CHAPTER 12 ACCRUALS, DEFERRALS, AND THE WORKSHEET

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1 CHAPTER 12 ACCRUALS, DEFERRALS, AND THE WORKSHEET Chapter Opener: Thinking Critically Students may assess that an unexpected decline in sales would mean surplus inventory which would have to be reduced most likely by selling the too sophisticated merchandise at lower prices. Expenses for market research to determine a better merchandise strategy would also need to be recorded. Fast Facts Urban Outfitters achieved compounded annual sales growth of approximately 19% from 2005 to 2010, with sales of approximately $1.9 billion in fiscal The first Urban Outfitters store opened 1970 near the University of Pennsylvania campus in Philadelphia. The company circulates nearly 40 million catalogs per year. The company employs 14,000 people; the number fluctuates based upon seasonal demand. Managerial Implications: Thinking Critically Financial results and financial condition will be incorrectly stated. Discussion Questions Note to instructor : These questions are designed to check students understanding of new terms, concepts, and procedures presented in the chapter. 1. Debiting Allowance for Doubtful Accounts and Crediting Accounts Receivable. 2. To the Income Statement columns. 3. Dr. Uncollectible Accounts Expense, Cr. Allowance for Doubtful Accounts. 4. Transfers cost of asset to expense over life of asset. 5. Long-term assets whose usefulness is consumed over the life of the assets. (Buildings, furniture and fixtures, machinery.) 6. a. Estimated selling price upon disposal of an asset. b. Cost of asset less salvage value. c. Number of years that asset will be used. d. Equal amount of depreciation taken in each year of the asset s useful life. 7. Dr. Depreciation Exp. Office Equipment., Cr. Accum. Depr. Office Equipment. 8. An expense that does not yet appear in the accounts. (Accrued salaries, accrued payroll taxes, and accrued interest on notes payable.) 9. Dr. Salaries Expense, Cr. Salaries Payable. 10. Item that has been paid for and recorded in the accounts in advance of its use. (Prepaid rent, prepaid insurance, prepaid interest on notes payable.) 11. Dr. Prepaid Insurance, Cr. Cash. 12. Dr. Insurance Expense, Cr. Prepaid Insurance 422 Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

2 Discussion Questions (continued) 13. Charge cost to expense account at the time cost is incurred. At end of period, amount still prepaid is debited to prepaid expense account and credited to the expense account. 14. Income earned but not yet received in cash or recorded as a receivable. (Interest on notes receivable.) 15. Dr. Interest Receivable, Cr. Interest Income. 16. Income for which payment has been received in advance, but which has not been earned. (Rent income received in advance.) 17. Dr. Cash, Cr. Unearned Income. 18. Dr. Unearned Income, Cr. Income. 19. Record amount received in advance as income at the time it is received in cash. At period end, unearned amount debited to Income and credited to Unearned Income. 20. Provides a single location for all information necessary to journalize adjusting entries and to prepare the financial statements. 21. Liability. Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

3 EXERCISE 12.1 GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec. 31 Income Summary Merchandise Inventory Merchandise Inventory Income Summary EXERCISE 12.2 Beginning Merchandise Inventory is $179,000 and ending Merchandise Inventory is $203,344. EXERCISE 12.3 GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec. 31 Uncollectible Accounts Expense Allowance for Doubtful Accounts Depreciation Expense Equipment Accumulated Depreciation Equipment Wages Expense Wages Payable Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable Payroll Taxes Expense Federal Unemployment Tax Payable State Unemployment Tax Payable Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

4 EXERCISE 12.4 GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec. 31 Interest Expense Interest Payable Supplies Expense Supplies Insurance Expense Prepaid Insurance Advertising Expense Prepaid Advertising EXERCISE 12.5 GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec. 1 Cash Prepaid Interest Notes Payable Interest Expense Prepaid Interest EXERCISE 12.6 GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec. 31 Interest Expense Interest Payable Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

5 EXERCISE 12.7 GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec. 31 Interest Receivable Interest Income Unearned Subscription Revenue Subscription Revenue Unearned Rent Rent Income Unearned Season Ticket Income Season Ticket Income Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

6 PROBLEM 12.1A GENERAL JOURNAL PAGE 18 DATE DESCRIPTION POST. REF. DEBIT CREDIT June 30 (Adjustment a) 2 3 Income Summary Merchandise Inventory (Adjustment b) 6 7 Merchandise Inventory Income Summary (Adjustment c) Unearned Seminar Fees Seminar Fees Income (Adjustment d) Insurance Expense Prepaid Insurance (Adjustment e) Depreciation Expense - Store Equipment Accumulated Depreciation - Store Equipment (Adjustment f) Wages Expense Wages Payable (Adjustment g) Payroll Taxes Expense State Unemployment Taxes Payable Federal Unemployment Taxes Payable Medicare Taxes Payable Social Security Taxes Payable (Adjustment h) Uncollectible Accounts Expense Allowance for Doubtful Accounts (Adjustment i) Rent Expense Prepaid Rent Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

7 PROBLEM 12.1A (continued) GENERAL JOURNAL PAGE 18 DATE DESCRIPTION POST. REF. DEBIT CREDIT (Adjustment j) Supplies Expense Supplies (Adjustment k) Interest Expense Interest Payable Notes on calculations: a.-b. Amounts given. c. $6,000 cash received/5 seminars = $1,200/seminar. $1,200/seminar 2 seminars conducted = $2,400 earned. d. $12,000/6 months in policy = $2,000/month. $2,000/month 2 months expired (May and June) = $4,000 insurance expense. e. ($5,000 cost - $500 salvage value)/60 months = $75/month depreciation. $75/month 3 months of use (April, May and June) = $225. f. Amounts given. g. Amounts given. h. $2,000,000 1% = $20,000 i. $6,600/6 months in policy = $1,100/month; $1,100 4 months expired = $4,400. j. $400 balance - $150 supplies on hand = $250 of supplies used. k. $6,000 principal 7% interest rate 1/12 time factor = $35 Analyze: The balance of the Prepaid Rent account will be $2,200 ($6,600 - $4,400 expired). 428 Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

8 PROBLEM 12.2A GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. REF. DEBIT CREDIT July 1 Prepaid Rent Cash Cash Prepaid Interest Notes Payable Cash Unearned Accounting Fees Office Equipment Notes Payable Prepaid Insurance Cash Office Furniture Cash Accounts Payable Supplies Cash Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

9 PROBLEM 12.2A (continued) GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. REF. DEBIT CREDIT 1 Adjusting Entries July 31 Rent Expense Prepaid Rent Interest Expense Prepaid Interest Unearned Accounting Fees Accounting Fees Interest Expense Interest Payable Depreciation Expense Office Equipment Accumulated Depreciation Office Equipment Insurance Expense Prepaid Insurance Depreciation Expense Office Furniture Accumulated Depreciation Office Furniture Supplies Expense Supplies Analyze: The Unearned Accounting Fees account would be $66, Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

10 PROBLEM 12.3A Michael Brady, Consultant Worksheet Month Ended July 31, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Cash Accounts Receivable Supplies (a) Prepaid Rent (b) Prepaid Insurance (c) Prepaid Interest (d) Office Furniture Accumulated Depreciation 9 Office Furniture (e) Office Equipment Accumulated (f) Depreciation Equipment 12 Notes Payable Accounts Payable Interest Payable (g) Unearned Consulting Fees (h) Michael Brady, Capital Michael Brady, Drawing Consulting Fees (h) Salaries Expense Utilities Expense Telephone Expense Supplies Expense (a) Rent Expense (b) Insurance Expense (c) Depreciation (e) Expense Furniture Depreciation (f) Expense Equipment 27 Interest Expense (d) (g) Totals Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

11 PROBLEM 12.3A Continued ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Analyze: The expense accounts of the business were adjusted by $2,262 ($2,662 - $400). 432 Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

12 PROBLEM 12.4A The Green Thumb Gallery Worksheet Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1Cash Accounts Receivable Allowance for Doubtful Accounts (c) Merchandise Inventory (b) (a) Supplies (d) Prepaid Advertising (e) Store Equipment Accumulated Depr. Store Equipment (f) Office Equipment Accumulated Depr. Office Equipment (g) Accounts Payable Social Security Tax Payable (i) Medicare Tax Payable (i) Federal Unemployment Tax Payable (j) State Unemployment Tax Payable (j) Salaries Payable (h) Beth Argo, Capital Beth Argo, Drawing Sales Sales Returns & Allowances Purchases Purchases Returns & Allowances Rent Expense Telephone Expense Salaries Expense (h) Payroll Taxes Expense (i) (j) Income Summary (a) (b) Supplies Expense (d) Advertising Expense (e) Depreciation expense Store Equipment (f) Depreciation expense Office Equipment (g) Totals Carried Forward Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

13 PROBLEM 12.4A (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

14 PROBLEM 12.4A (continued) The Green Thumb Gallery Worksheet (Continued) Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Totals Brought Forward Uncollectible Accounts Expense (c) Totals Net Income Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

15 PROBLEM 12.4A (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Analyze: The total assets (assets, less accumulated depreciation) were decreased $2,374 by adjustments. 436 Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

16 PROBLEM 12.5A Healthy Habits Foods Company Worksheet Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Cash Accounts Receivable Allowance for Doubtful Accounts (c) Merchandise Inventory (b) (a) Supplies (d) Prepaid Insurance (e) Office Equipment Accumulated Depr. Office (f) Warehouse Equipment Accumulated Depr. Warehouse (g) Equipment Notes Payable Bank Accounts Payable Interest Payable (h) Social Security Tax Payable (j) Medicare Tax Payable (j) Federal Unemployment Tax Payable (k) State Unemployment Tax Payable (k) Salaries Payable (i) Phillip Tucker, Capital Phillip Tucker, Drawing Sales Sales Returns and Allowances Purchases Purchases Returns and Allowance Income Summary (a) (b) Rent Expenses Telephone Expense Salaries Expense (i) Payroll Taxes Expense (j) (k) Supplies Expense (d) Insurance Expense (e) Totals Carried Forward Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

17 PROBLEM 12.5A (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

18 PROBLEM 12.5A (continued) TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Totals Brought Forward Depr. Expense Office Equipment (f) Depr. Expense Warehouse (g) Equipment Uncollectible Accounts Expense (c) Interest Expense (h) Totals Net Income Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

19 PROBLEM 12.5A (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Analyze: The net income will be $55, Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

20 PROBLEM 12.6A The Wine Shop Worksheet Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Cash Accounts Receivable Prepaid Advertising (c) Supplies (d) Merchandise Inventory (a) Store Equipment Accum. Depr., Store Equip (e) Office Equipment Accum. Depr., Office Equip (f) Notes Payable, due Accounts Payable Wages Payable (h) Social Security Tax Payable (i) Medicare Tax Payable Unearned Seminar Fees (g) Interest Payable (j) Vincent Arroyo, Capital Vincent Arroyo, Drawing Income Summary (b) (a) Sales Sales Discounts Seminar Fee Income (g) Purchases Purchases Returns & Allow Freight In Rent Expense Wages Expense (h) Payroll Taxes Expense (i) Depreciation Exp., Store Equip. (e) Depreciation Exp., Office Equip. (f) Advertising Expense (c) Supplies Expense (d) Interest Expense (j) Net income 36 Analyze: The firm earned $2,000 in 2013 by conducting seminars. Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

21 PROBLEM 12.6A (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

22 PROBLEM 12.1B GENERAL JOURNAL PAGE 18 DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec 31 (Adjustment a) 2 3 Income Summary Merchandise Inventory (Adjustment b) 6 7 Merchandise Inventory Income Summary (Adjustment c) Unearned Seminar Fees Seminar Fees Income (Adjustment d) Insurance Expense Prepaid Insurance (Adjustment e) Depreciation Expense - Store Equipment Accumulated Depreciation - Store Equipment (Adjustment f) Wages Expense Wages Payable (Adjustment g) Payroll Taxes Expense State Unemployment Taxes Payable Federal Unemployment Taxes Payable Medicare Taxes Payable Social Security Taxes Payable (Adjustment h) Uncollectible Accounts Expense Allowance for Doubtful Accounts Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

23 PROBLEM 12.1B (continued) GENERAL JOURNAL PAGE 18 DATE DESCRIPTION POST. REF. DEBIT CREDIT (Adjustment i) Rent Expense Prepaid Rent (Adjustment j) Supplies Expense Supplies (Adjustment k) Interest Expense Interest Payable 47 Notes on calculations: a.-b. Amounts given. c. $10,000 cash received /4 seminars = $2,500/seminar. $2,500/seminar 3 seminars conducted = $7,500 earned. d. $12,000/6 months in policy = $2,000/month. $2,000/month 3 months expired (October, November and December) = $6,000 insurance expense. e. ($5,000 cost - $500 salvage value) /60 months = $75/month depreciation. $75/month 4 months of use (September, October, November and December) = $300. f. Amounts given. g. Amounts given. h. i. j. k. $3,000, % = $45,000 $13,200/6 months prepaid = $2,200/month; $2,200 3 months expired = $6,600. $500 balance - $225 supplies on hand = $275 of supplies used. $8,000 principal 6% interest rate 1/12 time factor = $40 Analyze: The balance of the Unearned Seminar Fees account will be $2,500 ($10,000 - $7,500 earned). 444 Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

24 PROBLEM 12.2B GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. REF. DEBIT CREDIT June 1 Prepaid Rent Cash Cash Prepaid Interest Notes Payable Cash Unearned Advertising Fees Office Equipment Notes Payable Prepaid Insurance Cash Office Furniture Accounts Payable Cash Office Supplies Cash Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

25 PROBLEM 12.2B (continued) GENERAL JOURNAL PAGE 2 DATE DESCRIPTION POST. REF. DEBIT CREDIT 1 Adjusting Entries June 30 Rent Expense Prepaid Rent Interest Expense Prepaid Interest Unearned Advertising Fees Advertising Fees Interest Expense Interest Payable Depreciation Expense Office Equipment Accumulated Depreciation Office Equipment Insurance Expense Prepaid Insurance Depreciation Expense Office Furniture Accumulated Depreciation Office Furniture Office Supplies Expense Office Supplies Analyze: Total Rent expense will be $18,000 at the end of the year. 446 Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

26 PROBLEM 12.3B Cross Timbers Company Partial Worksheet Month Ended September 30, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Cash Supplies (a) Prepaid Rent (b) Prepaid Advertising (c) Prepaid Interest (d) Furniture Accumulated Depreciation Office Furniture (e) Equipment Accumulated (f) Depreciation Equipment 11 Notes Payable Accounts Payable Interest Payable (g) Unearned Course Fees (h) Scott Nelson, Capital Scott Nelson, Drawing Course Fees (h) Salaries Expense Telephone Expense Entertainment Expense Supplies Expense (a) Rent Expense (b) Advertising Expense (c) Depreciation (e) Expense Furniture 25 Depreciation (f) Expense Equipment Interest Expense (d) (g) Totals Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

27 PROBLEM 12.3B (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Analyze: The net dollar effect of the adjustments is an increase of $5, in income. 448 Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

28 PROBLEM 12.4B Fun Depot Worksheet Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Cash Accounts Receivable Allowance for Doubtful Accounts (c ) Merchandise Inventory (b) (a) Supplies (d) Prepaid Advertising (e) Store Equipment Accumulated Depr. Store Equip (f) Office Equipment Accumulated Depr. Office Equip (g) Accounts Payable Social Security Tax Payable (i) Medicare Tax Payable (i) Federal Unemployment Tax Payable (j) State Unemployment Tax Payable (j) Salaries Payable (h) Janie Fielder, Capital Janie Fielder, Drawing Sales 1, Sales Returns and Allowances Purchases Purchases Returns and Allowances Rent Expense Telephone Expense Salaries Expense (h) Payroll Taxes Expense (i) (j) Income Summary (a) (b) Supplies Expense (d) Advertising Expense (e) Depreciation Expense Store Equip. (f) Depreciation Expense Office (g) EUncollectible i Accounts Expense (c) Totals Carried Forward 1, , Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

29 PROBLEM 12.4B (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT , , , , Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

30 PROBLEM 12.4B (continued) Fun Depot Worksheet (Continued) Year Ended December 31, 2013 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT 1 Totals Brought Forward 1, , Totals 1, , Net Income Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved. Chapter

31 PROBLEM 12.4B (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 1, , , , , , Analyze: The resulting net income without the advertising adjustment would have been $191, Chapter 12 Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

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