,Introductory Financial Accounting for Business, 1e (Edmonds)
Chapter 3 Accounting for Deferrals
Indicate how each event affects the financial statements model. Use the following letters to record your
answer in the box shown below each element. You do not need to enter amounts.
Increase = I Decrease = D Not Affected = NA
(Note that "Not Affected" means that the event does not affect that element of the financial statements
or that the event causes an increase in that element, which is offset by a decrease in that same
element.)
1) Green Company paid $900 cash to purchase supplies.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
Paying cash to purchase supplies decreases one asset account (cash) and increases asset account
(supplies). The total amount of assets is not affected. It does not affect the income statement. Even
though cash has been paid, expense recognition is deferred until the supplies are used. It will be
reported as a cash outflow from operating activities on the statement of cash flows.
Difficulty: 1 Easy
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
2) Nickle Company performed a physical count of supplies and determined that the company used $600
of supplies during the year.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
Recognizing supplies expense is an asset use transaction. Assets (supplies) decrease and stockholder's
equity (retained earnings) decreases. The recognition of supplies expense would cause the amount of
net income shown on the income statement to decrease. There is no cash payment associated with the
use of supplies. Because the expense recognition did not involve the payment of cash, there is no effect
on the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
1
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,3) On February 1, Year 1, Owen Company paid $24,000 cash to lease office space for one year beginning
immediately.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
The cost of the office space is recognized as an asset. The asset account, Prepaid Rent, increases and the
asset account, Cash, decreases. Expense recognition is deferred until Owen Company uses the office
space to help generate revenue. Since the expense is deferred, there is no impact on stockholders'
equity (retained earnings) nor on the income statement. There is a cash outflow for operating activities
on the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
4) Owen Company recognizes rent expense for the period from February 1, Year 1, to December 31,
Year 1. Assume the company paid $24,000 cash to lease the office space on February 1, Year 1.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
At the end of Year 1, Owen is required to expense the amount of office space that has been used. Since
Owen paid $24,000 on February 1, Year 1, to rent office space for one year, the portion of the lease cost
that represents the office use from February 1 to December 31 is 11 months and $22,000. Recognizing
rent expense will decrease assets, Prepaid Rent, and stockholders' equity (retained earnings). Rent
expense will decrease net income. There is no effect on the statement of cash flows because the cash
was paid on February 1, Year 1.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
5) Calloway Company collected $750 from a customer for services that Calloway agrees to perform in
the future.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (I) (I) (NA) (NA) (NA) (NA) (I)
2
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Collecting a payment in advance from a customer increases assets (cash) and increases liabilities
(unearned revenue). It does not affect the income statement. Revenue will not be recognized until the
services are provided. It will be reported as a cash inflow from operating activities on the statement of
cash flows.
Difficulty: 1 Easy
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
6) Jennings Company makes an adjusting entry to recognize $500 of the previously unearned revenue
earned that it has now earned by providing services to its client during the period.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (D) (I) (I) (NA) (I) (NA)
The year-end adjustment moves $500 from the Unearned Revenue account to the Revenue account.
This adjustment is a claims exchange transaction. Assets are not affected. On the balance sheet,
liabilities (Unearned Revenue) decrease and stockholders' equity (Retained Earnings) increases. On the
income statement, revenue and net income increase. The statement of cash flows is not affected.
Difficulty: 1 Easy
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
7) On January 1, Year 1, Monica Company paid $41,000 cash to purchase a truck.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
Purchasing a truck for cash is an asset exchange transaction. The asset account, Cash, decreases and the
asset account, Truck, increases. The purchase does not affect the income statement. Because the asset
has a long term useful life the cash outflow is categorized as an investing activity on the statement of
cash flows.
Difficulty: 1 Easy
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
3
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 3 Accounting for Deferrals
Indicate how each event affects the financial statements model. Use the following letters to record your
answer in the box shown below each element. You do not need to enter amounts.
Increase = I Decrease = D Not Affected = NA
(Note that "Not Affected" means that the event does not affect that element of the financial statements
or that the event causes an increase in that element, which is offset by a decrease in that same
element.)
1) Green Company paid $900 cash to purchase supplies.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
Paying cash to purchase supplies decreases one asset account (cash) and increases asset account
(supplies). The total amount of assets is not affected. It does not affect the income statement. Even
though cash has been paid, expense recognition is deferred until the supplies are used. It will be
reported as a cash outflow from operating activities on the statement of cash flows.
Difficulty: 1 Easy
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
2) Nickle Company performed a physical count of supplies and determined that the company used $600
of supplies during the year.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
Recognizing supplies expense is an asset use transaction. Assets (supplies) decrease and stockholder's
equity (retained earnings) decreases. The recognition of supplies expense would cause the amount of
net income shown on the income statement to decrease. There is no cash payment associated with the
use of supplies. Because the expense recognition did not involve the payment of cash, there is no effect
on the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Supplies
Learning Objective: 03-01 Show how accounting for supplies affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
1
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
,3) On February 1, Year 1, Owen Company paid $24,000 cash to lease office space for one year beginning
immediately.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
The cost of the office space is recognized as an asset. The asset account, Prepaid Rent, increases and the
asset account, Cash, decreases. Expense recognition is deferred until Owen Company uses the office
space to help generate revenue. Since the expense is deferred, there is no impact on stockholders'
equity (retained earnings) nor on the income statement. There is a cash outflow for operating activities
on the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
4) Owen Company recognizes rent expense for the period from February 1, Year 1, to December 31,
Year 1. Assume the company paid $24,000 cash to lease the office space on February 1, Year 1.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
At the end of Year 1, Owen is required to expense the amount of office space that has been used. Since
Owen paid $24,000 on February 1, Year 1, to rent office space for one year, the portion of the lease cost
that represents the office use from February 1 to December 31 is 11 months and $22,000. Recognizing
rent expense will decrease assets, Prepaid Rent, and stockholders' equity (retained earnings). Rent
expense will decrease net income. There is no effect on the statement of cash flows because the cash
was paid on February 1, Year 1.
Difficulty: 2 Medium
Topic: Accounting for Prepaid Items
Learning Objective: 03-02 Show how accounting for prepaid items affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
5) Calloway Company collected $750 from a customer for services that Calloway agrees to perform in
the future.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (I) (I) (NA) (NA) (NA) (NA) (I)
2
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
, Collecting a payment in advance from a customer increases assets (cash) and increases liabilities
(unearned revenue). It does not affect the income statement. Revenue will not be recognized until the
services are provided. It will be reported as a cash inflow from operating activities on the statement of
cash flows.
Difficulty: 1 Easy
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
6) Jennings Company makes an adjusting entry to recognize $500 of the previously unearned revenue
earned that it has now earned by providing services to its client during the period.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (D) (I) (I) (NA) (I) (NA)
The year-end adjustment moves $500 from the Unearned Revenue account to the Revenue account.
This adjustment is a claims exchange transaction. Assets are not affected. On the balance sheet,
liabilities (Unearned Revenue) decrease and stockholders' equity (Retained Earnings) increases. On the
income statement, revenue and net income increase. The statement of cash flows is not affected.
Difficulty: 1 Easy
Topic: Accounting for Unearned Revenue
Learning Objective: 03-03 Show how accounting for unearned revenues affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
7) On January 1, Year 1, Monica Company paid $41,000 cash to purchase a truck.
Assets Liabilities Equity Revenue Expenses Net Income Stmt of Cash Flows
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
Purchasing a truck for cash is an asset exchange transaction. The asset account, Cash, decreases and the
asset account, Truck, increases. The purchase does not affect the income statement. Because the asset
has a long term useful life the cash outflow is categorized as an investing activity on the statement of
cash flows.
Difficulty: 1 Easy
Topic: Accounting for Depreciation
Learning Objective: 03-05 Compute depreciation expense and show how it affects financial statements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
3
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
