Page 140 - Accounting Principles (A Business Perspective)

3. Adjustments for financial reporting

Prepaid Rent 1,500

You know that the gross amount of rent paid was USD 4,500, which was to cover a one-year period. Determine:
a. The opening date of the year to which the USD 4,500 of rent applies.
b. The entry that was made on the date the rent was paid.
Exercise G Supplies were purchased for cash on 2010 May 2, for USD 8,000. Show how this purchase would be
recorded. Then show the adjusting entry that would be necessary, assuming that USD 2,500 of the supplies
remained at the end of the year.

Exercise H Assume that a company acquired a building on 2010 January 1, at a cost of USD 1,000,000. The
building has an estimated useful life of 40 years and an estimated residual value of USD 200,000. What adjusting
entry is needed on 2010 December 31, to record the depreciation for the entire year 2010?
Exercise I On 2010 September 1, Professional Golfer Journal, Inc., received a total of USD 120,000 as payment
in advance for one-year subscriptions to a monthly magazine. A liability account was credited to record this cash
receipt. By the end of the year, one-third of the magazines paid for in advance had been delivered. Give the entries
to record the receipt of the subscription fees and to adjust the accounts at December 31, assuming annual financial
statements are prepared at year-end.
Exercise J On 2010 April 15, Rialto Theater sold USD 90,000 in tickets for the summer musicals to be

performed (one per month) during June, July, and August. On 2010 July 15, Rialto Theater discovered that the
group that was to perform the July and August musicals could not do so. It was too late to find another group
qualified to perform the musicals. A decision was made to refund the remaining unearned ticket revenue to its
ticket holders, and this was done on July 20. Show the appropriate journal entries to be made on April 15, June 30,
and July 20. Rialto has a June 30th year-end.
Exercise K Guilty & Innocent, a law firm, performed legal services in late December 2010 for clients. The USD
30,000 of services would be billed to the clients in January 2011. Give the adjusting entry that is necessary on 2010

December 31, if financial statements are prepared at the end of each month.
Exercise L A firm borrowed USD 30,000 on November 1. By December 31, USD 300 of interest had been
incurred. Prepare the adjusting entry required on December 31.
Exercise M Convenient Mailing Services, Inc., incurs salaries at the rate of USD 3,000 per day. The last payday
in January is Friday, January 27. Salaries for Monday and Tuesday of the next week have not been recorded or paid
as of January 31. Financial statements are prepared monthly. Give the necessary adjusting entry on January 31.
Exercise N State the effect that each of the following independent situations would have on the amount of
annual net income reported for 2010 and 2011.
a, No adjustment was made for accrued salaries of USD 8,000 as of 2010 December 31.

b. The collection of USD 5,000 for services yet unperformed as of 2010 December 31, was credited to a revenue
account and not adjusted. The services are performed in 2011.
Exercise O In the following table, indicate the effects of failing to recognize each of the indicated adjustments
by writing “O” for overstated and “U” for understated.
Effect on Balance Sheet Items
Effect on Stockholders'
Failure to Recognize Net Income Assets Liabilities Equity
1. Depreciation on a building

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