Exam 3: Measuring Business Income: Adjusting the Accounts

Susan Kane won the mayoral election in the City of Ashley partly on the basis of her charge that Allen Ross,the former mayor,was responsible for the budget deficit.After taking office,she hired a major international accounting firm to straighten things out.This excerpt appeared in an article from a leading business publication,West End Business Review: [A riddle] Q: When is a budget deficit not a deficit? A: When it is a surplus,of course. Ashley Mayor Susan Kane was once again caught with egg on her face last week as she and her financial advisers tried to defend that riddle.On one hand,Comptroller Jim Guan,a Kane appointee,testified in hearings that the city had actually ended 20x5 with a $6 million surplus,not the much-reported deficit.He said further that the modest surplus grew to $54 million as a result of tax-enrichment supplements to the 20x5 balance sheet. On the other hand,the mayor stuck by the same guns she used last year on her predecessor.The city had ended 20x5,under the Allen Ross administration,not merely without a surplus,but with a deficit.The apparent discrepancy can be explained. Like most U.S.cities,Ashley operates under a modified accrual accounting basis.This is a combination of the cash basis and the accrual basis.The modified accrual basis differs from the accrual basis in that revenue is recorded when it is collected.The collection of Ashley's parking tax,which is assessed on all city parking lots and garages,is an example. The tax is assessed and collected on a quarterly basis,but the city doesn't collect the amount due for the last quarter of 20x6 until the first quarter of 20x7.Under ideal accrual methods,the parking revenues should be recorded in the 20x6 financial statements.Under a cash approach,the revenues would be recorded in the 20x7 budget.What the city did before was to record the money whenever it was advantageous politically.That,combined with the infamous revolving funds,allowed the city to hide the fact it was running large deficits under former Mayor Ross.That also means that no one really knew where the city stood. The auditors are now reallocating the parking revenues to the 20x7 budget but are accruing other revenues by shifting the period of collection from a year in the past.Overall,more revenues were moved into earlier fiscal years than into later years,inflating those budgets.Thus,the 20x7 deficit is a surplus. The article concluded: The upshot is that both Mayor Kane and Mr.Guan (the comptroller)were correct.There was a deficit in the 20x5 corporate or checkbook fund,but because of corrections taking place now,a surplus exists. a.Do you agree with the way the auditors handled parking revenues? Support your answer by explaining which method of accounting you think a city should use. b.Comment on the statement,"Systematically applied accounting principles will allow all to know exactly where the city stands."

Adjusting the accounts is a technique used to accomplish accrual accounting

Equipment might be depreciated over 15 years because

As the usefulness of a plant asset expires,

When a net loss occurs,it is subtracted from the balance in the Retained Earnings account.

The primary purpose of an expense is to generate revenue.

Accounts Receivable was $1,500 at the end of November and $1,050 at the end of December.Revenue totaled $8,400 for December.How much cash was received from revenues during December?

The adjusted trial balance may contain accounts that did not appear in the trial balance.

Revenue is equal to the cash received by a company during an accounting period.

The amount of a depreciable asset's annual depreciation expense can typically be obtained by referring to the balance sheet.

In order for revenue to be recognized,the seller's price to the buyer must be fixed or determinable.

When expenses exceed revenues,

In accounting,depreciation refers to the decline in fair value of a plant asset.

Use this information to answer the following question. The trial balance for Nowwick Company appears as follows: -If services totaling $250 had been performed but not billed,

Red Company created advertising copy for a client.Which of the following does not indicate that the transaction meets the SEC's four criteria for revenue recognition?

The 20x5 income statement for Almond Company showed rent expense of $10,800 and salaries expense of $7,200.The related balance sheet account balances at year end for last year and this year were as follows: a.Compute cash paid for rent during the year. b.Compute cash paid for salaries during the year.

Which of the following actions can distort company records and result in fraudulent financial reporting?

Custom Realty Services sold a house for a client and will be paid a commission for its services.Using the SEC's four conditions or revenue recognition,explain why Custom Realty Services either should or should not recognize the revenue now.

Which of the following transactions is most likely not to result in an adjusting entry at the end of the period?

Use this information to answer the following question. The trial balance for Nowwick Company appears as follows: -If on December 31,20x5,supplies on hand were $120,the adjusting entry would contain a