Unit 2


Here are the Review Answers for questions 4-6B and 5-12A which I really hope are the questions I assigned you.  If they aren’t, someone email be and I’ll try to post the correct answers.

Main Points Summary

The five main topics we covered in chapters 4 and 5 are:
1)    Adjustments
2)    Accounts Involved in Adjustments
3)    The Closing Process
4)    The Worksheet
5)    Classification Groups

Adjustments

Adjustments are done at the end of an accounting period to recognize internal transactions and bring asset and liability accounts to their proper balances after all transactions for an accounting period. It is based on the revenue recognition principle and the matching principle.

There are five different types of adjusting entries:
-Adjustments for Prepaid Expenses
-Adjustments for Amortization
-Adjustments for Unearned Revenues
-Adjustments for Accrued Expenses
-Adjustments for Accrued Revenues

Accounts Involved in Adjustments

Prepaid Expenses refers to the use of assets paid for in advance such as insurance or rent (debit expense, credit asset). Amortization adjustments are done to record the usage of a capital (long-term) assets life (debit expense, credit asset). Unearned Revenue is adjusted to recognize revenues earned (debit unearned revenue, credit revenue). Accrued Expenses are adjusted to recognize unrecorded and unpaid expenses (debit expense, credit liability). Lastly, Accrued Revenues are adjusted to recognize unrecorded and not yet received revenues (debit asset, credit revenue).

The Closing Process

After financial statements are completed, the closing process begins. The main function of the closing process is to ensure that the account is ready for the next fiscal period. The owner’s equity should reflect the revenue, expense and withdrawals accounts. In order to measure results from the period that has just ended, those accounts should begin with balances set at zero. Additionally, the increases that come from the net income should reflect the capital account of the owner. The decreases due to the net losses and withdrawals should also be shown in the owner’s capital account. Most accounts involved in the closing process are known as Temporary or Nominal Accounts, these accounts are the Revenue, Expense, Withdrawals and Income Summary accounts. These accounts are closed, with the balances brought to zero at the end of every fiscal period.

Process of closing:
-Close Revenue accounts into Income Summary (Debit = Revenue, Credit = Income Summary)
-Close Expense accounts into Income Summary (Debit = Income Summary, Credit = Income Summary)
-Close Income Summary account into Owner’s Capital account (Credits and Debits depend on Net Income / Net Loss)
-Close Withdrawals account into Owner’s Capital account (Debit = Capital, Credit = Drawings)

The Worksheet

The worksheet is used to to prepare for the creation of financial statements, such as the Income Statement, the Statement of Owner’s Equity, and the Balance Sheet. The worksheet contains five different sections for the Unadjusted Trial Balance, the Adjustments, the Adjusted Trial Balance, the Income Statement, and the Balance Sheet / Statement of Owners Equity. Every account can be listed onto the worksheet. Figures are all recorded into the Trial Balance sections before being moved over to their appropriate sections. Revenues and Expenses to the Income Statement section and Assets, Liabilities, and Owner’s Capital and Withdrawal into the Balance Sheet section. The Net Income / Loss also appears on the worksheet under the Income Statement and Balance Sheet sections.

Classification Groups

There are three major categories within a classified balance sheet; they are assets, liabilities, and owner’s equity. Within those three, there are multiple sub categories

Assets:
-Current assets (cash, accounts receivable), used within the fiscal period
-Long term investments (stocks, bonds, unused land), last more than one fiscal period
-Plants, property, and equipment (land, buildings, equipment), last more than one fiscal period
-Intangible assets (patents, grants, copyrights, trademarks, goodwill)

Liabilities:
-Current liabilities (accounts payable, notes payable, unearned revenue), paid within a fiscal period
-Long term liabilities (mortgage payable, bank loan), paid over multiple fiscal periods

Owners Equity:
-Capital

How does the unit relate to GAAPs?

In this unit we learn how to do adjustments. When adjusting we recognize the revenue recognition principle and the matching principle. We also learn that accrual basis accounting is founded on the revenue recognition principle, the matching principle and the time period principle.

How does the unit relate to identifying, recording, measuring, and communication information?

We identify what accounts are needed to do the adjustments for the accounting period and the accounts needed for the closing process. Then we record and measure the by using the general journal. Finally we communicate the information by posting post-closing trial balance, and classified balance sheets.

How do the topics covered ensure that accounting information is relevant, reliable, consistent, and comparable?

The GAAPS, which in this case are: matching principle, time period principle and revenue recognition principle ensure that the accounting information is relevant, reliable, consistent and comparable.

The formatting didn’t transfer very well but you can still check the accounts and values.

4-7A

2001

a) Jan. 31 Amortization Expense, Equipment                                  6,000

Accumulated Amortization, Equipment 6,000

To record amortization; 72,000/3 yrs = 24,000/yr × 3/12 = 6,000.

b) 31 Unearned Consulting Fees 6,000

Consulting Fees Earned 6,000

To record fees earned.

c) 31 Rent Expense 30,000

Prepaid Rent 30,000

To record expired rent; 45,000 × 4/6 = 30,000.

d) 31 Wages Expense                         19,000

Wages Payable 19,000

To record accrued wages.

e) 31 Interest Expense 1,470

Interest Payable 1,470

To record accrued interest; 84,000 × 7% = 5,880 × 3/12 = 1,470.

f) 31 Accounts Receivable 9,500

Consulting Fees Earned 9,500

To record accrued fees.

g) 31 Insurance Expense 1,500

Prepaid Insurance 1,500

To record expired insurance; 2,700/18 months = 150/month × 10 months.

h) 31 Amortization Expense, Office Furniture                          900

Accumulated Amortization, Office Furniture                             900

To record amortization of office furniture.

i) Jan. 31 Accounts Receivable                                                       4,100

Repair Revenues Earned                                                4,100

To record accrued repair revenues.

j) 31 Store Supplies Expense                                                  4,300

Store Supplies Inventory                                                 4,300

To record store supplies used; 1,600 + 3,000 – 300 = 4,300.

 

Problem 4-14A (35 minutes) Part 1

2001

Dec. 31      Office Supplies Expense…………………        12,760

Office Supplies…………………………..                           12,760

To record the cost of supplies used during
the year; $3,000 + $12,400 – $2,640.

31      Insurance Expense…………………………        12,312

Prepaid Insurance……………………..                           12,312

To record the cost of insurance coverage
that expired during the year.

Cost per    No. of        2001

Policy      Month     Months      Cost

1            $660           12        $  7,920

2              363             9             3,267

3              225             5         1,125

Total                                         $12,312

31      Salaries Expense…………………………….          2,100

Salaries Payable………………………..                              2,100

To record accrued but unpaid wages.

31      Amortization Expense, Building……..        11,250

Accumulated Amortization, Building                                           11,250

To record amortization expense. Annual
amortization
= ($855,000 $45,000)/30 = $27,000;
amortization for five months
= $27,000
× 5/12.

31      Rent Receivable……………………………….          2,400

Rent Earned……………………………….                              2,400

To record earned but unpaid rent.

31      Unearned Rent…………………………………          4,350

Rent Earned……………………………….                              4,350

To record the amount of rent earned; 2 × $2,175.

Jan.   6      Salaries Payable………………………            2,100

Salaries Expense……………………..            8,400

Cash……………………………………                               10,500

To record payment of accrued and current

salaries; 4 × $2,100 = 8,400.

15 Cash………………………………………….            4,800

Rent Receivable………………….                                 2,400

Rent Earned………………………..                                 2,400

To record past due rent for two months.


Textbook Questions:

  • pg 168 #QS 4-8, QS 4-9
  • pg 170 #4-7
  • pg 171 #4-9, 4-10
  • pg 174 #4-4A, 4-5A

Textbook Questions:

  • pg 167, #QS 4-1, QS 4-3, QS 4-4, QS 4-5
  • pg 168, QS 4-6
  • pg 169, #4-3,
  • pg 173, #4-1A, 4-2A
  • pg 174, 4-3A