Chapter 4

If a resource has been consumed but a bill has not been received at the end of the accounting period, then

an adjusting entry should be made recognizing the expense

Under revenue recognition principle service-type businesses recognize revenue:

when the service is performed.

Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue recognized $19000 Accounts receivable 3000 Expenses incurred 7250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1800

$11750 $19000 - $7250 = $11750 (Rev. recog. - exp. incur.)

Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Cash received from customers $45000 Accounts receivable 12000 Cash paid for expenses 26000 Accounts payable (related to expenses) 3000 Prepaid rent for next period 7000

$28000 $45000 + $12000 - $26000 - $3000 = $28000 (Cash rec. + acc. rec. - Cash paid - acc. pay.)

La More Company had the following transactions during 2016: • Sales of $9000 on account • Collected $4000 for services to be performed in 2017 • Paid $3750 cash in salaries for 2016 • Purchased airline tickets for $500 in December for a trip to take place in 2017 What is La More's 2016 net income using accrual accounting?

$5250 $9000 - $3750 = $5250 (Sales - Salaries)

Wang Company had the following transactions during 2016: • Sales of $10800 on account • Collected $4800 for services to be performed in 2017 • Paid $2600 cash in salaries for 2016 • Purchased airline tickets for $600 in December for a trip to take place in 2017 What is Wang's 2016 net income using accrual accounting?

$8200 $10800 - $2600 = $8200 (Sales - Salaries)

Which one of the following is not a justification for adjusting entries?

Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Otto's Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized?

August 31

A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized?

November 30

Which of the following is an example of a deferral adjusting entry?

Prepaid expense.

Under the cash basis of accounting:

cash must be received before revenue is recognized.

Greese Company purchased office supplies costing $7000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $2500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be:

debit Supplies Expense, $4500; credit Supplies, $4500

The Vintage Laundry Company purchased $8500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1500 on hand. The adjusting entry that should be made by the company on June 30 is:

debit Supplies Expense, $7000; credit Supplies, $7000

One of the accounting concepts upon which adjustments for prepayments and accruals are based is:

expense recognition.

Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns.

monthly, annual