1. For each of the following accounts, indicate the effect of a debit or a credit on the account and the normal balance.
Debit Credit Normal Effect Effect Balance
(a) Accounts Payable.
(b) Advertising Expense.
(c) Service Revenue.
(d) Accounts Receivable.
(e) Retained Earnings.
2. Proctor Company accumulates the following adjustment data at December 31.
(a) Service Revenue earned but unbilled totals $600.
(b) Store supplies of $300 are on hand. Supplies account shows $1,900 balance.
(c) Utility expenses of $275 are unpaid.
(d) Service revenue of $490 collected in advance has been earned.
(e) Salaries of $800 are unpaid.
(f) Prepaid insurance totaling $400 has expired
For each item indicate (1) the type of adjustment (Prepaid Expense, Unearned Revenue, Accrued Revenue, or Accrued Expense) and (2) the status of the accounts before adjustment (overstated or understated).
3. Below are some accounting reporting situations.
For each situation, list the assumption, principle, or constraint that has been violated, if any. List only one answer for each situation.
1. Economic entity assumption. 6. Materiality constraint.
2. Expense recognition principle. 7. Full disclosure principle.
3. Monetary unit assumption. 8. Going concern assumption.
4. Periodicity assumption. 9. Revenue recognition principle.
5. Cost principle. 10. Cost constraint.
11. No violation.
(a) Dorfner Company recognizes revenue at the end of the production cycle but before sale. The price of the
product, as well as the amount that can be sold, is not certain.
(b) Rayms Company is in its fifth year of operation and has yet to issue financial statements.
(c) Tariq, Inc. is carrying inventory at its original cost of $100,000. Inventory has a fair value of $110,000.
(d) Leer Hospital Supply Corporation reports only current assets and current liabilities on its balance sheet.
Property, plant, and equipment and bonds payable are reported as current assets and current liabilities,
respectively. Liquidation of the company is unlikely.
(e) Kim Company has inventory on hand that cost $400,000. Kim reports inventory on its balance sheet at its
current fair value of $425,000.
(f ) Kris Piwek, president of Classic Music Company, bought a computer for her personal use. She paid
for the computer by using company funds and debited the “Computers” account.
4. The ledger of Thurston Rental Agency on March 31 of the current year includes these selected accounts before adjusting entries have been prepared.
Prepaid Insurance $3,600
Accumulated Depreciation-Equipment $8,400
Notes Payable 20,000
Unearned Rent Revenue 10,200
Rent Revenue 60,000
Interest Expense 0
Wage Expense 14,000
An analysis of the accounts shows the following.
1. The equipment depreciates $280 per month.
2. Half of the unearned rent revenue was earned during the quarter.
3. Interest of $440 is accrued on the notes payable.
4. Supplies on hand total $850.
5. Insurance expires at the rate of $400 per month.
Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly.
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