Accounting -Exercise 4-4 Accruals and Deferrals, p. 203 For the following situations, indicate whether each involves

| January 31, 2017

Question
HOMEWORK

PART I

I. Exercise 4-4 Accruals and Deferrals, p. 203

For the following situations, indicate whether each involves a deferred expense ( DE), a deferred revenue ( DR), an accrued liability ( AL), or an accrued asset ( AA).

Example: (DE) Office supplies purchased in advance of their use

___________ 1. Wages earned by employees but not yet paid

___________ 2. Cash collected from subscriptions in advance of publishing a magazine

___________ 3. Interest earned on a customer loan for which principal and interest have not yet been collected

___________ 4. One year’s premium on life insurance policy paid in advance

___________ 5. Office building purchased for cash

___________ 6. Rent collected in advance from a tenant

___________ 7. State income taxes owed at the end of the year

___________ 8. Rent owed by a tenant but not yet collected

II. Exercise 4-19 The Effect of Adjustments on the Accounting Equation, p. 207

Determine whether recording each of the following adjustments will increase ( I), decrease ( D), or have no effect ( NE) on each of the three elements of the accounting equation.

Assets = Liabilities + Stock Equity________

Example: Wages earned during the

period but not yet paid are accrued. NE I D

1. Prepaid insurance is reduced for the portion of

the policy that has expired during the period. _____ ______ ________

2. Interest incurred during the period but not yet

paid is accrued. ______ ______ ________

3. Depreciation for the period is recorded. ______ ______ ________

4. Revenue is recorded for the earned portion of a

liability for amounts collected in advance

from customers. ______ _______ _________

5. Rent revenue is recorded for amounts owed by a

tenant but not yet received. _______ _______ __________

6. Income taxes owed but not yet paid are accrued. _______ _______ _______

III. Exercise 4-20 The Accounting Cycle, p. 207

The steps in the accounting cycle are listed in random order. Fill in the blank next to each step to indicate its order in the cycle. The first step in the cycle is filled in as an example.

Order Procedure

____ Prepare a work sheet.

____ Close the accounts.

__(1)__ Collect and analyze information from source documents.

____ Prepare financial statements.

____ Post transactions to accounts in the ledger.

____ Record and post adjustments.

____ Journalize daily transactions.

IV. Problem 4-2 Annual Adjustments, p. 209

Palmer Industries prepares annual financial statements and adjusts its accounts only at the end of the year. The following information is available for the year ended December 31, 2010:

a. Palmer purchased computer equipment two years ago for $ 15,000. The equipment has an estimated useful life of five years and an estimated salvage value of $ 250.

b. The Office Supplies account had a balance of $ 3,600 on January 1, 2010. During 2010, Palmer added $ 17,600 to the account for purchases of office supplies during the year. A count of the supplies on hand at the end of December 2010 indicates a balance of $ 1,850.

c. On August 1, 2010, Palmer created a liability account, Customer Deposits, for $ 24,000. This sum represents an amount that will be earned by Palmer over a six months period.

d. Palmer rented some officespace on November 1, 2010, at a rate of $ 2,700 per month. On that date, Palmer recorded Prepaid Rent for three months’ rent paid in advance.

e. Palmer took out a 120- day, 9%, $ 200,000 note on November 1, 2010, with interest and principal to be paid at maturity.

f. Palmer operates five days per week with an average daily payroll of $ 500. Palmer pays its employees every Thursday. December 31, 2010, is a Friday.

Required

1. For each of the preceding situations, identify and analyze the adjustment to be recorded on December 31, 2010.

2. Assume that Palmer’s accountant forgets to record the adjustments on December 31, 2010. Will net income for the year be understated or overstated? by what amount? (Ignore the effect of income taxes.)

PART II

I. Exercise 1-12 Accounting Principles and Assumptions, pp. 41-42

The following basic accounting principles and assumptions were discussed in the chapter:

Economic entity

Monetary unit

Cost principle

Going concern

Time period

Fill in each of the blanks with the accounting principle or assumption that is relevant to the situation described.

____________________ 1. Genesis Corporation is now in its 30th year of business. The founder of the company is planning to retire at the end of the year and turn the business over to his daughter. ______________________ 2. Nordic Company purchased a 20- acre parcel of property on which to build a new factory. The company recorded the property on the records at the amount of cash given to acquire it.

______________________ 3. Jim Bailey enters into an agreement to operate a new law firm in partnership with a friend. Each partner will make initial cash investment of $ 10,000. Jim opens a checking account in the name of the partnership and transfers $ 10,000 from his personal account into the new account.

______________________ 4. Multinational Corp. has a division in Japan. Prior to preparing the financial statements for the company and all of its foreign divisions, Multinational translates the financial statements of its Japanese division from yen to U. S. dollars.

______________________ 5. Camden Company has always prepared financial statements annually, with a year- end of June 30. Because the company is going to sell its stock to the public for the first time, quarterly financial reports will also be required by the SEC.

II. Exercise 1-13 Organizations and Accounting, p. 42

Match each of the organizations listed below with the statement that most adequately describes the role of the group.

Securities and Exchange Commission

International Accounting Standards Board

Financial Accounting Standards Board

American Institute of Certified Public Accountants

______________________ 1. The federal agency with ultimate authority to determine rules used for preparing financial statements for companies whose stock is sold to the public ______________________ 2. The group in the private sector with authority to set accounting standards ______________________ 3.The professional organization for certified public accountants ______________________ 4. The organization formed to develop worldwide accounting standards

III. Problem 1-10 Primary Assumptions Made in Preparing Financial Statements, p. 47

Joe Hale opened a machine repair business in leased retail space, paying the first month’s rent of $ 300 and a $ 1,000 security deposit with a check on his personal account. He took the tools, worth about $ 7,500, from his garage to the shop. He also bought some equipment to get started. The new equipment had a list price of $ 5,000, but Joe was able to purchase it on sale at Sears for only $ 4,200. He charged the new equipment on his personal Sears charge card. Joe’s first customer paid $ 400 for services rendered, so Joe opened a checking account for the company. He completed a second job, but the customer has not paid Joe the $ 2,500 for his work. At the end of the first month, Joe prepared the following balance sheet and income statement:

Joe’s Machine Repair Shop

Balance Sheet

July 31, 2010

Cash $ 400

Equipment 5,000 Equity $ 5,400

Total $ 5,400 Total $ 5,400

Joe’s Machine Repair Shop

Income Statement

For the Month Ended July 31, 2010

Sales $2,900

Rent $300

Tools 4,200 4,500

Net loss $( 1,600)

Joe believes that he should show a greater profit next month because he won’t have large expenses for items such as tools.

Required

Identify the assumptions that Joe has violated and explain how each event should have been handled. Prepare a corrected balance sheet and income statement.

IV. Decision Case 1-7 Responsibility for Financial Statements and the Role of the Auditor, p. 55

Financial statements are the means by which accountants communicate to external users. Recent financial reporting scandals have focused attention on the accounting profession and its role in the preparation of these statements and the audits performed on the statements.

Required

1. Who is responsible for the preparation of the financial statements that are included in a company’s annual report?

2. Who performs an audit of the financial statements referred to in part ( 1)?

3. Why is it important for those who are responsible for an audit of the financial statements to be independent of those who prepare the statements? Explain your answer.

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