Financial Accounting: An Integrated Statements Approach, 2nd Edition

134 Chapter 3 Accrual Accounting Concepts

Exercise 3-20

Adjustment for accrued fees

Goal 3

Exercise 3-24

Adjustment for depreciation

Goal 3

Exercise 3-25

Adjustments

Goal 3

Exercise 3-21

Adjustments for unearned and

accrued fees

Goal 3

Exercise 3-22

Effect of deferred revenue

Goal 3

a. $234 million

Exercise 3-23

Effect on financial statements

of omitting adjustment

Goal 3

At the end of the current year, $11,310 of fees have been earned but have not been billed to

clients.

a. What is the adjustment to record the accrued fees? Indicate each account affected,

whether the account is increased or decreased, and the amount of the increase or

decrease.

b. If the cash basis rather than the accrual basis had been used, would an adjustment have

been necessary? Explain.

The balance in the unearned fees account, before adjustment at the end of the year, is $67,250.

Of these fees, $18,000 have been earned. In addition, $10,200 of fees have been earned but have

not been billed. What are the adjustments (a) to adjust the unearned fees account and (b) to

record the accrued fees? Indicate each account affected, whether the account is increased or de-

creased, and the amount of the increase or decrease.

Time Warner Inc.reported short-term deferred revenue of $1,497 million and $1,731 million as

of December 31, 2004 and 2003, respectively. For the year ending December 31, 2004, Time

Warner reported total revenues of $42,089 million. (a) What was the amount of the adjustment

for unearned revenue for 2004? (b) What would have been total revenues under the cash basis

after considering the effect of (a)?

The adjustment for accrued fees was omitted at October 31, the end of the current year.

Indicate which items will be in error, because of the omission, on (a) the income statement for

the current year and (b) the balance sheet as of October 31. Also indicate whether the items

in error will be overstated or understated.

The estimated amount of depreciation on equipment for the current year is $5,000. (a) How is

the adjustment recorded? Indicate each account affected, whether the account is increased or de-

creased, and the amount of the increase or decrease. (b) If the adjustment in (a) was omitted,

which items would be erroneously stated on (1) the income statement for the year and (2) the

balance sheet as of December 31?

The Quasar Company is a consulting firm specializing in pollution control. The following

adjustments were made for The Quasar Company:

Adjustments

Account Increase (Decrease)

Accounts Receivable $ 7,140

Supplies (1,715)

Prepaid Insurance (1,400)

Accumulated Depreciation—Equipment 2,520

Wages Payable 1,260

Unearned Rent (3,500)

Fees Earned 7,140

Wages Expense 1,260

Supplies Expense 1,715

Rent Revenue 3,500

Insurance Expense 1,400

Depreciation Expense 2,520