Mastery Problem: The Adjusting Process.

Unadjusted Financial Statements

These financial statements were prepared from the unadjusted trial balance.

Cole Designs Inc.

Income Statement

For the Year Ended December $31,20$Y$3$

Fees earned $$69,000$

Wages expense $(44,600)$

Net income $$24,400$

Cole Designs Inc.

Balance Sheet

December $31,20$Y$3$

Assets

Cash $$5,000$

Accounts receivable $31,800$

Supplies $3,625$

Prepaid insurance $4,600$

Office equipment $11,000$

Total assets $$56,025$

Liabilities

Unearned fees $$9,500$

Stockholders$$ Equity

Common stock $$12,000$

Retained earnings $34,52546,525$

Total liabilities and stockholders$$ equity $$56,025$

Adjusted Financial Statements

These financial statements were prepared from the adjusted trial balance.

Cole Designs Inc.

Income Statement

For the Year Ended December $31,20$Y$3$

Fees earned $$74,550$

Expenses:

Wages expense $$46,450$

Supplies expense $3,565$

Insurance expense $3,600$

Depreciation expense $2,000$

Total expenses $(55,615)$

Net income $$18,935$

Cole Designs Inc.

Balance Sheet

December $31,20$Y$3$

Assets

Cash $$5,000$

Accounts receivable $32,400$

Supplies $60$

Prepaid insurance $1,000$

Office equipment $$11,000$

Accumulated depreciation$-$office equipment $(2,000)9,000$

Total assets $$47,460$

Liabilities

Wages payable $$1,850$

Unearned fees $4,550$

Total liabilities $$6,400$

Stockholders$$ Equity

Common stock $$12,000$

Retained earnings $29,06041,060$

Total liabilities and stockholders$$ equity $$47,460$

Question Content Area

Accounting Bases

Under which basis of accounting would adjusting entries never be recorded?

Which accounts would most likely not be used under the cash basis of accounting?

a$.$ Supplies Expense

b$.$ Unearned Fees

c$.$ Accounts Payable

d$.$ Revenue

e$.$ Accounts Receivable

f$.$ Cash

Question Content Area

Matching Principle$/$Revenue Recognition

Under the accrual basis of accounting, many of the account balances in the ledger at the end of the accounting period are reported on the financial statements without change. Some accounts require updating, though. When preparing financial statements, the economic life of the business is divided into time periods. The matching principle states that

Under the accrual basis of accounting, the revenue recognition principle states that

Review the following selected transaction data of a business for April. Keeping the matching principle in mind, indicate which of the following would be used to compute net income for the month of April.

a$.$ Cash paid in April for expenses incurred in May.

b$.$ Cash paid in April for expenses incurred in April.

c$.$ Cash received in April from customers for services performed in May.

d$.$ Expenses incurred in April but not paid until June.

e$.$ Services provided to customers on account during April.

f$.$ Cash received from cash customers for services performed in April.

Question Content Area

Overstated, Understated

Assume that the Cole Designs Inc. financial statements in the Unadjusted Financial Statements panel were prepared from the unadjusted trial balance and the financial statements in the Adjusted Financial Statements panel were prepared from the adjusted trial balance.

For the following financial statement items, indicate Yes or No if the item was overstated, understated or neither on the financial statements prepared using the unadjusted trial balance.

Overstated Understated Neither

Net income

Stockholders$$ equity

Revenues

Total assets

Total expenses

Total liabilities

Question Content Area

Adjusting Entries

Journalize the six December $31$ adjusting entries for Cole Designs Inc. that adjusted the accounts to arrive at the financial statements in the Adjusted Financial Statements panel. If an amount box does not require an entry, leave it blank.

Dec. $31$

Dec. $31$

Dec. $31$

Dec. $31$

Dec. $31$

Dec. $31$