College accounting 21st edition heintz solutions manual 1

COLLEGE ACCOUNTING 21ST EDITION

HEINTZ

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CHAPTER 5

ADJUSTING ENTRIES AND THE WORK SHEET REVIEW QUESTIONS

1. The revenue recognition principle states that revenues should be recognized when earned, regardless of when cash is received from the customer. Revenues are considered earned when a service is provided or a product sold.

2 The matching principle requires the matching of revenues earned during an accounting period with the expenses incurred to produce the revenues.

3. Under the historical cost principle, assets are recorded at their actual cost.

4. A plant asset is expected to provide benefits over more than one year.

5. A contra-asset has a credit balance and is deducted from the related asset account on the balance sheet.

6. The useful life of an asset is the period of time that an asset is expected to help produce revenues.

7. The purpose of depreciation is to provide a method of matching the cost of the assets against the revenues the assets will help to produce over their useful lives.

8. An asset’s depreciable cost is the cost of the asset that is subject to depreciation.

9. The book value of an asset is the difference between the asset’s cost and the related accumulated depreciation.

10 The purpose of a work sheet is to help in preparing end-of-period adjustments and financial statements. The work sheet pulls together all of the information needed to enter adjusting entries and prepare the financial statements.

11 The five major column headings on a work sheet are Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, and Balance Sheet.

12. The five steps when preparing a work sheet are as follows:

Step 1: Prepare the trial balance.

Step 2: Prepare the adjustments.

Step 3: Prepare the adjusted trial balance.

Step 4: Extend adjusted balances to the Income Statement and Balance Sheet columns.

Step 5: Complete the work sheet by summing the Income Statement and Balance Sheet columns and computing net income or net loss.

13. Four tips for finding errors on the work sheet are as follows:

a. Check the addition of all columns.

b. Check the addition and subtraction required when extending to the Adjusted Trial Balance columns.

c. Make sure the adjusted account balances have been extended to the appropriate columns.

d. Make sure that the net income or net loss has been added to the appropriate columns.

14 Under the accrual basis of accounting, revenues are recorded when earned. Revenues are considered earned when a service is provided or a product sold, regardless of whether cash has been received. Under the cash and modified cash bases of accounting, revenues are recorded when cash is received.

15. Under the accrual basis of accounting, expenses are recorded when incurred. Expenses are considered incurred when a service is received or an asset consumed, regardless of when cash is paid. Under the cash basis, expenses are recorded when cash is paid. Under the modified cash basis, a firm uses the cash basis for recording most expenses. However, under the modified cash basis when cash is paid for assets with useful lives greater than one accounting period, the cash payment is recorded as an asset and adjustments are made each period as under the accrual basis of accounting.

5-3A (Income Statement)

(Income Statement)

5-5A

cost = $6,840

Less: Accumulated depreciation = 665 (6,840/72 × 7 mos.)

Book value, December 31, 20-- = $6,175

Exercise 5-8A (Concluded)

Exercise 5-9A

Jim Jacobs’ Furniture Repair Work Sheet (Partial)

For Year Ended December 31, 20--

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Problem 5-14A

Problem 5-14A (Concluded)

Problem 5-15A (Concluded)

Problem 5-16A (Continued)

Problem 5-16A (Concluded)

Problem 5-17A: See pages 142 and 143

Exercise 5-1B

Note: Shaded areas indicate where corrections were made.

Problem 5-17A (Concluded)

cost = $5,760 Less: Accumulated depreciation = 720 (5,760/48 × 6 mos.)

Book value, July 1, 20-- = $5,040

Exercise 5-8B (Concluded)

Exercise 5-9B

For Month Ended June 30, 20--

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Exercise 5-13B (Concluded)

✓ Indicates accounting method for which the entry would be appropriate.

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Problem 5-14B (Concluded)

Problem 5-15B (Concluded)

Problem 5-16B (Continued)

Problem 5-16B (Continued)

Problem 5-16B (Concluded)

Note: Shaded areas indicate where corrections were made.

Problem 5-17B (Concluded)

MANAGING YOUR WRITING

Adjusting entries are important because the bank will want a proper matching of expenses and revenues for the year and proper measures of assets and liabilities as of December 31, 20 . Failure to make these adjustments not only leads to incorrect financial statements, but also conveys the impression that Ms. Alvarez is not knowledgeable about business matters.

Students should request additional information on the following accounts:

Supplies: What was the cost of supplies remaining on 12/31? This amount should be reported as an asset. The supplies used during the period should be recognized as an expense.

Prepaid Insurance: How much of the amount applies to insurance for next year? That amount should be reported as an asset. The remainder is an expense.

Lawn Equipment: How long has the equipment been owned? What is its expected life and salvage value? This information would be used to recognize depreciation expense and to reduce the book value of the asset by establishing a contra-asset account for accumulated depreciation.

Rent Expense: Was this amount paid only for 20 ? Or, was part of it paid for next year? If so, prepaid rent should be recognized and the expense should be reduced.

Wages Expense: Did the employees earn wages in 20 that were not paid by 12/31/ ? If so, additional wages expense and wages payable should be recognized.

Gas and Oil Expense: How much gas and oil still remains on 12/31? If it is just the amounts in the tanks and engines of the equipment, an adjustment is not worthwhile. However, if several cases of oil were stored on 12/31, an adjustment should be made to recognize this asset and reduce the expense.

Later in the text, we will cover the need to adjust Accounts Receivable for estimated bad debts. Some students may also request this information.

Note: The potential adjustments for rent, gas, and oil were not discussed in the text. The assignment provides an excellent opportunity to gauge student understanding of the concept of adjusting entries and their ability to apply this concept to new situations.

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Mastery Problem