The Adjusting Process

XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2018. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring; the controller accrued 80% of the contract revenue at December 31, 2018. McLauren sold the company in January 2019 and retired. By mid-year, it became apparent that XM would not be able to complete the project successfully and the new owner would never recoup his investment.

Requirements

1. For complex, high-tech contracts, how does a company determine the percentage of completion and the amount of revenue to accrue?

2. What action do you think was taken by XM in 2019 with regard to the revenue that had been accrued the previous year?

Question: Total Pool Services earned \(130,000 of service revenue during 2018. Of the \)130,000 earned, the business received \(105,000 in cash. The remaining amount, \)25,000, was still owed by customers as of December 31. In addition, Total Pool Services incurred \(85,000 of expenses during the year. As of December 31, \)10,000 of the expenses still needed to be paid. In addition, Total Pool Services prepaid $5,000 cash in December 2018 for expenses incurred during the next year. 1. Determine the amount of service revenue and expenses for 2018 using a cash basis accounting system. 2. Determine the amount of service revenue and expenses for 2018 using an accrual basis accounting system. 

Question: Total Pool Services earned \(130,000 of service revenue during 2018. Of the \)130,000 earned, the business received \(105,000 in cash. The remaining amount, \)25,000, was still owed by customers as of December 31. In addition, Total Pool Services incurred \(85,000 of expenses during the year. As of December 31, \)10,000 of the expenses still needed to be paid. In addition, Total Pool Services prepaid $5,000 cash in December 2018 for expenses incurred during the next year. 1. Determine the amount of service revenue and expenses for 2018 using a cash basis accounting system. 2. Determine the amount of service revenue and expenses for 2018 using an accrual basis accounting system.

Question: Match the accounting terminology to the definitions. 3. Time period concept 4. Revenue recognition principle 5. Matching principle a. Requires companies to record revenue when it satisfies each performance obligation. b. Assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods. c. Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period

Match the accounting terminology to the definitions. 3. Time period concept 4. Revenue recognition principle 5. Matching principle a. Requires companies to record revenue when it satisfies each performance obligation. b. Assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods. c. Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period

Question: Match the accounting terminology to the definitions. 3. Time period concept 4. Revenue recognition principle 5. Matching principle a. Requires companies to record revenue when it satisfies each performance obligation. b. Assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods. c. Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period

Startech Surveillance Services had the following adjustments as of the end of the year:

a. Equipment depreciation was \(1,500.

b. \)700 of advertising expense was incurred but not paid. (Use Advertising Payable.)

c. Office Supplies on hand at the end of the year totaled \(250. The beginning balance of Office Supplies was \)600.

d. \(1,200 of rent revenue was earned but not recorded or received.

e. Unearned revenue of \)3,000 had been earned.

6. For each situation, indicate which category of adjustment (deferral or accrual) is described.

7. Journalize the adjusting entry needed.

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Question: Hooten Carpentry had the following accounts and account balances after adjusting entries. Assume all accounts have normal balances. Prepare the adjusted trial balance for Hooten Carpentry as of December 31, 2018. Cash \( 4,025 Common Stock \) ? Land 5,000 Accounts Receivable 660 Utilities Expense 400 Office Supplies 120 Accounts Payable 225 Utilities Payable 210 Accumulated Depreciation—Equipment 1,000 Service Revenue 12,000 Salaries Expense 550 Unearned Revenue 300 Supplies Expense 80 Depreciation Expense—Equipment 800 Equipment 10,000 Dividends 500.

The partial worksheet for Sam’s Delivery Service follows. Complete the adjusted trial balance columns.

Iron Horse Printing Services purchased \(1,000 of printing supplies for cash, recording the transaction using the alternative treatment for deferred expenses. At the end of the year, Iron Horse had \)300 of printing supplies remaining. Record the journal entry for the purchase of printing supplies and the adjusting entry for printing supplies not used.

 Which accounting concept or principle requires companies to divide their activities into small time segments such as months, quarters, or years?

What is the difference between cash basis accounting and accrual basis accounting?

What is a fiscal year? Why might companies choose to use a fiscal year that is not a calendar year?

Which method of accounting (cash or accrual basis) is consistent with Generally Accepted Accounting Principles?

The Pink Peonies Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $3,000 for 10 months of advertising. How much advertising expense should Pink Peonies Law Firm record for the two months ending February 28 under the a. cash basis? b. accrual basis?

Under the matching principle, when are expenses recorded?

Under the revenue recognition principle, when is revenue recorded?

What are the two basic categories of adjusting entries? Provide two examples of each.

When are adjusting entries completed, and what is their purpose?

Protection Home provides house-sitting for people while they are away on vacation. Some of its customers pay immediately after the job is finished. Some customers ask that the business send them a bill. As of the end of the year, Protection Home has collected \(900 from cash-paying customers. Protection Home’s remaining customers owe the business \)1,300. How much service revenue would Protection Home have for the year under the a. cash basis? b. accrual basis?

Protection Home provides house-sitting for people while they are away on vacation. Some of its customers pay immediately after the job is finished. Some customers ask that the business send them a bill. As of the end of the year, Protection Home has collected \(900 from cash-paying customers. Protection Home’s remaining customers owe the business \)1,300. How much service revenue would Protection Home have for the year under the a. cash basis? b. accrual basis?

The Pink Peonies Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $3,000 for 10 months of advertising. How much advertising expense should Pink Peonies Law Firm record for the two months ending February 28 under the a. cash basis? b. accrual basis?

Question :What is a deferred expense? Provide an example.

Question :What is the process of allocating the cost of a plant asset over its useful life called?

Question :What is a contra account?

Question :In the recording of depreciation expense, which account is credited?

Question :What does accumulated depreciation represent?

Question :How is book value calculated, and what does it represent?

What is a deferred revenue? Provide an example.

What is an accrued expense? Provide an example.

What is an accrued revenue? Provide an example

What are the two rules to remember about adjusting entries?

When is an adjusted trial balance prepared, and what is its purpose?

If an accrued expense is not recorded at the end of the year, what is the impact on the financial statements?

What is a worksheet, and how is it used to help prepare an adjusted trial balance? 

If a payment of a deferred expense was recorded under the alternative treatment, what account would be debited at the time of payment?

If a payment of a deferred expense was recorded under the alternative treatment, what account would be debited in the adjusting entry .

Question :Seacoast Magazine sells subscriptions for $36 for 18 issues. The company collects cash in advance and then mails out the magazines to subscribers each month. Apply the revenue recognition principle to determine a. when Seacoast Magazine should record revenue for this situation. b. the amount of revenue Seacoast Magazine should record for eight issues.

Question :Seacoast Magazine sells subscriptions for $36 for 18 issues. The company collects cash in advance and then mails out the magazines to subscribers each month. Apply the revenue recognition principle to determine a. when Seacoast Magazine should record revenue for this situation. b. the amount of revenue Seacoast Magazine should record for eight issues.

Question :Suppose on January 1, Andrew’s Tavern prepaid rent of $16,800 for the full year. At November 30, how much rent expense should be recorded for the period January 1 through November 30?

Question :A select list of transactions for Anuradha’s Goals follows:

April 1 Paid six months of rent, \(4,800.

10 Received \)1,200 from customer for six-month service contract that

began April 1.

15 Purchased a computer for \(1,000.

18 Purchased \)300 of office supplies on account.

30 Work performed but not yet billed to customer, \(500.

30 Employees earned \)600 in salaries that will be paid May 2

For each transaction, identify what type of adjusting entry would be needed. Select from the following four types of adjusting entries: deferred expense, deferred revenue, accrued expense, and accrued revenue.

 On September 1, Big Fan of Toledo prepaid six months of rent, $3,300. Requirements 1. Record the journal entry for the September 1 payment. 2. Record the adjusting entry required at September 30. 3. Using T-accounts, post the journal entry and adjusting entry to the accounts involved and show their balances at September 30. (Ignore the Cash account.) 

On September 1, Big Fan of Toledo prepaid six months of rent, $3,300. Requirements 1. Record the journal entry for the September 1 payment. 2. Record the adjusting entry required at September 30. 3. Using T-accounts, post the journal entry and adjusting entry to the accounts involved and show their balances at September 30. (Ignore the Cash account.) 

On September 1, Big Fan of Toledo prepaid six months of rent, $3,300. Requirements 1. Record the journal entry for the September 1 payment. 2. Record the adjusting entry required at September 30. 3. Using T-accounts, post the journal entry and adjusting entry to the accounts involved and show their balances at September 30. (Ignore the Cash account.)