Chapter 4

Classify the following items as (a) deferred expense (prepaid expense), (b) deferred revenue (unearned revenue), (c) accrued expense (accrued liability), or (d) accrued revenue (accrued asset). 1\. Salary owed but not yet paid. 2\. Supplies on hand. 3\. Fees received but not yet earned. 4\. Fees earned but not yet received. 5\. Taxes owed but payable in the following period. 6\. Utilities owed but not yet paid. 7\. A two-year premium paid on a fire insurance policy. 8\. Subscriptions received in advance by a magazine publisher.

The following accounts were taken from the unadjusted trial balance of Dobro Co., a congressional lobbying firm. Indicate whether or not each account would normally require an adjusting entry. If the account normally requires an adjusting entry, use the following notation to indicate the type of adjustment: AE-Accrued Expense AR-Accrued Revenue DR-Deferred Revenue DE-Deferred Expense To illustrate, the answers for the first two accounts are shown below.

The balance in the supplies account, before adjustment at the end of the year, is \(\$ 1,175\). Journalize the adjusting entry required if the amount of supplies on hand at the end of the year is \(\$ 374\).

At December 31 , the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for December and (b) the balance sheet as of December 31? Also indicate whether the items in error will be overstated or understated.

The balance in the prepaid insurance account, before adjustment at the end of the year, is \(\$ 2,475\). Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (a) the amount of insurance expired during the year is \(\$ 1,215\); (b) the amount of unexpired insurance applicable to future periods is \(\$ 1,260\).

The prepaid insurance account had a balance of \(\$ 5,600\) at the beginning of the year. The account was debited for \(\$ 1,800\) for premiums on policies purchased during the year. Journalize the adjusting entry required at the end of the year for each of the following situations: (a) the amount of unexpired insurance applicable to future periods is \(\$ 3,680\); (b) the amount of insurance expired during the year is \(\$ 3,720\).

The balance in the unearned fees account, before adjustment at the end of the year, is \(\$ 21,880\). Journalize the adjusting entry required if the amount of unearned fees at the end of the year is \(\$ 12,310\).

At the end of July, the first month of the business year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for July and (b) the balance sheet as of July 31. Also indicate whether the items in error will be overstated or understated.

Xenon Realty Co. pays weekly salaries of \(\$ 15,600\) on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends (a) on Wednesday, (b) on Thursday.

Accrued salaries of \(\$ 1,590\) owed to employees for December 30 and 31 are not considered in preparing the financial statements for the year ended December 31 . Indicate which items will be erroneously stated, because of the error, on (a) the income statement for the year and (b) the balance sheet as of December 31. Also indicate whether the items in error will be overstated or understated.

Titanium Financial Services was organized on April 1 of the current year. On April 2, Titanium prepaid \(\$ 1,260\) to the city for taxes (license fees) for the next 12 months and debited the prepaid taxes account. Titanium is also required to pay in January an annual tax (on property) for the previous calendar year. The estimated amount of the property tax for the current year (April 1 to December 31 ) is \(\$ 8,750\). (a) Journalize the two adjusting entries required to bring the accounts affected by the two taxes up to date as of December 31 , the end of the current year. (b) What is the amount of tax expense for the current year?

For a recent period, Circuit City Stores reported accrued expenses and other current liabilities of \(\$ 128,776,000\). For the same period, Circuit City reported earnings of \(\$ 67,040,000\) before income taxes. If accrued expenses and other current liabilities had not been recorded, what would have been the earnings (loss) before income taxes?

The balance sheet for The Campbell Soup Co. as of July 31,2002 , includes accrued liabilities of \(\$ 503,000,000\). The income before taxes for The Campbell Soup Co. for the year ended July 28,2002 , was \(\$ 798,000,000\). (a) If the accruals had not been recorded at July 28,2002 , by how much would income before taxes have been misstated for the fiscal year ended July 28,2002 ? (b) What is the percentage of the misstatement in (a) to the reported income of \(\$ 798,000,000\) ?

The accountant for Glacier Medical Co., a medical services consulting firm, mistakenly omitted adjusting entries for (a) unearned revenue earned during the year \((\$ 6,900)\) and (b) accrued wages \((\$ 3,740)\). Indicate the effect of each error, considered individually, on the income statement for the current year ended December 31 . Also indicate the effect of each error on the December 31 balance sheet. Set up a table similar to the following, and record your answers by inserting the dollar amount in the appropriate spaces. Insert a zero if the error does not affect the item. 1\. Revenue for the year would be 2\. Expenses for the year would be 3\. Net income for the year would be

At the end of the current year, \(\$ 11,500\) of fees have been earned but have not been billed to clients. a. Journalize the adjusting entry to record the accrued fees. b. If the cash basis rather than the accrual basis had been used, would an adjusting entry have been necessary? Explain.

The balance in the unearned fees account, before adjustment at the end of the year, is \(\$ 27,600\). Of these fees, \(\$ 8,100\) have been earned. In addition, \(\$ 6,450\) of fees have been earned but have not been billed. Journalize the adjusting entries (a) to adjust the unearned fees account and (b) to record the accrued fees.

The adjusting entry for accrued fees was omitted at December 31 , the end of the current year. Indicate which items will be in error, because of the omission, on (a) the income statement for the current year and (b) the balance sheet as of December 31 . Also indicate whether the items in error will be overstated or understated.

The estimated amount of depreciation on equipment for the current year is \(\$ 5,200\). Journalize the adjusting entry to record the depreciation.

The balance in the equipment account is \(\$ 318,500\), and the balance in the accumulated depreciation-equipment account is \(\$ 113,900\). a. What is the book value of the equipment? b. Does the balance in the accumulated depreciation account mean that the equipment's loss of value is \(\$ 113,900\) ? Explain.

Microsoft Corporation reported Property, Plant, and Equipment of \(\$ 5,891\) million and Accumulated Depreciation of \(\$ 3,623\) million at June 30,2002 . a. What was the book value of the fixed assets at June 30,2002 ? b. Would the book value of Microsoft Corporation's fixed assets normally approximate their fair market values?

On December 31 , a business estimates depreciation on equipment used during the first year of operations to be \(\$ 7,500\). (a) Journalize the adjusting entry required as of December 31. (b) If the adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income statement for the year and (2) the balance sheet as of December 31 ?

The following income statement data (in thousands) for Dell Computer Corporation and Gateway Inc. were taken from their recent annual reports: \begin{tabular}{lrr} & Dell & Gateway \\ \hline Net sales & \(\$ 35,404,000\) & \(\$ 4,171,325\) \\ Cost of goods sold (expense) & \((29,055,000)\) & \((3,605,120)\) \\ Operating expenses & \((3,505,000)\) & \((1,077,447)\) \\ Operating income (loss) & \(\$ 2,844,000\) & \(\$(511,242)\) \\ \hline \hline \end{tabular} a. Prepare a vertical analysis of the income statement for Dell. b. Prepare a vertical analysis of the income statement for Gateway. c. Based upon (a) and (b), how does Dell compare to Gateway?