Page 143 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

the reported net income amounts, the result should be the correct net income amounts. The answer format should
appear as follows:
Explanation of corrections 2010 2011
Reported net income $200,000 $222,000
To correct error in accounting for:
Fire insurance policy premium:
Correct expense in 2010 -1,000
Correct expense in 2011 -1,200
Problem E Jupiter Publishing Company began operations on 2010 December 1. The company’s bookkeeper

intended to use the cash basis of accounting. Consequently, the bookkeeper recorded all cash receipts and
disbursements for items relating to operations in revenue and expense accounts. No adjusting entries were made
prior to preparing the financial statements for December.
Dec. 1 Issued capital stock for USD 300,000 cash.
3 Received USD 144,000 for magazine subscriptions to run for two years from this date. The magazine is
published monthly on the 23rd.
4 Paid for advertising to be run in a national periodical for six months (starting this month). The cost was

USD 36,000.
7 Purchased for cash an insurance policy to cover a two-year period beginning December 15, USD 24,000.
12 Paid the annual rent on the building, USD 36,000, effective through 2011 November 30.
15 Received USD 216,000 cash for two-year subscriptions starting with the December issue.
15 Salaries for the period December 1–15 amounted to USD 48,000. Beginning as of this date, salaries will be
paid on the 5th and 20th of each month for the preceding two-week period.
20 Salaries for the period December 1–15 were paid.
23 Supplies purchased for cash, USD 21,600. (Only USD 1,800 of these were subsequently used in 2010.)
27 Printing costs applicable equally to the next six issues beginning with the December issue were paid in

cash, USD 144,000.
31 Cash sales of the December issue, USD 84,000.
31 Unpaid salaries for the period December 16–31 amounted to USD 22,000.
31 Sales on account of December issue, USD 14,000.
a. Prepare journal entries for the transactions as the bookkeeper prepared them.
b. Prepare journal entries as they would have been prepared under the accrual basis. Where the entry is the
same as under the cash basis, merely indicate “same”. Where possible, record the original transaction so that no

adjusting entry would be necessary at the end of the month. Ignore explanations.
Alternate problems
Alternate problem A The trial balance of Caribbean Vacation Tours, Inc., at December 31 of the current year
includes, among other items, the following account balances:

Debits Credits
Prepaid Insurance ........................................ $24,000
Prepaid Rent ................................................ 24,000
Buildings...................................................... 188,000
Accumulated Depreciation—Buildings............. $31,600
Salaries Expense .......................................... 200,000

Accounting Principles: A Business Perspective 144 A Global Text