1. Accrued expense (accrued liability) 2. Deferred expense (prepaid expense) 3. Deferred revenue (unearned revenue) 4. Accrued revenue (accrued asset) 5. Accrued expense (accrued liability) 6. Accrued expense (accrued liability) 7. Deferred expense (prepaid expense) 8. Deferred revenue (unearned revenue) 3-2
Supplies Expense ................................................................. 801
Supplies .....................................................................
3-3
$1,067 ($118 + $949) 3-4
a. Insurance expense (or expenses) will be understated. Net income will be overstated.
b. Prepaid insurance (or assets) will be overstated. Owner’s equity will be overstated. 3-5
a. Insurance Expense ........................................................ 1,215
Prepaid Insurance .....................................................
b. Insurance Expense ........................................................ 1,215
Prepaid Insurance .....................................................
3-6
Unearned Fees ...................................................................... 9,570
Fees Earned ..............................................................
3-7
a. Salary Expense ............................................................... 9,360
Salaries Payable .......................................................
b. Salary Expense ...............................................................
12,480
801
1,215 1,215
9,570
9,360
3-8
Salaries Payable ....................................................... 12,480
$59,850 ($63,000 – $3,150)
3-9
$195,816,000 ($128,776,000 + $67,040,000) 3-10
Error (a)
Error (b)
Over- stated Under- stated Over- Under- stated stated
1. 2. 3. 4. 5. 6.
Revenue for the year would be ............... Expenses for the year would be ............. Net income for the year would be .......... Assets at December 31 would be ........... Liabilities at December 31 would be ...... Owner’s equity at December 31
would be ...................................................
$
0
0 0 0 6,900
0
$6,900 $ 0 $ 0
0 0 3,740 6,900 3,740 0
0 0 0 0 0 3,740 6,900
3,740
0
3-11
$175,840 ($172,680 + $6,900 – $3,740)
3-12
a. Accounts Receivable ..................................................... Fees Earned ..............................................................
11,500
11,500
b. No. If the cash basis of accounting is used, revenues are recognized only when the cash is received. Therefore, earned but unbilled revenues would not be recognized in the accounts, and no adjusting entry would be necessary. 3-13
a. Fees earned (or revenues) will be understated. Net income will be understated.
b. Accounts (fees) receivable (or assets) will be understated. Owner’s equity will be understated. 3-14
Depreciation Expense ..........................................................
5,200
Accumulated Depreciation ....................................... 3-15
a. $204,600 ($318,500 – $113,900)
b. No. Depreciation is an allocation of the cost of the equipment to the periods benefiting from its use. It does not necessarily relate to value or loss of value. 3-16
a. $2,268,000,000 ($5,891,000,000 – $3,623,000,000)
b. No. Depreciation is an allocation method, not a valuation method. That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which may vary significantly from year to year. 3-17
a. Depreciation Expense .................................................... 7,500
Accumulated Depreciation .......................................
b. (1) Depreciation expense would be understated. Net income would
be overstated. (2) Accumulated depreciation would be understated, and total assets
would be overstated. Owner’s equity would be overstated.
3-18
1. Accounts Receivable ..................................................... 4 Fees Earned ..............................................................
2. Supplies Expense .......................................................... 3 Supplies .....................................................................
3. Insurance Expense ........................................................ 8 Prepaid Insurance .....................................................
4. Depreciation Expense .................................................... 5 Accumulated Depreciation—Equipment .................
5. Wages Expense .............................................................. 1 Wages Payable ..........................................................
3-19
a. Dell Computer Corporation Amount Percent
Net sales
$35,404,000
100.0
5,200
7,500
4 3 8 5 1
Cost of goods sold Operating expenses Operating income (loss) (29,055,000) (3,505,000) $ 2,844,000 82.1 9.9 8.0 b. Gateway Inc.
Net sales
Cost of goods sold Operating expenses Operating income (loss)
Amount $ 4,171,325 (3,605,120) (1,077,447) $ (511,242) Percent 100.0 86.4 25.8 (12.2) c. Dell is more profitable than Gateway. Specifically, Dell’s cost of goods sold of 82.1% is significantly less (4.3%) than Gateway’s cost of goods sold of 86.4%. In addition, Gateway’s operating expenses are over one-fourth of sales, while Dell’s operating expenses are 9.9% of sales. The result is that Dell generates an operating income of 8.0% of sales, while Gateway generates a loss of 12.2% of sales. Obviously, Gateway must improve its operations if it is to remain in business and remain competitive with Dell.
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