Chapter 3 Exercises

E3.1  
Explain the time period assumption.
(LO 1) Chloe Davis has prepared the following list of statements about the time period assumption.
 1.Adjusting entries would not be necessary if a company's life were not divided into artificial time
periods.
 2.The IRS requires companies to file annual tax returns.
 3.Accountants divide the economic life of a business into artificial time periods, but each transaction
affects only one of these periods.
 4.Accounting time periods are generally a month, a quarter, or a year.
 5.A time period lasting one year is called an interim period.
 6.All fiscal years are calendar years, but not all calendar years are fiscal years.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

E3.2    
Distinguish between cash and accrual basis of accounting.
(LO 1) On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of
accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities
would have to be booked, and the federal deficit would increase substantially.
Instructions
(a)  What is the difference between accrual-basis accounting and cash-basis accounting?
(b)  Why would politicians prefer the cash basis over the accrual basis?
(c)  Write a letter to your senator explaining why the federal government should adopt the accrual basis of
accounting.

E3.3  
Compute cash and accrual accounting income.
(LO 1) Carillo Industries collected $108,000 from customers in 2020. Of the amount collected, $25,000 was for
services performed in 2019. In addition, Carillo performed services worth $36,000 in 2020, which will not be
collected until 2021.
Carillo Industries also paid $72,000 for expenses in 2020. Of the amount paid, $30,000 was for expenses
incurred on account in 2019. In addition, Carillo incurred $42,000 of expenses in 2020, which will not be paid
until 2021.
Instructions
(a)  Compute 2020 cash-basis net income.
(b)  Compute 2020 accrual-basis net income.

E3.4  
Identify the type of adjusting entry needed.
(LO 1, 2, 3) Luong Corporation encounters the following situations:
 1.Luong collects $1,300 from a customer in 2020 for services to be performed in 2021.
 2.Luong incurs utility expense which is not yet paid in cash or recorded.
 3.Luong's employees worked 3 days in 2020 but will not be paid until 2021.
 4.Luong performs services for customers but has not yet received cash or recorded the transaction.
 5.Luong paid $2,800 rent on December 1 for the 4 months starting December 1.
 6.Luong received cash for future services and recorded a liability until the service was performed.
 7.Luong performed consulting services for a client in December 2020. On December 31, it had not
billed the client for services provided of $1,200.
 8.Luong paid cash for an expense and recorded an asset until the item was used up.
 9.Luong purchased $900 of supplies in 2020; at year-end, $400 of supplies remain unused.
 10.Luong purchased equipment on January 1, 2020; the equipment will be used for 5 years.
 11.Luong borrowed $12,000 on October 1, 2020, signing an 8% one-year note payable.
Instructions
Identify what type of adjusting entry (prepaid expense, unearned revenue, accrued expense, or accrued revenue)
is needed in each situation at December 31, 2020.

E3.5  
Prepare adjusting entries from selected data.
(LO 2, 3) Devin Wolf Company has the following balances in selected accounts on December 31, 2020.
Accounts Receivable $    -0-  
Accumulated Depreciation— -0-  
Equipment
Equipment 7,000
Interest Payable -0-  
Notes Payable 10,000
Prepaid Insurance 2,100
Salaries and Wages Payable -0-  
Supplies 2,450
Unearned Service Revenue 30,000
All the accounts have normal balances. The information below has been gathered at December 31, 2020.
 1.Devin Wolf Company borrowed $10,000 by signing a 9%, one-year note on September 1, 2020.
 2.A count of supplies on December 31, 2020, indicates that supplies of $900 are on hand.
 3.Depreciation on the equipment for 2020 is $1,000.
 4.Devin Wolf Company paid $2,100 for 12 months of insurance coverage on June 1, 2020.
 5.On December 1, 2020, Devin Wolf collected $32,000 for consulting services to be performed from
December 1, 2020, through March 31, 2021.
 6.Devin Wolf performed consulting services for a client in December 2020. The client will be billed
$4,200.
 7.Devin Wolf Company pays its employees total salaries of $9,000 every Monday for the preceding 5-
day week (Monday through Friday). On Monday, December 29, employees were paid for the week ending
December 26. All employees worked the last 3 days of 2020.
Instructions
Prepare adjusting entries for the seven items described above.

E3.6  
Identify types of adjustments and account relationships.
(LO 2, 3, 4) Mendoza Company accumulates the following adjustment data at December 31.
 1.Services performed but unbilled total $3,000.
 2.Supplies of $300 have been used.
 3.Utility expenses of $552 are unpaid.
 4.Services performed of $260 collected in advance.
 5.Salaries of $800 are unpaid.
 6.Prepaid insurance totaling $350 has expired.
Instructions
For each of the above items indicate the following.
(a)  The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).
(b)  The status of accounts before adjustment (overstatement or understatement).

E3.7  
Prepare adjusting entries from selected account data.
(LO 2, 3) The ledger of Passehl Rental Agency on March 31 of the current year includes the selected accounts,
shown below, before adjusting entries have been prepared.
  Debit Credit
Prepaid Insurance $    3,600  
Supplies 2,800  
Equipment 25,000  
Accumulated Depreciation—   $    8,400
Equipment
Notes Payable   20,000
Unearned Rent Revenue   10,200
Rent Revenue   60,000
Interest Expense -0-      
Salaries and Wages Expense 14,000  
An analysis of the accounts shows the following.
 1.The equipment depreciates $400 per month.
 2.One-third of the unearned rent revenue was earned during the quarter.
 3.Interest of $500 is accrued on the notes payable.
 4.Supplies on hand total $750.
 5.Insurance expires at the rate of $300 per month.
Instructions
Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional
accounts are Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.

E3.8  
Prepare adjusting entries.
(LO 2, 3) Lorena Manzone, D.D.S., opened a dental practice on January 1, 2020. During the first month of
operations, the following transactions occurred.
 1.Performed services for patients who had dental plan insurance. At January 31, $785 of such services
were performed but not yet recorded.
 2.Utility expenses incurred but not paid prior to January 31 totaled $650.
 3.Purchased dental equipment on January 1 for $80,000, paying $30,000 in cash and signing a $50,000,
3-year note payable. The equipment depreciates $400 per month. Interest is $500 per month.
 4.Purchased a one-year malpractice insurance policy on January 1 for $24,000.
 5.Purchased $1,600 of dental supplies. On January 31, determined that $400 of supplies were on hand.
Instructions
Prepare the adjusting entries on January 31. Account titles are Accumulated Depreciation—Equipment,
Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest
Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.
E3.9  
Prepare adjusting entries.
(LO 2, 3) The trial balance for Pioneer Advertising is shown in Illustration 3.3. Instead of the adjusting entries
shown in the textbook at October 31, assume the following adjustment data.
 1.Supplies on hand at October 31 total $500.
 2.Expired insurance for the month is $120.
 3.Depreciation for the month is $50.
 4.Services related to unearned service revenue in October worth $600 were performed.
 5.Services performed but not recorded at October 31 are $360.
 6.Interest accrued at October 31 is $95.
 7.Accrued salaries at October 31 are $1,625.
Instructions
Prepare the adjusting entries for the items above.

E3.10     
Prepare correct income statement.
(LO 1, 2, 3, 4) The income statement of Lundeen Co. for the month of July shows net income of $1,400 based
on Service Revenue $5,500, Salaries and Wages Expense $2,300, Supplies Expense $1,200, and Utilities
Expense $600. In reviewing the statement, you discover the following.
 1.Insurance expired during July of $500 was omitted.
 2.Supplies expense includes $250 of supplies that are still on hand at July 31.
 3.Depreciation on equipment of $150 was omitted.
 4.Accrued but unpaid salaries and wages at July 31 of $400 were not included.
 5.Services performed but unrecorded totaled $650.
Instructions
Prepare a correct income statement for July 2020.

E3.11   
Analyze adjusted data.
(LO 1, 2, 3, 4) A partial adjusted trial balance of Frangesch Company at January 31, 2020, shows the following.
Frangesch Company
Adjusted Trial Balance
January 31, 2020
  Debit Credit
Supplies $    850  
Prepaid Insurance 2,400  
Salaries and Wages Payable   $    920
Unearned Service Revenue   750
Supplies Expense 950  
Insurance Expense 400  
Salaries and Wages Expense 2,900  
Service Revenue   2,000
Instructions
Answer the following questions, assuming the year begins January 1.
(a)  If the amount in Supplies Expense is the January 31 adjusting entry and $1,000 of supplies was purchased
in January, what was the balance in Supplies on January 1?
(b)  If the amount in Insurance Expense is the January 31 adjusting entry and the original insurance premium
was for one year, what was the total premium and when was the policy purchased?
(c)  If $3,800 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December
31, 2019?

E3.12  
Journalize basic transactions and adjusting entries.
(LO 2, 3) Selected accounts of Shannon Company are shown as follows.
Supplies Expense          
7/31 900              
Supplies   Salaries and Wages Payable
7/1 Bal. 1,100 7/31 900       7/31 1,200
7/10 650              
Accounts Receivable   Unearned Service Revenue
7/31 500       7/31 1,150 7/1 Bal. 1,500
              7/20 1,000
Salaries and Wages Expense   Service Revenue
7/15 1,200           7/14 2,200
7/31 1,200           7/31 1,150
              7/31 500
Instructions
After analyzing the accounts, journalize (a) the July transactions and (b) the adjusting entries that were made on
July 31.
(Hint: July transactions were for cash.)

E3.13  
Prepare adjusting entries from selected account data.
(LO 2, 3) The ledger of Armour Lake Lumber Supply on July 31, 2020, includes the selected accounts below
before adjusting entries have been prepared.
  Debit Credit
Notes Payable   $  20,000
Supplies $  24,000  
Prepaid Rent 3,600  
Buildings 250,000  
Accumulated Depreciation—Buildings   140,000
Unearned Service Revenue   11,500
An analysis of the company's accounts shows the following.
 1.The notes payable pays interest at a rate of 6% per year.
 2.Supplies on hand at the end of the month totaled $18,600.
 3.The balance in Prepaid Rent represents 4 months of rent costs.
 4.Employees were owed $3,100 related to unpaid salaries and wages.
 5.Depreciation on buildings is $6,000 per year.
 6.During the month, the company satisfied obligations worth $4,700 related to the Unearned Services
Revenue.
 7.Unpaid maintenance and repairs costs were $2,300.
Instructions
Prepare the adjusting entries at July 31 assuming that adjusting entries are made monthly. Use additional
accounts as needed.

E3.14  
Determine effect of adjusting entries.
(LO 2, 3) On December 31, 2020, Waters Company prepared an income statement and balance sheet, but failed
to take into account three adjusting entries. The balance sheet showed total assets $150,000, total liabilities
$70,000, and owner's equity $80,000. The incorrect income statement showed net income of $70,000.
The data for the three adjusting entries were:
 1.Salaries and wages amounting to $10,000 for the last 2 days in December were not paid and not
recorded. The next payroll will be in January.
 2.Rent payments of $8,000 was received for two months in advance on December 1. The entire amount
was credited to Unearned Rent Revenue when paid.
 3.Depreciation expense for 2020 is $9,000.
Instructions
Complete the following table to correct the financial statement amounts shown (indicate deductions with
parentheses).
Net Total
Item Income Total Assets Liabilities Owner's Equity
Incorrect balances $70,000 $150,000 $70,000 $80,000
Effects of:        
Salaries and Wages                      _                      
Rent Revenue                                            
Depreciation                                            
Correct balances                                            

E3.15  
Prepare and post transaction and adjusting entries for prepayments.
(LO 2) Action Quest Games Co. adjusts its accounts annually. The following information is available for the
year ended December 31, 2020.
 1.Purchased a 1-year insurance policy on June 1 for $1,800 cash.
 2.Paid $6,500 on August 31 for 5 months' rent in advance.
 3.On September 4, received $3,600 cash in advance from a company to sponsor a game each month for
a total of 9 months for the most improved students at a local school.
 4.Signed a contract for cleaning services starting December 1 for $1,000 per month. Paid for the first 2
months on November 30. (Hint: Use the account Prepaid Cleaning to record prepayments.)
 5.On December 5, received $1,500 in advance from a gaming club. Determined that on December 31,
$475 of these games had not yet been played.
Instructions
(a)  For each of the above transactions, prepare the journal entry to record the initial transaction.
(b)  For each of the above transactions, prepare the adjusting journal entry that is required on December 31,
(Hint: Use the account Service Revenue for item 3 and Repairs and Maintenance Expense for item 4.)
(c)  Post the journal entries in parts (a) and (b) to T-accounts and determine the final balance in each account
balance. (Note: Posting to the Cash account is not required.)

E3.16  
Prepare adjusting and subsequent entries for accruals.
(LO 3) Greenock Company has the following information available for accruals for the year ended December
31, 2020. The company adjusts its accounts annually.
 1.The December utility bill for $425 was unrecorded on December 31. Greenock paid the bill on January
11.
 2.Greenock is open 7 days a week and employees are paid a total of $3,500 every Monday for a 7-day
(Monday-Sunday) workweek. December 31 is a Thursday, so employees will have worked 4 days (Monday,
December 28-Thursday, December 31) that they have not been paid for by year-end. Employees will be paid
next on January 4.
 3.Greenock signed a $48,000, 5% bank loan on November 1, 2019, due in 2 years. Interest is payable on
the first day of each following month.
 4.Greenock receives a fee from Pizza Shop next door for all pizzas sold to customers using Greenock's
facility. The amount owed for December is $300, which Pizza Shop will pay on January 4. (Hint: Use the
Service Revenue account.)
 5.Greenock rented some of its unused warehouse space to a client for $6,000 a month, payable the first
day of the following month. It received the rent for the month of December on January 2.
Instructions
(a)  For each situation, prepare the adjusting entry required at December 31. (Round all calculations to the
nearest dollar.)
(b)  For each situation, prepare the journal entry to record the subsequent cash transaction in 2021.

E3.17  
Prepare adjusting entries from analysis of trial balances.
(LO 2, 3, 4) The trial balances before and after adjustment for Renfro Company at the end of its fiscal year are
presented below.
Renfro Company
Trial Balance
August 31, 2020
  Before Adjustment After Adjustment
  Dr. Cr. Dr. Cr.
Cash $10,400   $10,400  
Accounts Receivable 8,800   11,200  
Supplies 2,300   700  
Prepaid Insurance 4,000   2,500  
Equipment 14,000   14,000  
Accumulated Depreciation—   $ 3,600   $ 4,500
Equipment
Accounts Payable   5,800   5,800
 Renfro Company
Trial Balance
August 31, 2020
  Before Adjustment After Adjustment
  Dr. Cr. Dr. Cr.
Salaries and Wages Payable   -0-       1,100
Unearned Rent Revenue   1,500   400
Owner's Capital   15,600   15,600
Service Revenue   34,000   36,400
Rent Revenue   11,000   12,100
Salaries and Wages Expense 17,000   18,100  
Supplies Expense -0-     1,600  
Rent Expense 15,000   15,000  
Insurance Expense -0-     1,500  
Depreciation Expense -0-     900  
  $71,500 $71,500 $75,900 $75,900
Instructions
Prepare the adjusting entries that were made.

E3.18    
Prepare financial statements from adjusted trial balance.
(LO 4) The adjusted trial balance for Renfro Company is given in E3.17.
Instructions
Prepare the income and owner's equity statements for the year and the balance sheet at August 31.

E3.19  
Record transactions on accrual basis; convert revenue to cash receipts.
(LO 2, 3) The following data are taken from the comparative balance sheets of Bundies Billiards Club, which
prepares its financial statements using the accrual basis of accounting.
December 31 2020 2019
Accounts receivable from $16,00 $  8,000
members 0
Unearned service revenue   17,00   25,000
0
Members are billed based upon their use of the club's facilities. Unearned service revenues arise from the sale of
gift certificates, which members can apply to their future use of club facilities. The 2020 income statement for
the club showed that service revenue of $161,000 was earned during the year.
Instructions
(Hint: You will probably find it helpful to use T-accounts to analyze these data.)
(a)  Prepare journal entries for each of the following events that took place during 2020.
 1.Accounts receivable from 2019 were all collected.
 2.Gift certificates outstanding at the end of 2019 were all redeemed.
 3.An additional $38,000 worth of gift certificates were sold during 2020. A portion of these was used by
the recipients during the year; the remainder was still outstanding at the end of 2020.
 4.Services performed for members for 2020 were billed to members.
 5.Accounts receivable for 2020 (i.e., those billed in item [4] above) were partially collected.
(b)  Determine the amount of cash received by the club, with respect to member services, during 2020.

E3.20   
Journalize adjusting entries.
(LO 5) Bob Zeller Company has the following balances in selected accounts on December 31, 2020.
Service Revenue $40,000
Insurance 2,400
Expense
Supplies Expense 2,450
All the accounts have normal balances. Bob Zeller Company debits prepayments to expense accounts when
paid, and credits unearned revenues to revenue accounts when received. The following information below has
been gathered at December 31, 2020.
 1.Bob Zeller Company paid $2,400 for 12 months of insurance coverage on June 1, 2020.
 2.On December 1, 2020, Bob Zeller Company collected $40,000 for consulting services to be performed
from December 1, 2020, through March 31, 2021.
 3.A count of supplies on December 31, 2020, indicates that supplies of $600 are on hand.
Instructions
Prepare the adjusting entries needed at December 31, 2020.

E3.21   
Journalize transactions and adjusting entries.
(LO 5) At Sekon Company, prepayments are debited to expense when paid, and unearned revenues are credited
to revenue when cash is received. During January of the current year, the following transactions occurred.
Jan. Paid $1,920 for fire insurance protection for the year.
2
10 Paid $1,700 for supplies.
15 Received $6,100 for services to be performed in the future.
On January 31, it is determined that $2,100 of the services were performed and that there are $650 of supplies
on hand.
Instructions
(a)  Journalize and post the January transactions. (Use T-accounts.)
(b) Journalize and post the adjusting entries at January 31.
(c)  Determine the ending balance in each of the accounts.

E3.22   
Identify accounting assumptions and principles.
(LO 6) Presented below are the assumptions and principles discussed in this chapter.
 1.Full disclosure principle.
 2.Going concern assumption.
 3.Monetary unit assumption.
 4.Time period assumption.
 5.Historical cost principle.
 6.Economic entity assumption.
Instructions
Identify by number the accounting assumption or principle that is described below. Do not use a number more
than once.
(a)  Is the rationale for why plant assets are not reported at liquidation value. (Note: Do not use the historical
cost principle.)
(b) Indicates that personal and business record-keeping should be separately maintained.
(c)  Assumes that the monetary unit is the “measuring stick” used to report on financial performance.
(d)  Separates financial information into time periods for reporting purposes.
(e)  Measurement basis used when a reliable estimate of fair value is not available.
(f)  Dictates that companies should disclose all circumstances and events that make a difference to financial
statement users.

E3.23   
Identify the assumption or principle that has been violated.
(LO 6) Weber Co. had three major business transactions during 2020.
 (a)Reported at its fair value of $260,000 merchandise inventory with a cost of $208,000.
 (b)The president of Weber Co., Austin Weber, purchased a truck for personal use and charged it to his
expense account.
 (c)Weber Co. wanted to make its 2020 income look better, so it added 2 more weeks to the year (a 54-
week year). Previous years were 52 weeks.
Instructions
In each situation, identify the assumption or principle that has been violated, if any, and discuss what the
company should have done.

E3.24   
Identity financial accounting concepts and principles.
(LO 6) The following characteristics, assumptions, principles, or constraint guide the FASB when it creates
accounting standards.
 Relevance
 Faithful representation
 Comparability
 Consistency
 Monetary unit assumption
 Economic entity assumption
 Expense recognition principle
 Time period assumption
 Going concern assumption
 Historical cost principle
 Full disclosure principle
 Materiality
Match each item above with a description below.
 1.________ Ability to easily evaluate one company's results relative to another's.
 2.________ Requirement that a company will continue to operate for the foreseeable future.
 3.________ The judgment concerning whether an item's size is large enough to matter to decision-
makers.
 4.________ The reporting of all information that would make a difference to financial statement users.
 5.________ The practice of preparing financial statements at regular intervals.
 6.________ The quality of information that indicates the information makes a difference in a decision.
 7.________ A belief that items should be reported on the balance sheet at the price that was paid to
acquire them.
 8.________ A company's use of the same accounting principles and methods from year to year.
 9.________ Tracing accounting events to particular companies.
 10.________ The desire to minimize bias in financial statements.
 11.________ Reporting only those things that can be measured in monetary units.
 12.________ Dictates that efforts (expenses) be recognized in the period in which a company generates
results (revenues).

E3.25     
Comment on the objective and qualitative characteristics of accounting information.
(LO 6) Speyeware International Inc., headquartered in Vancouver, Canada, specializes in Internet safety and
computer security products for both the home and commercial markets. In a recent balance sheet, it reported a
deficit of US$5,678,288. It has reported only net losses since its inception. In spite of these losses, Speyeware's
shares of stock have traded anywhere from a high of $3.70 to a low of $0.32 on the Canadian Venture
Exchange.
Speyeware's financial statements have historically been prepared in Canadian dollars. Recently, the company
adopted the U.S. dollar as its reporting currency.
Instructions
(a)  What is the objective of financial reporting? How does this objective meet or not meet Speyeware's
investors' needs?
(b)  Why would investors want to buy Speyeware's shares if the company has consistently reported losses over
the last few years? Include in your answer an assessment of the relevance of the information reported on
Speyeware's financial statements.
(c)  Comment on how the change in reporting information from Canadian dollars to U.S. dollars likely affected
the readers of Speyeware's financial statements. Include in your answer an assessment of the comparability of
the information.

E3.26     
Comment on the objective and qualitative characteristics of financial reporting.
(LO 6) A friend of yours, Mindy Gare, recently completed an undergraduate degree in science and has just
started working with a biotechnology company. Mindy tells you that the owners of the business are trying to
secure new sources of financing which are needed in order for the company to proceed with development of a
new healthcare product. Mindy said that her boss told her that the company must put together a report to present
to potential investors.
Mindy thought that the company should include in this package the detailed scientific findings related to the
Phase I clinical trials for this product. She said, “I know that the biotech industry sometimes has only a 10%
success rate with new products, but if we report all the scientific findings, everyone will see what a sure success
this is going to be! The president was talking about the importance of following some set of accounting
principles. Why do we need to look at some accounting rules? What they need to realize is that we have
scientific results that are quite encouraging, some of the most talented employees around, and the start of some
really great customer relationships. We haven't made any sales yet, but we will. We just need the funds to get
through all the clinical testing and get government approval for our product. Then these investors will be quite
happy that they bought in to our company early!”
Instructions
(a)  What is accounting information?
(b)  Comment on how Mindy's suggestions for what should be reported to prospective investors conforms to the
qualitative characteristics of accounting information. Do you think that the things that Mindy wants to include
in the information for investors will conform to financial reporting guidelines?
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