Accounting 215 – Quiz Section #6 Autumn 2013 1 A Little Review: Revenue recognition – We record revenue in the period in which it is earned, which may or may not be the period in which we receive cash. Expense recognition – We record expenses in the same period we recognize the revenues they helped generate. In other words, we match the expenses with the revenues they helped generate (this is called the “matching principle”). Three Different Types of Journal Entries: External Transactions – Journal entries that record explicit transactions with external parties Adjusting Journal Entries – Journal entries that record events that have occurred but have not yet been recorded - Generally occur at the end of each period - Do not involve cash - Involve one temporary & one permanent account - Attempt to better match expenses to revenues in the proper time period Closing Entries – End-of-period journal entries that close out all temporary accounts into retained earnings Recording an Adjusting Entry: (1) Was the revenue earned or the expense incurred? (2) Was cash received/paid in the past or will it be received/paid in the future? (3) Calculate the amount (4) Verify that: Debits = Credits and Assets = Liabilities + Shareholders’ Equity Adjusting journal entries fall into four general categories: - Prepayments (Deferrals): Unearned Revenues and Prepaid Expenses (e.g., prepaid insurance, supplies) - Accruals: Accrued Revenues (e.g., interest receivable, other receivables) and Accrued Expenses (e.g., wages payable, other payables)Accounting 215 – Quiz Section #6 Autumn 2013 2 Practice Problem: The information necessary for preparing the 2012 year-end adjusting entries for Tom Jackson Advertising Agency appears below. Jackson’s fiscal year-end is December 31. a. On July 1, 2012, Jackson receives $5,000 from a customer for advertising services to be given evenly over the next 10 months (beginning in July). Jackson credits unearned revenue. b. At the beginning of 2012, Jackson’s depreciable equipment has a cost of $30,000, a five-year life, and no salvage value. The equipment is depreciated evenly (straight-line depreciation method) over the five years. c. On November 1, 2012, extra office space is rented to Don Jackson, Tom’s brother, for the next six months. Payment of $6,000 is due at the end of the six months (April 30, 2013). No entry is made on November 1. d. On May 1, 2012, the company pays $3,600 for a two-year fire and liability insurance policy and debits prepaid insurance. e. On September 1, 2012, the company borrows $10,000 from a local bank and signs a note. Principal and interest of 12% (annual rate) will be paid on August 31, 2013. f. At year-end there is a $2,200 debit balance in the supplies (asset) account. Only $900 of supplies remains on hand. Required: 1. Record the necessary adjusting entries on December 31, 2012. No prior adjustments have been made during 2012. 2. Determine the amounts by which total assets, total liabilities, and net income are misstated if Tom Jackson failed to make these adjusting entries.Accounting 215 – Quiz Section #6 Autumn 2013 3 Requirement 1 A=Assets, XA=Contra Assets, L=Liabilities, R=Revenues, E=Expenses, SE=Shareholders’ Equity (a) Debit Credit (-L) Unearned Revenue 3,000 (+R/+SE) Advertising Revenue 3,000 (Adjust unearned revenue) (b) Debit Credit (+E/-SE) Depreciation Expense 6,000 (+XA/-A) Accumulated Depreciation 6,000 (Adjust accumulated depreciation) (c) Debit Credit (+A) Rent Receivable 2,000 (+R/+SE) Rent Revenue 2,000 (Adjust rent receivable) (d) Debit Credit (+E/-SE) Insurance Expense 1,200 (-A) Prepaid Insurance 1,200 (Adjust prepaid insurance) (e) Debit Credit (+E/-SE) Interest Expense 400 (+L) Interest Payable 400 (Adjust interest payable) (f) Debit Credit (+E/-SE) Supplies Expense 1,300 (-A) Supplies 1,300 (Adjust supplies) Requirement 2 If the adjusting entry is NOT Jackson’s books would be misstated as follows: Assets Liabilities Net Income (a) $0 +$3,000 −$3,000 (b) +$6,000 $0 +$6,000 (c) −$2,000 $0 −$2,000 (d) +$1,200 $0 +$1,200 (e) $0 −$400 +$400 (f) +$1,300 $0 +$1,300 +$6,500 +$2,600