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1、McGraw-Hill Companies, 2009Solutions Manual, Chapter 3119Chapter 3Adjusting Accounts and Preparing Financial StatementsQUESTIONS1.The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when ca
2、sh is paid while the accrual basis reports expenses when they are incurred and matched with revenues they generated.2.The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the
3、comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.3.Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.4.A prepaid expense is an item paid fo
4、r in advance of receiving its benefits. As such, it is reported as an asset on the balance sheet.5.Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation. Generally, land is the only long-term tangible plant asset that does not require deprec
5、iation.6.The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of
6、 replacement.7.Unearned revenue refers to cash received in advance of providing products and services. Another name for unearned revenue is deferred revenue. It is reported as a liability on the balance sheet.8.Accrued revenue is revenue that is earned but is not yet received in cash (and/or other a
7、ssets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed.9.AIf pr
8、epaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition12010.For Best Buy, all of the accounts under the category of Property and Eq
9、uipment (except for Land), require adjusting entries. The expense related to the depreciation expense account would be understated on the income statement if Best Buy fails to adjust these asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might als
10、o correctly identify accounts receivable, goodwill, and tradenames as needing adjustment.11.Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and possibly other assets an
11、d liabilities such as Receivables for bad debts. (It is also possible that Circuit City would need to adjust Goodwill and Other intangible assets.)12.RadioShack would need to debit interest receivable and credit interest revenue.13.The Accrued Wages Expense would be reported as part of “Accrued Expe
12、nses” on Apples balance sheet.QUICK STUDIESQuick Study 3-1 (15 minutes)Cash AccountingRevenues (cash receipts). $52,000 Expenses (cash payments: $37,500 - $6,000 + $3,250). 34,750 Net income $17,250Accrual AccountingRevenues (earned) .$60,000 Expenses (incurred) 37,500 Net income.$22,500Quick Study
13、3-2 (10 minutes)a.AE Accrued expenses b.PE Prepaid expenses c.UR Unearned revenues d.PE Prepaid expenses (Depreciation) e.AR Accrued revenuesMcGraw-Hill Companies, 2009Solutions Manual, Chapter 3121Quick Study 3-3 (20 minutes)Accounts Debited and CreditedFinancial Statement a.DebitUnearned RevenueBa
14、lance Sheet CreditRevenue EarnedIncome Statementb.DebitWages ExpenseIncome Statement CreditWages PayableBalance Sheetc.DebitAccounts ReceivableBalance Sheet CreditRevenue EarnedIncome Statementd.DebitInsurance ExpenseIncome Statement CreditPrepaid InsuranceBalance Sheete.DebitDepreciation ExpenseInc
15、ome Statement CreditAccumulated DepreciationBalance SheetQuick Study 3-4 (15 minutes)a.Insurance Expense.3,000 Prepaid Insurance .3,000 To record 6-month insurance coverage expired.b.Supplies Expense.4,150 Supplies .4,150 To record supplies used during the year. ($900 + $4,000 ? = $750)Quick Study 3
16、-5 (15 minutes)a. Depreciation ExpenseEquipment8,400 Accumulated DepreciationEquipment.8,400 To record depreciation expense for the year. ($45,000 - $3,000) / 5 years = $8,400b.No depreciation adjustments are made for land as it is expected to last indefinitely.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition122Quick Study 3-6 (10 minutes)Salaries Expense 400 Salaries Payable400 To record salaries incurred
