Homework Assignment 03A

1. Explain the difference between accrual basis accounting and cash basis accounting.
The difference between accrual basis accounting and cash basis accounting is the point at which
revenue and expenses are recognized. In the income statement, the cash method accounts for
revenue only when the money is received and for expenses when money is paid out. The accrual
method accounts for revenue when it’s earned, and expense goods and services when they are
incurred. Revenue will be recorded whether cash is received or not, or if expenses have been incurred
but no cash is paid. The accrual basis accounting is required because of the matching principle. The
matching principle states that all expenses must be matched in the same accounting period as
revenues earned.

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 2. On March 1, a business paid $3,600 for a twelve-month liability insurance policy. On April 1, the
business entered into a two-year rental contract for equipment at a total cost of $18,000. Determine
the following amounts:
(a) Insurance expense for the month of March
$300.00
(b) Prepaid insurance as of March 31
$3,300.00
(c) Equipment rent expense for the month of April
$750.00
(d) Prepaid equipment rental as of April 30
$17,250.00

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 3.
Prepare the required entries for the following transactions:
Austin Company pays daily wages of $645 (Monday - Friday). Paydays are every other Friday. Prepare
(a)
the Monday, January 31 adjusting entry, assuming that the previous payday was Friday, January 21.
(b) Prepare the journal entry to record the Austin Company’s payroll on Friday, February 4.
Annual depreciation expense on the company’s fixed assets is $39,600. Prepare the adjusting entry to
(c)
recognize depreciation for the month of January.
The company’s office supplies account shows a debit balance of $3,755. A count of office supplies on
(d) hand on January 31 shows $635 worth of supplies on hand. Prepare the January 31 adjusting entry
for Office Supplies.

A.) Wages Expense $3,870.00

Wages Payable $3,870.00

B.) Wages Payable $6,450.00

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Cash $6,450.00

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C.) Depreciation expense $3,300.00

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Accrued Depreciation $3,300.00

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D.) Office Supplies Expense rs e $3,120.00
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Office Supplies $3,120.00
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 4. Prepare adjusting entries for the following transactions:

The beginning balance of the supplies account was $245. During the month the company bought
(a) additional supplies in the amount of $735. At the end of the month a physical inventory showed
$343 of unused supplies.
The company has a 12% note payable in the amount of $17,000 due in 6 months. The interest
(b)
expense for the month has not been recorded.
The company has two employees. The manager is paid on the 15th of every month for work
performed during the first half of the month and on the 1st of the following month for the work
(c) performed during the second half of the month. His monthly salary is $5,500. The other employee
is paid $650 for each 5-day work week (Monday - Friday). The last day of the month fell on
Thursday.
The unearned revenue account shows a balance of $46,000. According to the manager 60% of that
(d)
amount has been earned.
(e) At the end of the month $5,700 of services had been performed but not yet billed.

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A) Supplies Expense $637.00

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Supplies $637.00

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B) Interest Expense $170.00
Interest Payable $170.00

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C) Wages & Salary Expense
rs e $3,270.00
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Wages & Salary Payable $3,270.00
D) Unearned Revenue $27,600.00
Fees Earned $27,600.00
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E) Accounts Receivable $5,700.00

Fees Earned $5,700.00
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 5. At the end of the fiscal year, the following adjusting entries were omitted:
(a) No adjusting entry was made to transfer the $1,750 of prepaid insurance from the asset
account to the expense account.
(b) No adjusting entry was made to record accrued fees of $525 for services provided to
customers.
Assuming that financial statements are prepared before the errors are discovered, indicate the
effect of each error, considered individually, by inserting the dollar amount in the appropriate
spaces. Insert "0" if the error does not affect the item.

Error (a) Error (b)

Overstated Understated Overstated Understated
(1) Assets at December 31 would be $ 0 0 $

(2) Liabilities at Dec. 31 would be 0 0 0 0

(3) Net income for the year would be $ 0 0 $

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(4) Owner’s equity at Dec. 31 would be $ 0 0 $

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