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 (f).

h. Office
supplies on hand at year-end.

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

Interest Payable	Accumulated Depreciation: Equipment
Alex Kenzy, Drawing	Accounts Payable
Service Revenue	Cash
Accounts Receivable	Supplies Expense
Interest Expense

Which of the preceding
accounts

a. appear on a post-closing trial
balance?

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?

3. Adjusting
entries and financial statements. The following information pertains to
Fixation Enterprises:

·
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 period.

·
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.

Instructions

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).

4. 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 $15,500all 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 Thursday.

·
Kathy’s Day Care paid insurance
premiums as follows, each time debiting Pre­paid Insurance:

Date Paid	Policy No.	Length of Policy	Amount
Feb. 1, 20X2	1033MCM19	1 year	$540
Jan. 1, 20X3	7952789HP	1 year	912
Aug. 1, 20X3	XQ943675ST	2 years	840

Instructions

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

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

Balance per bank	$6,150
Balance per company records	$3,580
Bank service charge for January	$20
Deposits in transit	$940
Interest on note collected by bank	$100
Note collected by bank	$1,000
NSF check returned by the bank with the bank statement	$650
Outstanding checks	$3,080

Instructions:

a.
Prepare Palmetto’s January bank reconciliation.

b. Prepare any necessary journal entries for
Palmetto.

6. 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.

7. 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:

20X2	20X1
Sales	$23,987,000	$8,423,000
Accounts Receivable, 12/31	12,444,000	1,056,000
Allowance for Uncollectible Accounts, 12/31	?	23,000 cr.

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

Age of Receivable	Amount	Percentage of Accounts Expected to Be Collected
Under 31 days	$5,321,000	99%
31260 days	3,890,000	90
61290 days	1,067,000	80
Over 90 days	2,166,000	60

Assume
that no accounts were written off during 20X2.

Instructions

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.