Exam 3: Adjusting Accounts and Preparing Financial Statements

On May 1, Carter Advertising Company received $3,600 from Kaitlyn Breanna for advertising services to be completed April 30 of the following year. The Cash receipt was recorded as unearned fees. The adjusting entry for the year ended December 31, Year 2 would include:

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show proper financial statement amounts even though all transactions were correctly recorded.

The following unadjusted and adjusted trial balances were taken from the current year's accounting system for High Point. In general journal form, present the six adjusting entries that explain the changes in the account balances from the unadjusted to the adjusted trial balance.

Two main accounting principles used in accrual accounting are matching and full closure.

A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account.

Which of the following statements is incorrect?

Unearned revenue is reported in the financial statements as:

Salvo Co. had the following transactions in the last two months of its year ended December 31. Prepare entries for these transactions under the method that records prepaid expenses as expenses and records unearned revenues as revenues. Also prepare adjusting entries at the end of the year.

A _____________ account is an account linked with another account, having an opposite normal balance, and reported as a subtraction from that other account's balance.

Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items.

Accrued revenues:

Profit margin measures the relation of debt to assets.

The matching principle does not aim to record expenses in the same accounting period as the revenue earned as a result of these expenses.

An account linked with another account that has an opposite normal balance and that is subtracted from the balance of the related account is a(n):

On June 30 of the current calendar year, Apricot Co. paid $7,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 for Apricot would include:

A salary owed to employees is an example of an accrued expense.

Profit margin = ___________________ divided by net sales.

Based on the unadjusted trial balance for Bella's Beauty Salon and the adjusting information given below, prepare the adjusting journal entries for Bella's Beauty Salon. After completing the adjusting entries, prepare the trial balance for Bella's Beauty Salon. Bella Beauty Salon's unadjusted trial balance for the current year follows: Additional information: a. An insurance policy examination showed $1,240 of expired insurance. b. An inventory count showed $210 of unused shop supplies still available. c. Depreciation expense on shop equipment, $350. d. Depreciation expense on the building, $2,220. e. A beautician is behind on space rental payments, and this $200 of accrued revenues was unrecorded at the time the trial balance was prepared. f. $800 of the Unearned Rent account balance was earned by year-end. g. The one employee, a receptionist, works a five-day workweek at $50 per day. The employee was paid last week but has worked four days this week for which she has not been paid. h. Three months' property taxes, totaling $450, have accrued. This additional amount of property taxes expense has not been recorded. i. One month's interest on the note payable, $600, has accrued but is unrecorded. Use the above information to prepare the adjusted trial balance for Bella's Beauty Salon.

The following information is available for Hughes Co. From the information provided, calculate Hughes' profit margin ratio for each of the three years. In 2010 economic conditions and a slowing economy impacted the results of operations. Comment on the results, assuming that the industry average for the profit margin ratio is 7% for each of the three years.

A company's month-end adjusting entry for Insurance Expense is $1,000. If this entry is not made then expenses are understated by $1,000 and net income is overstated by $1,000.