Solved by verified expert :Week Two Exercise Assignment
Revenue and Expenses

1. Recognition of concepts.
Ron Carroll operates a small company that books enter­tainers for theaters,
parties, conventions, and so forth. The company’s fiscal year ends on June 30.
Consider the following items and classify each as either (1) pre­paid expense,
(2) unearned revenue, (3) accrued expense, (4) accrued revenue, or (5) none of
the foregoing.
a. Amounts paid on June 30 for a
1-year insurance policy
b. Professional fees earned but not
billed as of June 30
c. Repairs to the firm’s copy
machine, incurred and paid in June
d. An advance payment from a client
for a performance next month at a convention
e. The payment in part (d) from the
client’s point of view
f. Interest owed on the company’s
bank loan, to be paid in early July
g. The bank loan payable in part
h. Office supplies on hand at

2. Analysis of prepaid account
balance. The following information relates to Action Sign Company for 20X2:

Insurance expense


Prepaid insurance, December 31, 20X2


Cash outlays for insurance during 20X2


Compute the balance in the Prepaid Insurance account on
January 1, 20X2.

3. Understanding the closing process. Examine the
following list of accounts:

Interest Payable

Accumulated Depreciation: Equipment

Alex Kenzy, Drawing

Accounts Payable

Service Revenue


Accounts Receivable

Supplies Expense

Interest Expense

Which of the preceding accounts
a. appear on a post-closing trial
b. are commonly known as temporary,
or nominal, accounts?
c. generate a debit to Income Summary
in the closing process?
d. are closed to
the capital account in the closing process?
4. Adjusting entries and
financial statements. The following information pertains to Fixation
The company previously collected $1,500 as an
advance payment for services to be rendered in the future. By the end of
December, one third of this amount had been earned.
Fixation provided $2,500 of services to Artech Corporation;
no billing had been made by December 31.
Salaries owed to employees at year-end amounted
to $1,650.
The Supplies account revealed a balance of
$8,800, yet only $3,300 of supplies were actually on hand at the end of the
The company paid $18,000 on October 1 of the
current year to Vantage Property Management. The payment was for 6 months’ rent
of Fixation’s headquarters, beginning on November 1.
Fixation’s accounting year ends on December 31.

Analyze the five preceding cases individually and determine
the following:
a. The typeof
adjusting entry needed at year-end (Use the following codes: A, adjust­ment of
a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to
record an accrued expense; or D, adjustment to record an accrued revenue.)
b. The year-end
journal entry to adjust the accounts
c. The income
statement impact of each adjustment (e.g., increases total revenues by $500)

5. Adjusting entries. You
have been retained to examine the records of Kathy’s Day Care Center as of
December 31, 20X3, the close of the current reporting period. In the course of
your examination, you discover the following:
On January 1, 20X3, the Supplies account had a
balance of $2,350. During the year, $5,520 worth of supplies was purchased, and
a balance of $1,620 remained unused on December 31.
Unrecorded interest owed to the center totaled
$275 as of December 31.
All clients pay tuition in advance, and their
payments are credited to the Unearned Tuition Revenue account. The account was
credited for $75,500 on August 31. With the exception of $15,500 all amounts
were for the current semester ending on December 31.
Depreciation on the school’s van was $3,000 for
the year.
On August 1, the center began to pay rent in
6-month installments of $21,000. Kathy wrote a check to the owner of the
building and recorded the check in Pre­paid Rent, a new account.
Two salaried employees earn $400 each for a
5-day week. The employees are paid every Friday, and December 31 falls on a
Kathy’s Day Care paid insurance premiums as
follows, each time debiting Pre­paid Insurance:



of Policy


Feb. 1,


1 year


Jan. 1,


1 year


Aug. 1,


2 years



The center’s accounts were last
adjusted on December 31, 20X2.
Prepare the adjusting entries necessary under the accrual basis of accounting.

6. Bank reconciliation and
entries. The following information was taken from the accounting records of
Palmetto Company for the month of January:

Balance per bank


Balance per company records


Bank service charge for January


Deposits in transit


Interest on note collected by bank


Note collected by bank


NSF check returned by the bank with the bank statement


Outstanding checks


Prepare Palmetto’s January bank reconciliation.
Prepare any necessary journal entries for Palmetto.
7. Direct write-off method.
Harrisburg Company, which began business in early 20X7, reported $40,000 of
accounts receivable on the December 31, 20X7, balance sheet. Included in this
amount was $550 for a sale made to Tom
Mattingly in July. On January 4, 20X8, the company learned that Mattingly had
filed for personal bankruptcy. Harrisburg uses the direct write-off method to
account for uncollectibles.

a. Prepare the journal entry needed
to write off Mattingly’s account.
b. Comment on the ability of the direct write-off method to value
receivables on the year-end balance sheet.
method: estimation and balance sheet disclosure.
The following pre-­adjusted information for the Maverick Company is available
on December 31:
Accounts receivable $107,000
Allowance for uncollectible accounts 5,400 (credit balance)
Credit sales 250,000
Prepare the journal entries necessary to record Maverick’s uncollectible
accounts expense under each of the following assumptions:
Uncollectible accounts are estimated to be 5% of Credit Sales.
Uncollectible accounts are estimated to be 14% of Accounts Receivable.
How would Maverick’s Accounts Receivable appear on the December 31 balance
sheet under assumption (1) of part (a)?
c. How would Maverick’s Accounts
Receivable appear on the December 31 balance sheet under assumption (2) of part

9. Direct write-off and
allowance methods: matching approach. The December 31, 20X2, year-end trial
balance of Targa Company revealed the following account information:



Accounts Receivable


Allowance for Uncollectible Accounts

$ 3,000



a. Determine the adjusting entry
for bad debts under each of the following condi­tions:
(1) An aging
schedule indicates that $12,420 of accounts receivable will be uncollectible.
(2) Uncollectible
accounts are estimated at 2% of net sales.
b. On January 19, 20X3, Targa
learned that House Company, a customer, had declared bankruptcy. Present the
proper entry to write off House’s $950 balance using the allowance method.
c. Repeat the requirement in part
(b), using the direct write-off method.
d. In light of the House
bankruptcy, examine the allowance and direct write-off methods in terms of
their ability to properly match revenues and expenses.

10. Allowance method: analysis
of receivables. At a January 20X2 meeting, the presi­dent of Sonic Sound
directed the sales staff “to move some product this year.” The president noted
that the credit evaluation department was being disbanded be­cause it had
restricted the company’s growth. Credit decisions would now be made by the
sales staff.
By the end of the year, Sonic had
generated significant gains in sales, and the president was very pleased. The
following data were provided by the accounting department:






Accounts Receivable, 12/31



Allowance for Uncollectible Accounts, 12/31


23,000 cr.

The $12,444,000 receivables balance was aged as follows:

Age of Receivable


Percentage of Accounts Expected to Be Collected

Under 31 days



31260 days



61290 days



Over 90 days



that no accounts were written off during 20X2.

a. Estimate
the amount of Uncollectible Accounts as of December 31, 20X2.
b. What is
the company’s Uncollectible Accounts expense for 20X2?
c. Compute
the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.
d. Compute the net realizable value at
the end of 20X1 and 20X2 as a percentage of respective year-end receivables
balances. Analyze your findings and comment on the president’s decision to
close the credit evaluation department.

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