Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 3 Accrual Accounting Concepts 131

Exercise 3-5

Accrual basis of accounting

Goal 2

Neal Hastings established Ember Services, P.C., a professional corporation, on January 1 of

the current year. Ember Services offers financial planning advice to its clients. The effect of

each transaction on the balance sheet and the balances after each transaction for January are

as follows. Each increase or decrease in stockholders’ equity, except transaction (h), affects net

income.

Assets  Liabilities  Stockholders’ Equity

Accounts Accounts Capital Retained

Cash  Receivable  Supplies  Payable  Stock  Earnings

a. 20,000 20,000

b.  900  900

Bal. 20,000 900 900 20,000

c.  775  775

Bal. 19,225 900 125 20,000

d. 11,500 11,500

Bal. 30,725 900 125 20,000 11,500

e. 7,500 7,500

Bal. 23,225 900 125 20,000 4,000

f.  625  625

Bal. 23,225 275 125 20,000 3,375

g. 3,000 3,000

Bal. 23,225 3,000 275 125 20,000 6,375

h. 1,000 1,000

Bal. 22,225 3,000 275 125 20,000 5,375

a. Describe each transaction.

b. What is the amount of the net income for January?

Classify the following items as (a) deferred expense (prepaid expense), (b) deferred revenue (un-

earned revenue), (c) accrued expense (accrued liability), or (d) accrued revenue (accrued asset).

1. Fees earned but not yet received.


2. Taxes owed but payable in the following period.


3. Salary owed but not yet paid.


4. Supplies on hand.


5. Fees received but not yet earned.


6. Utilities owed but not yet paid.


7. A two-year premium paid on a fire insurance policy.


8. Subscriptions received in advance by a magazine publisher.

The following accounts were taken from the unadjusted trial balance of Dobro Co., a congres-

sional lobbying firm. Indicate whether or not each account would normally require an adjusting

entry. If the account normally requires an adjusting entry, use the following notation to indicate

the type of adjustment:

AE—Accrued Expense

AR—Accrued Revenue

DR—Deferred Revenue

DE—Deferred Expense

To illustrate, the answers for the first two accounts are shown below.

Account Answer

Dividends Does not normally require adjustment.

Accounts Receivable Normally requires adjustment (AR).

Accumulated Depreciation

Cash (continued)

Exercise 3-7

Classify adjustments

Goal 3

Exercise 3-6

Classify accruals and
deferrals

Goal 3