o entry has yet been made to record this revenue.Credit Concessions Revenue.)
7.alaries earned by employees, but not recorded or paid as of September 30, amount to $2,200.o entry has yet been made to record this liability and expense.
8.ncome taxes expense for September is estimated at $3,600.his amount will be paid in the October 15 installment payment.
9.tilities expense is recorded as monthly bills are received.o adjusting entries for utilities expense are made at month-end.
Instructions
a.or each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.efer to the balances shown in the unadjusted trial balance at September 30.ow many months of expense are included in each of the following balances (Remember, Off-Campus Playhouse adjusts its accounts monthly.hus, the accounts shown were last adjusted on August 31, 2015.)
1.tilities expense
2.epreciation expense
3.ccumulated depreciation: building
c.ssume the playhouse has been operating profitably all year.lthough the September 30 trial balance shows substantial income taxes expense, income taxes payable is a much smaller amount.his relationship is quite normal throughout much of the year.xplain.

Question 23

Ken Hensley Enterprises, Inc., is a small recording studio in St.ouis.ock bands use the studio to mix high-quality demo recordings distributed to talent agents.ew clients are required to pay in advance for studio services.ands with established credit are billed for studio services at the end of each month.djusting entries are performed on a monthly basis.n unadjusted trial balance dated December 31, 2015, follows.Bear in mind that adjusting entries already have been made for the first 11 months of 2015, but not for December.)

Other Data
1.ecords show that $4,400 in studio revenue had not yet been billed or recorded as of December 31.
2.tudio supplies on hand at December 31 amount to $6,900.
3.n August 1, 2015, the studio purchased a six-month insurance policy for $1,500.he entire premium was initially debited to Unexpired Insurance.
4.he studio is located in a rented building.n November 1, 2015, the studio paid $6,000 rent in advance for November, December, and January.he entire amount was debited to Prepaid Studio Rent.
5.he useful life of the studio's recording equipment is estimated to be five years (or 60 months).he straight-line method of depreciation is used.
6.n May 1, 2015, the studio borrowed $16,000 by signing a 12-month, 9 percent note payable to First Federal Bank of St.ouis.he entire $16,000 plus 12 months' interest is due in full on April 30, 2016.
7.ecords show that $3,600 of cash receipts originally recorded as Unearned Studio Revenue had been earned as of December 31.
8.alaries earned by recording technicians that remain unpaid at December 31 amount to $540.
9.he studio's accountant estimates that income taxes expense for the entire year ended December 31, 2015, is $19,600.Note that $17,900 of this amount has already been recorded.)
Instructions
a.or each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.sing figures from the company's unadjusted trial balance in conjunction with the adjusting entries made in part a, compute net income for the year ended December 31, 2015.
c.as the studio's monthly rent for the last 2 months of 2015 more or less than during the first 10 months of the year Explain your answer.
d.as the studio's monthly insurance expense for the last five months of 2015 more or less than the average monthly expense for the first seven months of the year Explain your answer.
e.f the studio purchased all of its equipment when it first began operations, for how many months has it been in business Explain your answer.
f.ndicate the effect of each adjusting entry prepared in part a on the major elements of the company's income statement and balance sheet.rganize your answer in tabular form using the column headings shown.se the symbols I for increase, D for decrease, and NE for no effect.he answer for the adjusting entry number 1 is provided as an example.

Question 24

The unadjusted and adjusted trial balances for Tinker Corporation on December 31, 2015, are shown below:

Journalize the nine adjusting entries that the company made on December 31, 2015.

Question 25

Preparing and Analyzing the Effects of Adjusting Entries
Enchanted Forest, a large campground in South Carolina, adjusts its accounts monthly.ost guests of the campground pay at the time they check out, and the amounts collected are credited to Camper Revenue.he following information is available as a source for preparing the adjusting of entries at December 31:
1.nchanted Forest invests some of its excess cash in certificates of deposit (CDs) with its local bank.ccrued interest revenue on its CDs at December 31 is $400.one of the interest has yet been received.Debit Interest Receivable.)
2. six-month bank loan in the amount of $12,000 had been obtained on September 1.nterest is to be computed at an annual rate of 8.5 percent and is payable when the loan becomes due.
3.epreciation on buildings owned by the campground is based on a 25-year life.he original cost of the buildings was $600,000.he Accumulated Depreciation: Buildings account has a credit balance of $310,000 at December 31, prior to the adjusting entry process.he straight- line method of depreciation is used.
4.anagement signed an agreement to let Boy Scout Troop 538 of Lewisburg, Pennsylvania, use the campground in June of next year.he agreement specifies that the Boy Scouts will pay a daily rate of $15 per campsite, with a clause providing a minimum total charge of $1,475.
5.alaries earned by campground employees that have not yet been paid amount to $1,250.
6.s of December 31, Enchanted Forest has earned $2,400 of revenue from current campers who will not be billed until they check out.Debit Camper Revenue Receivable.)
7.everal lakefront campsites are currently being leased on a long-term basis by a group of senior citizens.ix months' rent of $5,400 was collected in advance and credited to Unearned Camper Revenue on October 1 of the current year.
8. bus to carry campers to and from town and the airport had been rented the first week of December at a daily rate of $40.t December 31, no rental payment has been made, although the campground has had use of the bus for 25 days.
9.nrecorded Income Taxes Expense accrued in December amounts to $8,400.his amount will not be paid until January 15.
Instructions
a.or each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).f no adjusting entry is required, explain why.
b.our types of adjusting entries are described at the beginning of the chapter.sing these descriptions, identify the type of each adjusting entry prepared in part a above.
c.ndicate the effects that each of the adjustments in part a will have on the following six total amounts in the campground's financial statements for the month of December.rganize your answer in tabular form, using the column headings shown below.se the letters I for increase, D for decrease, and NE for no effect.djusting entry 1 is provided as an example.

d.hat is the amount of interest expense recognized for the entire current year on the $12,000 bank loan obtained September 1
e.ompute the book value of the campground's buildings to be reported in the current year's December 31 balance sheet.Refer to paragraph 3.)

Question 26

Assume Fisher Corporation usually earns taxable income, but sustains a loss in the current period.he entry to record income taxes expense in the current period will most likely (indicate all correct answers):
a.ncrease the amount of that loss.
b.nclude a credit to the Income Taxes Expense account.
c.e an adjusting entry, rather than an entry to record a transaction completed during the period.
d.nclude a credit to Income Taxes Payable.

Question 27

Clint Stillmore operates a private investigating agency called Stillmore Investigations.ome clients pay in a dvance for services; others are billed after services have been performed.dvance payments are credited to an account entitled Unearned Retainer Fees.djusting entries are performed on a monthly basis.n unadjusted trial balance dated December 31, 2015, follows.Bear in mind that adjusting entries have already been made for the first 11 months of 2015, but not for December.)
Other Data
1.ccrued but unrecorded client fees earned at December 31 amount to $1,500.
2.ecords show that $2,500 of cash receipts originally recorded as Unearned Retainer Fees had been earned as of December 31.
3.ffice supplies on hand at December 31 amount to $110.
4.he company purchased all of its office equipment when it first began business.t that time, the equipment's estimated useful life was six years (or 72 months).
5.n October 1, 2015, the company renewed its rental agreement paying $1,800 cash for six months' rent in advance.
6.n March 1 of the current year, the company paid $1,080 cash to renew its 12-month insurance policy.
7.ccrued but unrecorded salaries at December 31 amount to $1,900.
8.n June 1, 2015, the company borrowed money from the bank by signing a $9,000, 8 percent, 12-month note payable.he entire note, plus 12 months' accrued interest, is due on May 31, 2016.
9.he company's CPA estimates that income taxes expense for the entire year is $7,500.

Instructions
a.or each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.repare the company's adjusted trial balance dated December 31, 2015.
c.sing figures from the adjusted trial balance prepared in b, compute net income for the year ended December 31, 2015.
d.ow much was the company's average monthly rent expense in January through September of 2015 Explain your answer.
e.ow much was the company's average monthly insurance expense in January and February of 2015 Explain your answer.
f.f 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.ndicate the effect of each adjusting entry prepared in part a on the major elements of the company's income statement and balance sheet.rganize your answer in tabular form using the column headings shown.se the symbols I for increase, D for decrease, and NE for no effect.he answer for adjusting entry number 1 is provided as an example.

Question 28

How do accrued but unpaid expenses affect the balance sheet

Question 29

Preparing and Analyzing the Effects of Adjusting Entries
Big Oaks, a large campground in Vermont, adjusts its accounts monthly and closes its accounts annually on December 31.ost guests of the campground pay at the time they check out, and the amounts collected are credited to Camper Revenue.he following information is available as a source for preparing the adjusting entries at December 31:
1.ig Oaks invests some of its excess cash in certificates of deposit (CDs) with its local bank.ccrued interest revenue on its CDs at December 31 is $425.one of the interest has yet been received.Debit Interest Receivable.)
2.n eight-month bank loan in the amount of $12,000 had been obtained on October 1.nterest is to be computed at an annual rate of 8 percent and is payable when the loan becomes due.
3.epreciation on buildings owned by the campground is based on a 20-year life.he original cost of the buildings was $720,000.he Accumulated Depreciation: Buildings account has a credit balance of $160,000 at December 31, prior to the adjusting entry process.he straight- line method of depreciation is used.
4.anagement signed an agreement to let Girl Scouts from Easton, Connecticut, use the campground in June of next year.he agreement specifies that the Girl Scouts will pay a daily rate of $15 per campsite, with a clause providing a minimum total charge of $1,200.
5.alaries earned by campground employees that have not yet been paid amount to $1,515.
6.s of December 31, Big Oaks has earned $2,700 of revenue from current campers who will not be billed until they check out.Debit Camper Revenue Receivable.)
7.everal lakefront campsites are currently being leased on a long-term basis by a group of senior citizens.ive months' rent ci $7,500 was collected in advance and credited to Unearned Camper Revenue on November 1 of the current year.
8. bus to carry campers to and from town and the airport had been rented the first week of December at a daily rate of $45.t December 31, no rental payment has been made, although the campground has had use of the bus for 18 days.
9.nrecorded Income Taxes Expense accrued in December amounts to $6,600.his amount will not be paid until January 15.
Instructions
a.or each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).f no adjusting entry is required, explain why.
b.our types cf adjusting entries are described at the beginning of the chapter.sing these descriptions, identify the type of each adjusting entry prepared in part a above.
c.ndicate the effects that each of the adjustments in part a will have on the following six total amounts in the campground's financial statements for the month of December.rganize your answer in tabular form, using the column headings shown below.se the letters 1 for increase, D for decrease, and NE for no effect.djusting entry 1 is provided as an example.

d.hat is the amount of interest expense recognized for the entire current year on the $12,000 bank loan obtained October 1
e.ompute the book value of the campground's buildings to be reported in the current year's December 31 balance sheet.Refer to paragraph 3.)

Question 30

Ted's Tax Service had earned-but not yet recorded-the following client service revenue at the end of the current accounting period:

Prepare the necessary adjusting entry to record Ted's unbilled client service revenue.

Question 31

Jump Corporation borrowed $60,000 on December 1, 2015, by issuing a two-month, 4 percent note payable to Service One Credit Union.he entire amount of the loan, plus interest, is due February 1, 2016.
a.repare the necessary adjusting entry for interest expense on December 31, 2015.
b.ecord the repayment of the loan plus interest on February 1, 2016.

Question 32

Effects of Adjusting Entries
Four types of adjusting entries were identified in this chapter:

Complete the following table by indicating the effect of each adjusting entry type on the major ele­ments of the income statement and balancc sheet.se the symbols I for increase, D for decrease, and NE for no effect.

Question 33

Before month-end adjustments are made, the January 31 trial balance of Rover Excursions contains revenue of $27,900 and expenses of $17,340.djustments are necessary for the following items:
Portion of prepaid rent applicable to January, $2,700
Depreciation for January, $1,440
Portion of fees collected in advance earned in January, $3,300
Fees earned in January, not yet billed to customers, $1,950
Net income for January is:
a.10,560.
b.17,070.
c.7,770.
d.ome other amount.

Question 34

If services have been rendered to customers during the current accounting period but no revenue has been recorded and no bill has been sent to the customers, why is an adjusting entry needed What types of accounts should be debited and credited by this entry

Question 35

Discuss the realization principle and how it is applied in the recognition of revenue.oes the receipt of cash for customers necessarily coincide with the recognition of revenue Explain.

Question 36

How does accrued but uncollected revenue affect the balance sheet

Question 37

On March 1, Phonic Corporation had office supplies on hand of $1,000.uring the month, Phonic purchased additional supplies costing $500.pproximately $200 of unused office supplies remain on hand at the end of the month.
Prepare the necessary adjusting entry on March 31 to account for office supplies.

Question 38

The geological consulting firm of Gilbert, Marsh, Kester prepares adjusting entries on a monthly basis.mong the items requiring adjustment on December 31, 2015, are the following:
1.he company has outstanding a $50,000, 9 percent, two-year note payable issued on July 1, 2014.ayment of the $50,000 note, plus all accrued interest for the two-year loan period, is due in full on June 30, 2016.
2.he firm is providing consulting services to Texas Oil Company at an agreed-upon rate of $1,000 per day.t December 31, 10 days of unbilled consulting services have been provided.
a.repare the two adjusting entries required on December 31 to record the accrued interest expense and the accrued consulting revenue earned.
b.ssume that the $50,000 note payable plus all accrued interest are paid in full on June 30, 2016.hat portion of the total interest expense associated with this note will be reported in the firm's 2016 income statement
c.ssume that on January 30, 2016, Gilbert, Marsh, Kester receive $25,000 from Texas Oil Company in full payment of the consulting services provided in December and January.hat portion of this amount constitutes revenue earned in January

Question 39

Jesse Company adjusts its accounts monthly and closes its accounts on December 31.n October 31, 2015, Jesse Company signed a note payable and borrowed $150,000 from a bank for a period of six months at an annual interest rate of 6 percent.
a.ow much is the total interest expense over the life of the note How much is the monthly interest expense (Assume equal amounts of interest expense each month.)
b.n the company's annual balance sheet at December 31, 2015, what is the amount of the liability to the bank
c.repare the journal entry to record issuance of the note payable on October 31, 2015.
d.repare the adjusting entry to accrue interest on the note at December 31, 2015.
e.ssume the company prepared a balance sheet at March 31, 2016.tate the amount of the liability to the bank at this date.

Question 40

Accounting Principles
For each of the situations described below, indicate the underlying accounting principle that is being violated.hoose from the following principles:

If you do not believe that the practice violates any of these principles, answer "None" and explain.
a.he bookkeeper of a large metropolitan auto dealership depreciates the $7.20 cost of metal wastebaskets over a period of 10 years.
b. small commuter airline recognizes no depreciation expense on its aircraft because the planes are maintained in "as good as new" condition.
c.alm Beach Hotel recognizes room rental revenue on the date that a reservation is received.or the winter season, many guests make reservations as much as a year in advance.

Question 41

Hold the Expenses!

Slippery Slope, Inc., is a downhill ski area in northern New England.n an attempt to attract more ski enthusiasts, Slippery Slope's management recently engaged in an aggressive preseason advertising campaign in which it spent $9,000 to distribute brochures, $17,000 to air broadcast media spots, and $14,000 to run magazine and newspaper ads.
Slippery Slope is now planning to borrow money from a local bank to expand its snowmaking capabilities next season.n preparing financial statements to be used by the bank, Slippery Slope's management capitalized the entire $40,000 of advertising expenditures as Prepaid Advertising in the current year's balance sheet.t decided to defer converting this asset to advertising expense for three years, arguing that it will take a least that long to realize the full benefit of its promotional efforts.anagement also contends that it does not matter how the $40,000 advertising expenditure is reported, because the amount is immaterial.
Instructions
a.oes management's decision to defer converting this $40,000 prepayment to advertising expense comply with generally accepted accounting principles Defend your answer.
b.ould management's decision to defer reporting this expenditure as an expense for three years have any ethical implications Explain.

Question 42

Terrific Temps fills temporary employment positions for local businesses.ome businesses pay in advance for services; others are billed after services have been performed.dvanced payments are credited to an account entitled Unearned Fees.djusting entries are performed on a monthly basis.n unadjusted trial balance dated December 31, 2015, follows.Bear in mind that adjusting entries have already been made for the first 11 months of 2015, but not for December.)

Other Data
1.ccrued but unrecorded fees earned as of December 31, 2015, amount to $1,500.
2.ecords show that $2,500 of cash receipts originally recorded as unearned fees had been earned as of December 31.
3.he company purchased a six-month insurance policy on September 1, 2015, for $1,800.
4.n December 1, 2015, the company paid its rent through February 28, 2016.
5.ffice supplies on hand at December 31 amount to $400.
6.ll equipment was purchased when the business first formed.he estimated life of the equipment at that time was 10 years (or 120 months).
7.n August 1, 2015, the company borrowed $12,000 by signing a six-month, 8 percent note payable.he entire note, plus six months' accrued interest, is due on February 1, 2016.
8.ccrued but unrecorded salaries at December 31 amount to $2,700.
9.stimated income taxes expense for the entire year totals $15,000.axes are due in the first quarter of 2016.
Instructions
a.or each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.etermine that amount at which each of the following accounts will be reported in the company's 2015 income statement:
1.ees Earned
2.ravel Expense
3.nsurance Expense
4.ent Expense
5.ffice Supplies Expense
6.tilities Expense
7.epreciation Expense: Equipment
8.nterest Expense
9.alaries Expense
10.ncome Taxes Expense
c.he unadjusted trial balance reports dividends of $3,000.s of December 31, 2015, have these dividends been paid Explain.

Question 43

Understanding the Effects of Various Errors
Coyne Corporation recently hired Elaine Herrold as its new bookkeeper.errold was not very experienced and made seven recording errors during the last accounting period.he 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.se the following symbols: O = overstated, U = understated, and NE = no effect.

Question 44

Explain how Royal Caribbean accounts for customer deposits as passengers purchase cruise tickets in advance.

Question 45

On November 1, Girtz Corporation purchased a six-month insurance policy from The Tomptee Agency for $4,500.
a.repare the necessary adjusting entry for Girtz Corporation on November 30, assuming it recorded the November 1 expenditure as Unexpired Insurance.
b.repare the necessary adjusting entry for The Tomptee Agency on November 30, assuming it recorded Girtz's payment as Unearned Insurance Premiums.

Question 46

Why does the recording of adjusting entries require a better understanding of the concepts of accrual accounting than does the recording of routine revenue and expense transactions occurring throughout the period

Question 47

Marvelous Music provides music lessons to student musicians.ome students pay in advance for lessons; others are billed after lessons have been provided.dvance payments are credited to an account entitled Unearned Lesson Revenue.djusting entries are performed on a monthly basis.n unadjusted trial balance dated December 31, 2015, follows.Bear in mind that adjusting entries have already been made for the first 11 months of 2015, but not for December.)

Other Data
1.ccrued but unrecorded lesson revenue earned as of December 31, 2015, amounts to $3,200.
2.ecords show that $800 of cash receipts originally recorded as unearned lesson revenue had been earned as of December 31.
3.he company purchased a 12-month insurance policy on August 1, 2015, for $4,800.
4.n October 1, 2015, the company paid $9,000 for rent through March 31, 2016.
5.heet music supplies on hand at December 31 amount to $200.
6.ll music equipment was purchased when the business was first formed.ts estimated life at that time was five years (or 60 months).
7.n November 1, 2015, the company borrowed $5,000 by signing a three-month, 6 percent note payable.he entire note, plus three months' accrued interest, is due on February 1, 2016.
8.ccrued but unrecorded salaries at December 31 amount to $3,500.
9.stimated income taxes expense for the entire year totals $22,000.axes are due in the first quarter of 2016.
Instructions
a.or each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation).
b.etermine that amount at which each of the following accounts will be reported in the company's 2015 income statement:
1.esson Revenue Earned
2.dvertising Expense
3.nsurance Expense
4.ent Expense
5.heet Music Supplies Expense
6.tilities Expense
7.epreciation Expense: Music Equipment
8.nterest Expense
9.alaries Expense
10.ncome Taxes Expense
c.he unadjusted trial balance reports dividends of $1,000.s of December 31, 2015, have these dividends been paid Explain.

Question 48

Understanding the Effects of Various Errors
Stephen Corporation recently hired Tom Waters as its new bookkeeper.aters is very inexperienced and has made seven recording errors during the last accounting period.he 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.se the following symbols: O = overstated, U = understated, and NE = no effect

Question 49

Using the Financial Statements of Home Depot, Inc.
The financial statements of Home Depot, Inc., appear in Appendix A at the end of this textbook.xamine the company's consolidated balance sheet and identify specific accounts that may have required adjusting entries at the end of the year.

Question 50

Property Management Professionals provides building management services to owners of office buildings and shopping centers.he company closes its accounts at the end of the calendar year.he manner in which the company has recorded several transactions occurring during 2015 is described as follows:
a.n September 1, received advance payment from a shopping center for property management services to be performed over the three-month period beginning September 1.he entire amount received was credited directly to a revenue account.
b.n December 1, received advance payment from the same customer described in parta for services to be rendered over the three-month period beginning December 1.his time, the entire amount received was credited to an unearned revenue account.
c.endered management services for many customers in December.ormal 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.n December 15, made full payment for a one-year insurance policy that goes into effect on January 2, 2016.he cost of the policy was debited to Unexpired Insurance.
e.umerous purchases of equipment were debited to asset accounts, rather than to expense accounts.
f.ayroll expense is recorded when employees are paid.ayday for the last two weeks of December falls on January 2, 2016.
Instructions
For each item above, explain whether an adjusting entry is needed at December 31, 2015, and state the reasons for your answer.f you recommend an adjusting entry, explain the effects this entry would have on assets, liabilities, owners' equity, revenue, and expenses in the 2015 financial statements.

Question 51

The Freemont Flyers, a professional soccer team, prepares financial statements on a monthly basis.he soccer season begins in May, but in April the team engaged in the following transactions:
1.aid $1,500,000 to the municipal stadium as advance rent for use of the facilities for the six-month period from May 1 through October 31.his payment was initially recorded as Prepaid Rent.
2.ollected $6,000,000 cash from the sale of season tickets for the team's home games.he entire amount was initially recorded as Unearned Ticket Revenue.uring the month of May, the team played several home games at which $750,000 of the season tickets sold in April were used by fans.
Prepare the two adjusting entries required on May 31.

Question 52

The concept of materiality (indicate all correct answers):
a.equires that financial statements be accurate to the nearest dollar, but need not show cents.
b.s based upon what users of financial statements are thought to consider important.
c.ermits accountants to ignore generally accepted accounting principles in certain situations.
d.ermits accountants to use the easiest and most convenient means of accounting for events that are immaterial.

Question 53

Hunter's unadjusted trial balance dated December 31, 2015, reports Income Taxes Expense of $70,000, and Income Taxes Payable of $20,000.he company's accountant estimates that income taxes expense for the entire year ended December 31, 2015, is $85,000.
a.repare the necessary adjusting entry for income taxes expense on December 31, 2015.
b.etermine the amount of income taxes payable reported in the balance sheet dated December 31, 2015.

Question 54

What is the purpose of making adjusting entries Your answer should relate adjusting entries to the goals of accrual accounting.

Question 55

Gunflint Adventures operates an airplane service that takes fishing parties to a remote lake resort in northern Manitoba, Canada.ndividuals must purchase their tickets at least one month in advance during the busy summer season.he company adjusts its accounts only once each month.elected balances appearing in the company's June 30 adjusted trial balance appear as follows:

Other Information
1.he airplane is being depreciated over a 15-year life with no residual value.
2.nearned passenger revenue represents advance ticket sales for bookings in July and August
at $300 per ticket.
3.ix months' airport rent had been prepaid on May 1.
4.he unexpired insurance is what remains of a 12-month policy purchased on February 1.
5.assenger revenue earned in June totaled $40,000.
Instructions
a.etermine the following:
1.he age of the airplane in months.
2.he monthly airport rent expense.
3.he amount paid for the 12-month insurance policy on February 1.
b.repare the adjusting entries made on June 30 involving the following accounts:
1.epreciation Expense: Airplane
2.irport Rent Expense
3.nsurance Expense
4.assenger Revenue Earned

Question 56

Jasper's unadjusted trial balance reports Unearned Client Revenue of $4,000 and Client Revenue Earned of $30,000.n examination of client records reveals that $2,500 of previously unearned revenue has now been earned.
a.repare the necessary adjusting entry pertaining to these accounts.
b.t what amount will Client Revenue Earned be reported in Jasper's income statement

Question 57

Discuss the matching principle and how it is applied in the recognition of expenses.oes the payment of cash necessarily coincide with the recognition of an expense Explain.

Question 58

Accounting Terminology
Listed below are nine technical accounting terms used in this chapter:

Each of the following statements may (or may not) describe one of these technical terms.or each statement, indicate the accounting term described, or answer "None" if the statement does not cor­rectly describe any of the terms.
a.he net amount at which an asset is carried in the accounting records as distinguished from its market value.
b.n accounting concept that may justify departure from other accounting principles for pur­poses of convenience and economy.
c.he offsetting of revenue with expenses incurred in generating that revenue.
d.evenue earned during the current accounting period but not yet recorded or billed, which requires an adjusting entry at the end of the period.
e.ntries made at the end of the period to achieve the goals of accrual accounting by recording revenue when it is earned and by recording expenses when the related goods and services are used.
f. type of account credited when customers pay in advance for services to be rendered in the future.
g. balance sheet category used for reporting advance payments of such items as insurance, rent, and office supplies.
h.n expense representing the systematic allocation of an asset's cost over its useful life.

Question 59

River Rat, Inc., operates a ferry that takes travelers across the Wild River.he company adjusts its accounts at the end of each month.elected account balances appearing in the April 30 adjusted trial balance are as follows:

Other Data
1.he ferry is being depreciated over an 12-year estimated useful life.
2.he unearned passenger revenue represents tickets good for future rides sold to a resort hotel for $5 per ticket on April 1.uring April, 150 of the tickets were used.
3.ix months' rent had been prepaid on April 1.
4.he unexpired insurance is a 12-month fire insurance policy purchased on March 1.
Instructions
a.etermine the following:
1.he age of the ferry in months.
2.ow many $5 tickets for future rides were sold to the resort hotel on April 1.
3.he monthly rent expense.
4.he original cost of the 12-month fire insurance policy.
b.repare the adjusting entries that were made on April 30.

Question 60

What is meant by the term unearned revenue Where should an unearned revenue account appear in the financial statements As the work is done, what happens to the balance of an unearned revenue account

Question 61

Among the ledger accounts used by Rapid Speedway are the following: Prepaid Rent, Rent Expense, Unearned Admissions Revenue, Admissions Revenue, Prepaid Printing, Printing Expense, Concessions Receivable, and Concessions Revenue.or each of the following items, provide the journal entry (if one is needed) to record the initial transaction and provide the adjusting entry, if any, required on May 31, assuming the company makes adjusting entries monthly.
a.n May 1, borrowed $500,000 cash from National Bank by issuing a 9 percent note payable due in three months.
b.n May 1, paid rent for six months beginning May 1 at $12,000 per month.
c.n May 2, sold season tickets for a total of $600,000 cash.he season includes 60 racing days: 15 in May, 20 in June, and 25 in July.
d.n May 4, an agreement was reached with Snack-Bars, Inc., allowing that company to sell refreshments at the track in return for 10 percent of the gross receipts from refreshment sales.

Question 62

Preparing Adjusting Entries
Florida Palms Country Club adjusts its accounts monthly.lub members pay their annual dues in advance by January 4.he entire amount is initially credited to Unearned Membership Dues.t the end of each month, an appropriate portion of this amount is credited to Membership Dues Earned.uests of the club normally pay green fees before being allowed on the course.he amounts collected are credited to Green Fee Revenue at the time of receipt.ertain guests, however, are billed for green fees at the end of the month.he following information is available as a source for preparing adjusting entries at December 31:
1.alaries earned by golf course employees that have not yet been recorded or paid amount to $9,600.
2.he Tampa University golf team used Florida Palms for a tournament played on December 30 of the current year.t December 31, the $1,800 owed by the team for green fees had not yet been recorded or billed.
3.embership dues earned in December, for collections received in January, amount to $106,000.
4.epreciation of the country club's golf carts is based on an estimated life of 15 years.he carts had originally been purchased for $180,000.h'e straight-line method is used.
( Note : The clubhouse building was constructed in 1925 arid is fully depreciated.)
5. 12-month bank loan in the amount of $45,000.had been obtained by the country club on November 1.nterest is computed at an annual rate of 8 percent.he entire $45,000, plus all of the interest accrued over the 12-month life of the loan, is due in full on October 31 of the upcoming year.he necessary adjusting entry was made on November 30 to record the first- month of accrued interest expense.owever, no adjustment has been made to record interest expense accrued in December.
6. one-year property insurance policy had been purchased on March 1.he entire premium of $7,800 was initially recorded as Unexpired Insurance.
7.n December, Florida Palms Country Club entered into an agreement to host the annual tournament of the Florida Seniors Golf Association.he country club expects to generate green fees of $4,500 from this event.
8.nrecorded Income Taxes-Expense accrued in December amounts to $19,000.his amount will not be paid until January 15.
Instructions
a.or each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).f no adjusting entry is required, explain why.
b.our types of adjusting entries are described at the beginning of the chapter.sing these descriptions, identify the type of each adjusting entry prepared in part a above.
c.lthough Florida Palms's clubhouse building is fully depreciated, it is in excellent physical condition.xplain how this can be.

Question 63

The CPA firm auditing Mason Street Recording Studios found that total stockholders' equity was understated and liabilities were overstated.hich of the following errors could have been the cause
a.aking the adjustment entry for depreciation expense twice.
b.ailure to record interest accrued on a note payable.
c.ailure to make the adjusting entry to record revenue that had been earned but not yet billed to clients.
d.ailure to record the earned portion of fees received in advance.

Question 64

When American Airlines sells tickets for future flights, it debits Cash and credits an account entitled Air Traffic Liability (as opposed to crediting Passenger Revenue Earned).his account, reported recently at nearly $4.5 billion, is among the largest liabilities appearing in the company's balance sheet.
a.xplain why this liability is often referred to as a deferred revenue account.
b.hat activity normally reduces this liability Can you think of any other transaction that would also reduce this account
c.ssume that, in a recent flight, passengers of the airline used tickets that they had purchased in advance for $87,500.ecord the entry American Airlines would make upon completion of this flight.

Question 65

Concept of Materiality
The concept of materiality is an underlying principle of financial reporting.
a.riefly explain the concept of materiality.
b.s $2,500 a "material" dollar amount Explain.
c.escribe two ways in which the concept of materiality may save accountants' time and effort in making adjusting entries.