CHAPTER y3
THE yADJUSTING yPROCESS
DISCUSSION yQUESTIONS
1. a. Under ycash-basis yaccounting, yrevenues yare yreported yin ythe yperiod yin ywhich ycash yis
yreceived yand yexpenses yare yreported yin ythe yperiod yin ywhich ycash yis ypaid.
b. Under yaccrual-basis yaccounting, yrevenues yare yreported yin ythe yperiod yin ywhich ythey yare
yearned yand yexpenses yare yreported yin ythe ysame yperiod yas ythe yrevenues yto ywhich ythey
yrelate.
2. The y matching y concept y is yrelated y to y the y accrual y basis y of y accounting.
3. Adjusting y entries y are y needed y at y the y end yof y an y accounting y period y to y bring y the y ledger y up y to
y date.
4. Adjusting yentries ybring ythe yledger yup yto ydate yas ya ynormal ypart yof ythe yaccounting ycycle.
yCorrecting y entries ycorrect yerrors yin ythe yledger.
5. Four ydifferent ycategories yof yadjusting yentries yinclude yprepaid yexpenses y(deferred yexpenses),
yunearned y revenues y(deferred yrevenues), yaccrued yexpenses y(accrued yliabilities), yand yaccrued
yrevenues y(accrued y assets).
6. Statement y (a): y Increases y the y balance y of y a y revenue y account.
7. Statement y (b): y Increases y the y balance y of y an y expense y account.
8. Yes, y because y every y adjusting y entry y affects y expenses y or y revenues.
9. a. The y rights y acquired y represent y an y asset.
b. The yjustification yfor ydebiting yRent yExpense yis ythat ywhen ythe yledger yis ysummarized
yin ya ytrial ybalance yat ythe yend yof ythe ymonth yand ystatements yare yprepared, ythe yrent
ywill yhave ybecome yan yexpense. yHence, yno yadjusting yentry ywill ybe ynecessary.
10. a. The yportion yof ythe ycost yof ya yfixed yasset ydeducted yfrom yrevenue yof ythe yperiod yis
ydebited yto yDepreciation yExpense. yIt yrepresents ythe ycost yof ythe yfixed yasset ythat yhas
ybeen yexpensed yin ygenerating y revenue y during y the y period. y The y reduction y in y the
y fixed y asset y account y is y recorded
by ya ycredit yto yAccumulated yDepreciation yrather ythan yto ythe yfixed yasset yaccount. yThe
yuse yof ythe ycontra yasset yaccount yfacilitates ythe ypresentation yof yoriginal ycost yand
yaccumulated ydepreciation y on ythe ybalance ysheet.
b. Depreciation y Expense—debit y balance; y Accumulated y Depreciation—credit y balance.
c. No. y It y is y not y customary yfor y the y balances y of y the y two y accounts y to y be y equal y in y amount.
d. Depreciation yExpense yappears yon ythe yincome ystatement; yAccumulated yDepreciation
yappears yon ythe ybalance ysheet.
3-1
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 3 The Adjusting Process
PRACTICE yEXERCISES
PE y 3-1A
a. No c. Yes e. No
b. No d. No f. Yes
PE y 3-1B
a. Yes c. No e. Yes
b. No d. Yes f. Yes
PE y 3-2A
a. (2) y Unearned y revenue c. (4) y Accrued y expense
b. (3) y Accrued y revenue d. (1) y Prepaid y expense
PE y 3-2B
a. (2) y Unearned y revenue c. (3) y Accrued y revenue
b. (1) y Prepaid y expense d. (4) y Accrued y expense
PE y 3-3A
Accounts y Receivable 18,540
Fees yEarned 18,540
Accrued y fees.
PE y 3-3B
Accounts y Receivable 27,480
Fees yEarned 27,480
Accrued y fees.
PE y 3-4A
Salaries y Expense 22,200
Salaries y Payable 22,200
Accrued ysalaries y [($33,300 y ÷ y 6 y days) y × y 4 y days].
PE y 3-4B
Salaries y Expense 6,480
Salaries y Payable 6,480
Accrued ysalaries y [($16,200 y ÷ y 5 y days) y × y 2 y days].
3-2
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 3 The Adjusting Process
PE y 3-5A
Dec. 31 Unearned y Rent 5,500
Rent y Revenue 5,500
Rent y Earned y [($13,200 y ÷ y 12 y months) y × y 5
y months].
PE y 3-5B
Dec. 31 Unearned y Fees 96,050
Fees yEarned 96,050
Fees y Earned y ($316,290 y – y $220,240).
PE y 3-6A
Insurance y Expense 23,400
Prepaid y Insurance 23,400
Insurance yexpired y ($6,800 y + y $25,100 y – y $8,500).
PE y 3-6B
Supplies y Expense 8,285
Supplies 8,285
Supplies y used y ($4,085 y + y $7,810 y – y $3,610).
PE y 3-7A
Depreciation y Expense 14,400
Accumulated y Depreciation—Equipment 14,400
Depreciation y on y equipment.
PE y 3-7B
Depreciation y Expense 8,120
Accumulated y Depreciation—Building 8,120
Depreciation y on y building.
3-3
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 3 The Adjusting Process
PE y 3-8A
a. Revenues y were y understated y by y $8,000.
b. Expenses y were y understated y by y $12,600 y ($1,700 y + y $10,900).
c. Net y income y was y overstated y by y $4,600 y ($12,600 y – y $8,000).
PE y 3-8B
a. Revenues y were y understated y by y $64,400.
b. Expenses y were y understated y by y $19,000 y ($8,400 y + y $10,600).
c. Net y income y was y understated y by y $45,400 y ($64,400 y – y $19,000).
PE y 3-9A
a. The ytotals yare yequal yeven ythough ythe ycredit yshould yhave ybeen yto
yWages yPayable yinstead yof yAccounts yPayable.
b. The y totals y are y unequal. y The y credit y total y is y higher y by y $72 y ($1,591 y – y $1,519).
PE y 3-9B
a. The y totals y are y unequal. y The y debit y total y is y higher y by y $1,800 y ($9,700 y – y $7,900).
b. The y totals y are y equal y because y the y adjusting y entry y was y omitted.
PE y 3-10A
a. Upward Company
Income Statements
For the Years Ended December 31
20Y5 20Y4
Amount Percent Amount Percent
Fees earned $924,000 100% $784,000 100%
Operating expenses 545,160 59% 478,240 61%
Income from operations $378,840 41% $305,760 39%
b. A yfavorable ychange yof ydecreasing yoperating yexpenses yand yincreasing yincome
yfrom yoperations yas ypercentages yof yrevenue yis yindicated.
PE y 3-10B
a. Versatile Company
Income Statements
For the Years Ended December 31
20Y5 20Y4
Amount Percent Amount Percent
Fees earned $1,468,000 100% $1,164,000 100%
Operating expenses 822,080 56% 628,560 54%
Income from operations $ 645,920 44% $ 535,440 46%
b. An yunfavorable ychange yof yincreasing yoperating yexpenses yand ydecreasing
yincome yfrom yoperations yas ypercentages yof yrevenue yis yindicated.
3-4
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
THE yADJUSTING yPROCESS
DISCUSSION yQUESTIONS
1. a. Under ycash-basis yaccounting, yrevenues yare yreported yin ythe yperiod yin ywhich ycash yis
yreceived yand yexpenses yare yreported yin ythe yperiod yin ywhich ycash yis ypaid.
b. Under yaccrual-basis yaccounting, yrevenues yare yreported yin ythe yperiod yin ywhich ythey yare
yearned yand yexpenses yare yreported yin ythe ysame yperiod yas ythe yrevenues yto ywhich ythey
yrelate.
2. The y matching y concept y is yrelated y to y the y accrual y basis y of y accounting.
3. Adjusting y entries y are y needed y at y the y end yof y an y accounting y period y to y bring y the y ledger y up y to
y date.
4. Adjusting yentries ybring ythe yledger yup yto ydate yas ya ynormal ypart yof ythe yaccounting ycycle.
yCorrecting y entries ycorrect yerrors yin ythe yledger.
5. Four ydifferent ycategories yof yadjusting yentries yinclude yprepaid yexpenses y(deferred yexpenses),
yunearned y revenues y(deferred yrevenues), yaccrued yexpenses y(accrued yliabilities), yand yaccrued
yrevenues y(accrued y assets).
6. Statement y (a): y Increases y the y balance y of y a y revenue y account.
7. Statement y (b): y Increases y the y balance y of y an y expense y account.
8. Yes, y because y every y adjusting y entry y affects y expenses y or y revenues.
9. a. The y rights y acquired y represent y an y asset.
b. The yjustification yfor ydebiting yRent yExpense yis ythat ywhen ythe yledger yis ysummarized
yin ya ytrial ybalance yat ythe yend yof ythe ymonth yand ystatements yare yprepared, ythe yrent
ywill yhave ybecome yan yexpense. yHence, yno yadjusting yentry ywill ybe ynecessary.
10. a. The yportion yof ythe ycost yof ya yfixed yasset ydeducted yfrom yrevenue yof ythe yperiod yis
ydebited yto yDepreciation yExpense. yIt yrepresents ythe ycost yof ythe yfixed yasset ythat yhas
ybeen yexpensed yin ygenerating y revenue y during y the y period. y The y reduction y in y the
y fixed y asset y account y is y recorded
by ya ycredit yto yAccumulated yDepreciation yrather ythan yto ythe yfixed yasset yaccount. yThe
yuse yof ythe ycontra yasset yaccount yfacilitates ythe ypresentation yof yoriginal ycost yand
yaccumulated ydepreciation y on ythe ybalance ysheet.
b. Depreciation y Expense—debit y balance; y Accumulated y Depreciation—credit y balance.
c. No. y It y is y not y customary yfor y the y balances y of y the y two y accounts y to y be y equal y in y amount.
d. Depreciation yExpense yappears yon ythe yincome ystatement; yAccumulated yDepreciation
yappears yon ythe ybalance ysheet.
3-1
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 3 The Adjusting Process
PRACTICE yEXERCISES
PE y 3-1A
a. No c. Yes e. No
b. No d. No f. Yes
PE y 3-1B
a. Yes c. No e. Yes
b. No d. Yes f. Yes
PE y 3-2A
a. (2) y Unearned y revenue c. (4) y Accrued y expense
b. (3) y Accrued y revenue d. (1) y Prepaid y expense
PE y 3-2B
a. (2) y Unearned y revenue c. (3) y Accrued y revenue
b. (1) y Prepaid y expense d. (4) y Accrued y expense
PE y 3-3A
Accounts y Receivable 18,540
Fees yEarned 18,540
Accrued y fees.
PE y 3-3B
Accounts y Receivable 27,480
Fees yEarned 27,480
Accrued y fees.
PE y 3-4A
Salaries y Expense 22,200
Salaries y Payable 22,200
Accrued ysalaries y [($33,300 y ÷ y 6 y days) y × y 4 y days].
PE y 3-4B
Salaries y Expense 6,480
Salaries y Payable 6,480
Accrued ysalaries y [($16,200 y ÷ y 5 y days) y × y 2 y days].
3-2
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 3 The Adjusting Process
PE y 3-5A
Dec. 31 Unearned y Rent 5,500
Rent y Revenue 5,500
Rent y Earned y [($13,200 y ÷ y 12 y months) y × y 5
y months].
PE y 3-5B
Dec. 31 Unearned y Fees 96,050
Fees yEarned 96,050
Fees y Earned y ($316,290 y – y $220,240).
PE y 3-6A
Insurance y Expense 23,400
Prepaid y Insurance 23,400
Insurance yexpired y ($6,800 y + y $25,100 y – y $8,500).
PE y 3-6B
Supplies y Expense 8,285
Supplies 8,285
Supplies y used y ($4,085 y + y $7,810 y – y $3,610).
PE y 3-7A
Depreciation y Expense 14,400
Accumulated y Depreciation—Equipment 14,400
Depreciation y on y equipment.
PE y 3-7B
Depreciation y Expense 8,120
Accumulated y Depreciation—Building 8,120
Depreciation y on y building.
3-3
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 3 The Adjusting Process
PE y 3-8A
a. Revenues y were y understated y by y $8,000.
b. Expenses y were y understated y by y $12,600 y ($1,700 y + y $10,900).
c. Net y income y was y overstated y by y $4,600 y ($12,600 y – y $8,000).
PE y 3-8B
a. Revenues y were y understated y by y $64,400.
b. Expenses y were y understated y by y $19,000 y ($8,400 y + y $10,600).
c. Net y income y was y understated y by y $45,400 y ($64,400 y – y $19,000).
PE y 3-9A
a. The ytotals yare yequal yeven ythough ythe ycredit yshould yhave ybeen yto
yWages yPayable yinstead yof yAccounts yPayable.
b. The y totals y are y unequal. y The y credit y total y is y higher y by y $72 y ($1,591 y – y $1,519).
PE y 3-9B
a. The y totals y are y unequal. y The y debit y total y is y higher y by y $1,800 y ($9,700 y – y $7,900).
b. The y totals y are y equal y because y the y adjusting y entry y was y omitted.
PE y 3-10A
a. Upward Company
Income Statements
For the Years Ended December 31
20Y5 20Y4
Amount Percent Amount Percent
Fees earned $924,000 100% $784,000 100%
Operating expenses 545,160 59% 478,240 61%
Income from operations $378,840 41% $305,760 39%
b. A yfavorable ychange yof ydecreasing yoperating yexpenses yand yincreasing yincome
yfrom yoperations yas ypercentages yof yrevenue yis yindicated.
PE y 3-10B
a. Versatile Company
Income Statements
For the Years Ended December 31
20Y5 20Y4
Amount Percent Amount Percent
Fees earned $1,468,000 100% $1,164,000 100%
Operating expenses 822,080 56% 628,560 54%
Income from operations $ 645,920 44% $ 535,440 46%
b. An yunfavorable ychange yof yincreasing yoperating yexpenses yand ydecreasing
yincome yfrom yoperations yas ypercentages yof yrevenue yis yindicated.
3-4
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
