E3-1 Matching Definitions with Terms
Match each defi nition with its related term by entering the appropriate letter in the space provided. Term Definition 1. Expenses 2. Unearned Revenue 3. Prepaid Expenses 4. Revenues
A. A liability account used to record the obligation to provide future services or return cash that has been received, before revenues have been earned.
B. Costs that result when a company sacrifices resources to generate revenues in the current period.
C. A type of asset account used to record the benefits obtained, when cash is paid before expenses are incurred.
D. The amount charged to customers for providing goods or services.
E3–2 Matching Definitions with Terms
Match each defi nition with its related term by entering the appropriate letter in the space provided.
LO 3–1
LO 3–1
Term Definition
1. Accrual basis accounting 2. Expense recognition principle 3. Revenue recognition principle 4. Cash basis accounting
A. Record expenses when incurred in earning revenue. B. Record revenues when earned, not necessarily when
cash is received.
C. Record revenues when received and expenses when paid.
D. Record revenues when earned and expenses when incurred.
E3-3 Identifying Accrual Basis Revenues
According to the revenue recognition principle, revenues should be recognized when they are earned, which happens when the company performs acts promised to the customer. For most busi- nesses, this condition is met at the point of delivery of goods or services. The following transac- tions occurred in September 2013:
a. A customer paid $10 cash for 10 song files from Apple’s iTunes store. Answer from Apple’s standpoint.
b. Home Depot provided a carpet installation for $2,000 cash. A comparable installation from other companies costs $3,000.
c. AT&T is scheduled to install digital cable at 1,000 Austin area homes next week. The instal- lation charge is $100 per home. The terms require payment within 30 days of installation. Answer from AT&T’s standpoint.
d. AT&T completed the installations described in ( c ). Answer from AT&T’s standpoint.
e. AT&T received payment from customers for the installations described in ( c ). Answer from AT&T’s standpoint.
f. A customer purchased a ticket from American Airlines in September for $500 cash to travel in December. Answer from American Airlines’ standpoint.
LO 3–1, 3–2
Apple
AT&T American Airlines
Required:
For each of the transactions, if revenue is to be recognized in September, indicate the amount. If revenue is not to be recognized in September, explain why.
E3-4 Identifying Accrual Basis Revenues
According to the revenue recognition principle, revenues should be recognized when they are earned, which happens when the company performs acts promised to the customer. For most busi- nesses, this condition is met at the point of delivery of goods or services. The following transac- tions occurred in September 2013:
a. Gillespie Enterprises Inc. issued $26 million in new common stock.
b. Cal State University received $20,000,000 cash for 80,000 five-game season football tickets. None of the games have been played.
c. Cal State played the first football game referred to in ( b ).
d. Hall Construction Company signed a contract with a customer for the construction of a new $500,000 warehouse. At the signing, Hall received a check for $50,000 as a deposit to be applied against amounts earned during the first phase of construction. Answer from Hall’s standpoint.
e. A popular snowboarding magazine company received a total of $1,800 today from subscribers.
The subscriptions begin in the next fiscal year. Answer from the magazine company’s standpoint.
f. T-Mobile sold a $100 cell phone plan for service in September to a customer who charged the sale on his credit card. Answer from the standpoint of T-Mobile.
Required:
For each of the transactions, if revenue is to be recognized in September, indicate the amount. If revenue is not to be recognized in September, explain why.
E3-5 Identifying Accrual Basis Expenses
Under accrual basis accounting, expenses are recognized when incurred, which means the activity giving rise to the expense has occurred. Assume the following transactions occurred in January 2013:
a. Dell paid its computer service technicians $90,000 in salary for work done in January 2013. Answer from Dell’s standpoint.
b. At the beginning of January, Turner Construction Company paid $3,000 in rent for February–April 2013.
c. McGraw-Hill Education—publisher of this textbook—used $3,000 worth of electricity and natural gas in January for which it has not yet been billed.
d. Pooler Company received and paid in January a $1,500 invoice from a consulting firm for services received in January.
e. The campus bookstore received consulting services at a cost of $5,000. The terms indicate that payment is due within 30 days of the consultation.
f. Schergevitch Incorporated had its delivery van repaired in January for $280 and charged the amount on account.
Required:
For each of the transactions, if an expense is to be recognized in January, indicate the amount. If an expense is not to be recognized in January, indicate why.
E3-6 Identifying Accrual Basis Expenses
Under accrual basis accounting, expenses are recognized when incurred. The following transac- tions occurred in January 2013:
a. American Express paid its salespersons $3,500 in commissions related to December sales of financial advisory services. Answer from American Express’s standpoint.
b. On January 31, American Express determined that it will pay its salespersons $4,200 in com- missions related to January sales. The payment will be made in early February. Answer from American Express’s standpoint.
c. The city of Omaha hired Waste Management, Inc., to provide trash collection services beginning January 1. The city paid $12 million for the entire year. Answer from the city’s standpoint.
d. The University of Florida paid $10,000 in advance for refundable airline tickets to fly the baseball team to a tournament in California. The first game will be played in March. Answer from the university’s standpoint.
LO 3–1, 3–2 T-Mobile LO 3–1, 3–2 Dell LO 3–1, 3–2 American Express Waste Management, Inc.
e. A Houston Community College employee worked eight hours, at $15 per hour, on January 31;
payday is not until February 3. Answer from the college’s point of view.
f. Wang Company paid $3,600 for a fire insurance policy on January 1. The policy covers 12 months beginning on January 1. Answer from Wang’s point of view.
g. Ziegler Company, a farm equipment company, received a phone bill for $230 of January calls. The bill has not been paid to date.
Required:
For each of the transactions, if an expense is to be recognized in January, indicate the amount. If an expense is not to be recognized in January, indicate why.
E3-7 Determining Accounting Equation Effects and Net Income
The following transactions occurred during a recent year:
a. Paid wages of $1,000 for the current period (example). b. Borrowed $5,000 cash from local bank using a short-term note.
c. Purchased $2,000 of equipment on credit.
d. Earned $400 of sales revenue, collected cash.
e. Received $800 of utilities services, on credit.
f. Earned $1,700 of service revenue, on credit.
g. Paid $300 cash on account to a supplier.
h. Incurred $70 of travel expenses, paid cash.
i. Earned $400 of service revenue, collected half in cash, balance on credit.
j. Collected $100 cash from customers on account.
k. Incurred $300 of advertising costs, paid half in cash, balance on credit.
Required:
For each of the transactions, complete the table below, indicating the account, amount, and direction of the effect ( 1 for increase and 2 for decrease) of each transaction under the accrual basis. Write NE if there is no effect. Include revenues and expenses as subcategories of stockhold- ers’ equity, as shown for the fi rst transaction, which is provided as an example. Also, determine the company’s preliminary net income.
Transaction Assets Liabilities Stockholders’ Equity (a) (example) Cash 21,000 NE Wages Expense (1E) 21,000
E3-8 Determining Accounting Equation Effects and Net Income
Wolverine World Wide, Inc., manufactures military, work, sport, and casual footwear and leather accessories under a variety of brand names, such as Caterpillar, Hush Puppies, Wolverine, and Steve Madden. The following transactions occurred during a recent month.
a. Made cash sales of $49,000 (example).
b. Purchased $3,000 of additional supplies on account.
c. Borrowed $58,000 on long-term notes.
d. Purchased $18,600 in additional equipment, paying in cash.
e. Incurred $27,000 in selling expenses, paying two-thirds in cash and owing the rest on account. f. Paid $4,700 in rent for this month, and $4,700 for next month.
Required:
For each of the transactions, complete the table below, indicating the account, amount, and direction of the effect ( 1 for increase and 2 for decrease) of each transaction under the accrual basis. Write NE if there is no effect. Include revenues and expenses as subcategories of stockhold- ers’ equity, as shown for the fi rst transaction, which is provided as an example. Also, determine the company’s preliminary net income.
Transaction Assets Liabilities Stockholders’ Equity (a) (example) Cash 149,000 NE Sales Revenue (1R) 149,000 LO 3–2, 3–3
LO 3–2, 3–3
E3-9 Recording Journal Entries and Determining Net Income
Sysco, formed in 1969, is America’s largest marketer and distributor of food service products, serv- ing nearly 250,000 restaurants, hotels, schools, hospitals, and other institutions. The following transactions are typical of those that occurred in a recent year, but the amounts are simplifi ed.
a. Borrowed $80,000 from a bank, signing a short-term note payable.
b. Provided $100,000 in service to customers, with $95,000 on account and the rest received in cash.
c. Purchased equipment for $130,000 in cash.
d. Paid employee wages of $1,000.
e. Received $410 on account from a customer.
f. Paid $4,000 cash for travel costs during the year.
g. Paid $8,200 cash on accounts payable.
h. Incurred $20,000 in utility expenses during the year, of which $15,000 was paid in cash and the rest owed on account.
Required:
For each of the transactions, prepare accrual basis journal entries and determine whether the accounting equation remains in balance and debits equal credits after each entry. Also, calculate the company’s preliminary net income.
E3-10 Recording Journal Entries and Determining Net Income
Greek Peak is a ski resort in upstate New York. The company sells lift tickets, ski lessons, and ski equipment. It operates several restaurants and rents townhouses to vacationing skiers. The follow- ing hypothetical December 2013 transactions are typical of those that occur at the resort.
a. Borrowed $500,000 from the bank on December 1, signing a note payable, due in six months. b. Purchased a new snowplow for $20,000 cash on December 31.
c. Purchased ski supplies for $10,000 on account.
d. Incurred $22,000 in routine maintenance expenses for the chairlifts; paid cash.
e. Received $72,000 for season passes (beginning in the new year).
f. Daily lift passes were sold this month for a total of $76,000 cash.
g. Received a $320 deposit on a townhouse to be rented for five days in January 2014.
h. Paid half the charges incurred on account in ( c ).
i. Paid $18,000 in wages to employees for the month of December.
Required:
Prepare accrual basis journal entries for each transaction. Be sure to categorize each account as an Asset (A), Liability (L), Stockholders’ Equity (SE), Revenue (R), or Expense (E), and check that debits equal credits for each journal entry. Also, calculate the company’s preliminary net income. E3-11 Recording Journal Entries and Determining Net Income
Rowland & Sons Air Transport Service, Inc., has been in operation for three years. The following transactions occurred in February 2013:
Feb. 1 Paid $200 for rent of hangar space in February.
Feb. 4 Received customer payment of $800 to ship several items to Philadelphia next month.
Feb. 7 Flew cargo from Denver to Dallas; the customer paid in full ($900 cash). Feb. 10 Paid pilot $1,200 in wages for flying in February.
Feb. 14 Paid $100 for an advertisement run in the local paper on February 14. Feb. 18 Flew cargo for two customers from Dallas to Albuquerque for $1,700; one cus-
tomer paid $500 cash and the other asked to be billed $1,200. Feb. 25 Purchased on account $1,350 in supplies for future use on the planes.
Required:
Prepare accrual basis journal entries for each transaction. Be sure to categorize each account as an Asset (A), Liability (L), Stockholders’ Equity (SE), Revenue (R), or Expense (E). Also, calculate the company’s preliminary net income.
LO 3–2, 3–3
Sysco
LO 3–2, 3–3
Greek Peak
E3-12 Recording and Posting Accrual Basis Journal Entries
Ricky’s Piano Rebuilding Company has been operating for one year (2012). At the start of 2013, its income statement accounts had zero balances and its balance sheet account balances were as follows:
Cash $ 6,000 Accounts Payable $ 8,000
Accounts Receivable 25,000 Unearned Revenue (deposits) 3,200
Supplies 1,200 Notes Payable 40,000
Equipment 8,000 Contributed Capital 8,000
Land 6,000 Retained Earnings 9,000
Building 22,000
Required:
1. Create T-accounts for the balance sheet accounts and for these additional accounts: Service
Revenue, Rent Revenue, Wages Expense, and Utilities Expense. Enter the beginning balances.
2. Prepare journal entries for the following January 2013 transactions, using the letter of each
transaction as a reference:
a. Received a $500 deposit from a customer who wanted her piano rebuilt in February. b. Rented a part of the building to a bicycle repair shop; $300 rent received for January. c. Delivered five rebuilt pianos to customers who paid $14,500 in cash.
d. Delivered two rebuilt pianos to customers for $7,000 charged on account. e. Received $6,000 from customers as payment on their accounts.
f. Received an electric and gas utility bill for $350 for January services to be paid in
February.
g. Ordered $800 in supplies.
h. Paid $1,700 on account in January.
i. Paid $10,000 in wages to employees in January for work done this month. j. Received and paid cash for the supplies in (g).
3. Post the journal entries to the T-accounts. Show the unadjusted ending balances in the
T-accounts.
E3-13 Preparing an Unadjusted Trial Balance
Refer to E3-12.
Required:
Use the balances in the completed T-accounts in E3-12 to prepare an unadjusted trial balance at the end of January 2013.
E3-14 Analyzing Transactions from Seller and Buyer Perspectives
Over-the-Top Technologies (OTT) operates a computer repair and web consulting business. News Now (NN) publishes a local newspaper. The two companies entered into the following transactions.
a. NN billed OTT for $500 of advertising services provided this month on account. b. OTT repaired some of NN’s equipment this month, for $135 on account.
c. NN collected $500 cash from OTT for the advertising services provided in (a).
d. NN paid $60 cash to OTT for OTT advertising NN’s online newspaper this month on OTT’s Web site.
e. OTT and NN signed a promissory note, documenting OTT’s $1,000 cash loan to NN this month with repayment to occur in six months.
Required:
Show the journal entries that OTT and NN would record for items (a) – (e). Use a two-part table, with the left side showing OTT’s journal entries and the right side showing NN’s journal entries. LO 3–2, 3–3
LO 3-4
LO 3–2, 3–3 LEVEL
E3-15 Inferring Transactions and Computing Effects Using T-Accounts
A company’s accounting records included the following accounts.
Accounts Receivable (A) Prepaid Rent (A) Unearned Revenue (L)
1/1 313 1/1 25 240 1/1
2,573 a 43 b c 328
12/31 295 12/31 26 253 12/31
Required:
1. For each T-account, describe the typical transactions that cause it to increase and decrease. 2. Express each T-account in equation format (Beginning 1 Increase Side 2 Decrease
Side 5 Ending) and then solve for the missing amounts. For example, the Accounts Receiv- able T-account can be expressed as: 313 1 2,573 2 a 5 295. By rearranging the equation, you can solve for 313 1 2,573 2 295 5 a.
E3-16 Determining Accounting Equation Effects of Several Transactions
In January 2013, Tongo, Inc., a branding consultant, had the following transactions. Indicate the accounts, amounts, and direction of the effects on the accounting equation under the accrual basis. A sample is provided.
a. (Sample) Received $9,500 cash for consulting services rendered in January.
b. Issued stock to investors for $10,000 cash.
c. Purchased $12,000 of equipment, paying 25 percent in cash and owing the rest on a note due in 2 years.
d. Received $7,500 cash for consulting services to be performed in February.
e. Bought $1,000 of supplies on account.
f. Received utility bill for January for $1,250, due February 15.
g. Consulted for customers in January for fees totaling $15,900, due in February.
h. Received $12,000 cash for consulting services rendered in December.
i. Paid $500 toward supplies purchased in ( e ) .
a.
Assets 5 Liabilities 1 Stockholders’ Equity Cash 19,5005 Service Revenue (1R) 19,500
E3-17 Preparing Journal Entries
For each of the transactions in E3-16 (including the sample), write the journal entry using the format shown in this chapter.
E3-18 Posting to T-Accounts
For each of the transactions in E3-16 (including the sample), post the effects to the appropriate T-accounts and determine ending account balances. Beginning account balances have been given. The sample transaction has been posted as an example.
Cash (A) 1/1/13 a. 10,000 9,500 Accounts Payable (L) 5,000 1/1/13
Contributed Capital (SE)
12,000 1/1/13
Retained Earnings (SE)
8,800 1/1/13
Accounts Receivable (A)
1/1/13 12,500 Unearned Revenue (L) 2,500 1/1/13 LO 3–1, 3–2, 3–3 LO 3–2, 3–3 LO 3-3 LO 3-3