Question

E3-5 Devin Wolf Company has the following balances in selected accounts on December should adopt the achtily each statement a
nower 3. Depreciation and 2. A count of supplies on December 31, 2017, indicates that supplies of $900 are on hand. 4. Devin
lected, $25,000 was for services performed in 2016. In addition, Carillo performed services worth $36,000 in 2017, which will
new building on November 1. At December 31, the company had the following rental Instructions (a) Journalize the adjusting en
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Answer #1

E 3-2:

(a)      Accrual-basis accounting records the transactions that change a company’s financial statements in the periods in which the events occur rather than in the periods in which the company receives or pays cash. Information presented on an accrual basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash basis of accounting often leads to misleading financial statements.

(b)      Politicians might desire a cash-basis accounting system over an accrual-basis system because if an accrual-accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for.

(c)      Dear Senator,

          It is my understanding, after having taken a beginning course in account­ing principles, that the Federal government uses a cash-basis system rather than an accrual-basis accounting system.

          I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded yet for the mere reason that they haven’t been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to.

          Sincerely,

CONCERNED STUDENT

E3-3:

(a)        Cash received from revenue..........................................................................                     $108,000

            Cash paid for expenses..................................................................................                        (72,000)

                        Cash-basis net income........................................................................                     $  36,000

(b)       Revenues [($108,000 – $25,000) + $36,000]................................................                     $119,000

            Expenses [($72,000 – $30,000) + $42,000]...................................................                        (84,000)

                        Accrual-basis net income...................................................................                     $  35,000

E 3-4:

1.         Unearned revenue.

2.         Accrued expense.

3.         Accrued expense.

4.         Accrued revenue.

5.         Prepaid expense.

6.         Unearned revenue.

7.         Accrued revenue.

8.         Prepaid expense.

9.         Prepaid expense.

10.       Prepaid expense.

11.       Accrued expense.

E 3-5:

1.

(a)      Dec.       31   Interest Expense................................................. 300

                                      Interest Payable

                                      ($10,000 × 9% × 4/12)................................. 300

(b)      Aug.      31   Interest Expense

                                ($10,000 × 9% × 8/12)....................................... 600

                                Interest Payable................................................. 300

                                Notes Payable.....................................................     10,000

                                      Cash..............................................................                         10,900

E 3-6:

Item

(a)

Type of Adjustment

(b)

Accounts before Adjustment

1.

Accrued Revenues

Assets Understated

Revenues Understated

2.

Prepaid Expenses

Assets Overstated

Expenses Understated

3.

Accrued Expenses

Expenses Understated

Liabilities Understated

4.

Unearned Revenues

Liabilities Overstated

Revenues Understated

5.

Accrued Expenses

Expenses Understated

Liabilities Understated

6.

Prepaid Expenses

Assets Overstated

Expenses Understated

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