Intermediate Accounting, Ninth Edition

Exercise 2—10 1. The rent was paid on June 1, seven months ago. Exercise 2—11 1. Rent revenue Accumulated depreciation - building Gross profit Operating expenses: Salaries Total operating expenses Operating income Other expense: Interest Net income Property and equipment: Office equipment Exercise 2—12 concluded Requirement 2 December 31, Sales revenue Exercise 2—13 December 31, Sales revenue December 31, Sales revenue December 31, Insurance expense Accrued salaries and wages.

December 31, Salaries and wages expense December 31, Deferred rent revenue Requirement 2 Dec. Supplies Insurance Miscellaneous Other expense: Interest Supplies expense to balance Supplies increase in account Insurance expense to balance Prepaid insurance increase in account Miscellaneous expense to balance Accrued liabilities increase in account Operating expenses: Salaries and wages Less: Accumulated depreciation Total assets July 1 - reversing entry Salaries and wages payable July 2 — payment of salaries Salaries and wages expense Requirement 2 June 30 - adjusting entry Salaries and wages expense July 2 - payment of salaries Salaries and wages expense Exercise 2—22 Requirement 1 The accountant would reverse adjusting entry 1, the accrual of interest receivable, and entry 5, the accrual of salaries payable.

Requirement 2 1. Requirement 3 1. Exercise 2—23 Requirement 1 The transactions affected would be the prepayment of rent, transaction 2, and the purchase of supplies in transaction 6. Requirement 2 2. Original transaction on November 1: Rent expense Original transaction during the year: Supplies expense Adjusting entry on December Supplies Supplies expense Requirement 3 2.

Utilities expense Problem 2—3 1. Deferred revenue Operating income Other income expense : Interest revenue Interest expense Office equipment Problem 2—4 continued Requirement 5 December 31, Sales revenue Advertising expense Problem 2—5 Rent expense Problem 2—6 Requirement 2 a.

Miscellaneous expenses Problem 2—6 continued Requirement 8 December 31, Service revenue Income summary Problem 2—7 Requirement 1 a.

Requirement 2 Income overstated understated Adjustments to revenues: Understatement of interest revenue Understatement of rent revenue.

Adjustments to expenses: Overstatement of insurance expense Understatement of depreciation expense Understatement of interest expense Understatement of supplies expense Overstatement of net income. Problem 2—8 1. Problem 2—9 Requirements 1 and 2 a. Accumulated depreciation - buildings Accumulated depreciation—office equipment Accumulated depreciation—office equip. Account Title Cash Accounts receivable Prepaid insurance Land Buildings Accumulated depreciation—buildings Office equipment Accumulated depreciation—office equipment Accounts payable Salaries and wages payable Deferred rent revenue Common stock Retained earnings Sales revenue Interest revenue Rent revenue Salaries and wages expense Depreciation expense Insurance expense Utility expense Maintenance expense Totals.

Problem 2—9 continued Requirement 4 December 31, Sales revenue Utility expense Maintenance expense Problem 2—9 concluded Requirement 5 Account Title Cash Accounts receivable Prepaid insurance Land Buildings Accumulated depreciation—buildings Office equipment Accumulated depreciation—office equipment Accounts payable Salaries and wages payable Deferred rent revenue Common stock Retained earnings Totals. Problem 2—11 Requirement 1 a. Balance Sheet Dr.

This measure is the difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers. Requirement 2 In most cases, the accrual accounting model provides a better measure of performance because it attempts to measure the accomplishments and sacrifices that occurred during the year, which may not correspond to cash inflows and outflows.

Requirement 3 Adjusting entries, for the most part, are conversions from cash to accrual. Prepayments and accruals occur when cash flow precedes or follows expense or revenue recognition.

Deduct: 3. Communication Case 2—3 Requirement 1 Prepayments occur when the cash flow precedes either expense or revenue recognition. Accruals occur when the cash flow comes after either expense or revenue recognition. Requirement 2 The appropriate adjusting entry for a prepaid expense is a debit to expense and a credit to the prepaid asset.

For deferred revenue, the appropriate adjusting entry is a debit to the deferred revenue liability account and a credit to revenue. Requirement 3 The required adjusting entry for accrued liabilities is a debit to expense and a credit to a liability.

For accrued receivables, the appropriate adjusting entry is a debit to a receivable and a credit to revenue. Assuming this pertains to prepaid insurance, insurance expense must have exceeded the amount paid for insurance coverage, because the balance decreased during the year. The appropriate adjusting entry for a prepaid expense is a debit to expense and a credit to the prepaid asset. Failure to record an adjusting entry for a prepaid expense will cause expenses to be understated and thus net income to be overstated.

Each of these is in the opposite order from what we see in Illustration 2—14 based on U. If AF used U. GAAP, Issued share capital would be Common stock, Reserves and retained earnings would be separated into retained earnings and one or more other accounts, usually Accumulated other comprehensive income accounts.

Under U. GAAP balance sheet. The purpose of this chapter is to review the fundamental accounting process used to produce the financial statements. This review establishes a framework for the study of the concepts covered in intermediate accounting. Actual accounting systems differ significantly from company to company.

This chapter focuses on the many features that tend to be common to any accounting system. LO2—2 Record transactions using the general journal format. LO2—3 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. LO2—4 Identify and describe the different types of adjusting journal entries.

LO2—5 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. LO2—6 Describe the basic financial statements. LO2—7 Explain the closing process. LO2—8 Convert from cash basis net income to accrual basis net income. The Basic Model A. External events involve an exchange between the company and another entity; internal transactions do not involve an exchange transaction but do affect financial position.

Each transaction has a dual effect on the accounting equation. The double-entry system is used to process transactions. Elements of the accounting equation are represented by accounts in a general ledger.

In the double-entry system, debit means left side of an account, and credit means right side of an account. Asset increases are entered on the debit side of accounts and decreases are entered on the credit side. Liability and equity account increases are credits and decreases are debits. The Accounting Processing Cycle A.

Step 1. Obtain information about transactions from source documents. Step 2. Transaction analysis is the process of reviewing source documents to determine the dual effect on the accounting equation and the specific elements involved.

Step 3. Record the transaction in a journal. Step 4. Post from the journal to the general ledger accounts. In addition to general ledger control accounts, a subsidiary ledger discussed in Appendix 2C contains a group of subsidiary accounts associated with particular general ledger control accounts. Step 5. Prepare an unadjusted trial balance.

A worksheet discussed in Appendix 2A can be used as a tool after and instead of step 5 in the processing cycle. Adjusting Entries A. Step 6. Record adjusting entries and post to the ledger accounts. Prepayments are transactions in which the cash flow precedes expense of revenue recognition.

Prepaid expenses represent assets recorded when a cash disbursement creates benefits beyond the current reporting period. Deferred revenues represent liabilities recorded when cash is received from customers in advance of providing a good or service.

Accruals involve transactions where the cash outflow or inflow takes place in a period subsequent to expense or revenue recognition. Accrued liabilities represent liabilities recorded when an expense has been incurred prior to cash payment. Accrued receivables involve situations when the revenue is recognized in a period prior to the cash receipt.

Estimates often are made to comply with the accrual accounting model. Most estimates involve either prepayments or accruals. One situation involving an estimate that does not fit neatly into either the prepayment or accrual classification is accounting for bad debts.

Step 7. Preparation of an adjusted trial balance. Accountants sometimes use reversing entries discussed in Appendix 2B in conjunction with adjusting entries. Step 8. Prepare Financial Statements A. The income statement B. The statement of comprehensive income C. The balance sheet D. The statement of cash flows E. Step 9. Close the Temporary Accounts A. Close the revenue accounts to income summary. Close the expense accounts to income summary. Close the income summary account to retained earnings.

Step Prepare a post-closing trial balance. Add deduct increases decreases in assets. For example, an increase in accounts receivable means that the company recognized more revenue than cash collected. Add deduct decreases increases in accrued liabilities. For example, a decrease in interest payable means that the company incurred less interest expense than the cash interest paid, requiring the addition to cash basis-income. Accessible PowerPoint Presentations. Accessibility is becoming even more important in the education marketplace.

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In addition to Exercise 2—20 and Problem 2—13, the requirements for Problems 2—2, 2—4, 2—6, 2—8, and 2—10 can be modified to include the use of software such as Excel. Professional Skills Development Activities The following are suggested assignments from the end-of-chapter material that will help your students develop their communication, analysis and judgment skills. Communication Skills.

In addition to Communication Case 2—3, Judgment Cases 2—1 and 2—2 can be adapted to ask students to write a memo. These Judgment Cases also do well as group assignments and create good class discussions. Analysis Skills. Exercises 2—15, 2—18 and Problems 2—7, 2—9 provide opportunities to develop and sharpen analytical skills.

Judgment Skills. This chapter includes Judgment Cases 2—1 and 2—2. Assignment Chart Questions 2—1 2—2 2—3 2—4 2—5 2—6 2—7 2—8 2—9 2—10 2—11 2—12 2—13 2—14 2—15 2—16 2—17 2—18 2—19 2—20 2— External and internal events 5 Dual effect of transactions on financial position 5 Purpose of journal and ledger 5 Permanent and temporary accounts 5 Debits and credits 5 Debits and credits 5 Accounting processing cycle 5 Transaction analysis 5 Posting 5 Journal entries 5 Trial balance 5 Adjusting entries 5 Closing entries 5 Adjusting entries—prepaid expenses 5 Adjusting entries—deferred revenue 5 Adjusting entries—accrued liabilities 5 Financial statements 5 Worksheet [Based on Appendix 2A] 5 Reversing entries [Based on Appendix 2B] 5 Special journals [Based on Appendix 2C] 5 Subsidiary ledger [Based on Appendix 2C] 5.

Topic Transaction analysis Journal entries T-accounts Journal entries Adjusting entries Adjusting entries; income determination Adjusting entries Income determination Adjusting entries Financial statements Financial statements Closing entries Cash versus accrual accounting. Exercises 2—1 2—2 2—3 2—4 2—5 2—6 2—7 2—8 2—9 2—10 2—11 2—12 2—13 2—14 2—15 2—16 2—17 2—18 2—19 2—20 2—21 2—22 2—23 2—24 2— Transaction analysis 15 Journal entries 15 T-accounts and trial balance 15 Journal entries 20 The accounting processing cycle 15 Debits and credits 15 Transaction analysis; debits and credits 15 Adjusting entries 15 Adjusting entries 15 Adjusting entries; solving for unknowns 15 Adjusting entries 15 Financial statements and closing entries 20 Closing entries 10 Closing entries 10 Cash versus accrual accounting; adjusting entries 15 External transactions and adjusting entries 15 Accrual accounting income determination 15 Cash versus accrual accounting 20 Cash versus accrual accounting 20 Worksheet [Based on Appendix 2A] 35 Reversing entries [Based on Appendix 2B] 10 Reversing entries [Based on Appendix 2B] 10 Reversing entries [Based on Appendix 2B] 10 Special journals [Based on Appendix 2C] 15 Special journals [Based on Appendix 2C] Learning Est.

No reproduction or distribution without prior written consent of McGraw-Hill Education. The Basic Model Economic Events Cause changes in the financial position of the company External Events Involve an exchange transaction with another entity. Accounting Equation—Owner Investment 1. Accounting Equation—Borrowing Money from the Bank 2. This transaction causes assets and liabilities to increase. A bank loan increases cash and creates an obligation to repay it.

See examples below:. Explanation: The function of financial accounting is the creation of financial statements, for the Explanation: External events are the events which involves an exchange transaction between the two Explanation: Following are the purposes of the balance sheet Summarized information of assets and Explanation: Income statement: The financial statement which reports revenues and expenses from Explanation: The five key steps to applying the revenue recognition principle are as follows: Explanation: The term interest is defined as follows: Interest is the amount of interest paid on the Explanation: Cash equivalents are the highly liquid investments with the maturity period of less The three types of inventory of a manufacturing company are: Raw Materials: It refers to the cost of Explanation: The difference between the tangible and intangible long-lived, revenue producing assets Explanation: The term depreciation, depletion and amortization are the similar methods used for Explanation: For, the purposes of reporting, the investments in debt securities are classified in Explanation: The three main characteristics of liabilities are as follows: Liabilities exist for the Explanation: The periodic interest payments determined by the outstanding liabilities The periodic Explanation: When accounting for leases, the legal form of agreement is irrelevant.

A finance lease Explanation: Income tax expense combines both current and deferred tax. Explanation: Definition of pension plan: This is the plan devised by corporations to pay the Paid in capital 2.

Explanation: Restricted Stock: Restricted stock is the portion of shares held up by the management, Explanation: Accounting changes are categorized into following types: 1. Change in principle: It Explanation: The cash flow statement reports the actual cash inflow and outflow, which occurred Explanation: Some financial instruments are meant for managing risk in the financial markets. More Editions of This Book Corresponding editions of this textbook are also available below:.

Intermediate Accounting With Annual Report. Intermediate Acct. Intermediate Accounting 8th. Study Guide Volume 1 to accompany Intermediate Accounting. Connect Access Card for Intermediate Accounting. Intermediate Accounting Custom.

Loose Leaf Intermediate Accounting. Intermediate Accounting Ninth Edition Volume 1. Intermediate Accounting custom. Intermediate Accounting, 10 Ed. Intermediate Accounting-package. Intermediate Accounting -upd.