Last revised: December 2021.
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Revised for the 17th Edition by:
John Harris, Seneca College
Technical checks by: Rhonda Heninger, SAIT
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-1
,Last revised: December 2021.
Chapter 3 Adjusting Accounts for
Financial Statements
Chapter Opening Critical Thinking Challenge Questions*
Riot Micro should consider the matching principle discussed in Chapter 1, where a company will
match the expenses relating to the revenue it generated in the period in which the revenue is
recorded. These expenses would include a portion of any development costs that were
capitalized as well as any direct manufacturing costs of building the product.
*The Chapter 3 Critical Thinking Challenge questions are asked at the beginning of this chapter.
Students are reminded at the conclusion of the chapter, to refer to the Critical Thinking
Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking
Challenge questions are available here in the Solutions Manual as well as the print book and
ebook.
Knowledge Check-Up Questions
1. d) 2. c) 3. b) 4. c) 5. b)
6. c) 7. a) 8. b) 9. a) 10. d)
Concept Review Questions
1. The cash basis reports revenues when cash is received while the accrual basis reports
revenues when they are earned.
The cash basis reports expenses when cash is paid while the accrual basis reports
expenses when economic benefits are used.
Accrual basis of accounting provides a better picture of a company’s performance. This is
because it records revenue and expenses in the period they most closely relate to. The
timing of when cash is received or paid can vary. These timing differences can distort the
true picture of a company’s performance. Also, accrual accounting increases the
comparability of the financial statements from one period to another.
Accrual basis of accounting follows generally accepted accounting principles (GAAP) and
is based on the GAAP principles of revenue recognition, matching, and timeliness. Cash
basis accounting is not allowed under GAAP.
2. Revenue should be recorded in the period it is earned. Earning revenue is when services
are provided or products are delivered. For example, you should record revenue when
you complete a graphic design project, such as designing cards for a customer. Once
you deliver your design service, you can record revenue, even if you have not received
the cash payment.
Expenses should be recorded in the period they are incurred. Expenses are incurred
when they are used. For example, you need to use your cell phone to discuss design
projects with customers. Your cell phone expense should be recorded in the month you
used the service. The expense can be recorded even if you do not need to pay the bill
until the next month.
Answers will vary for examples.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-2
,Last revised: December 2021.
3. Hannah, you have identified most of the revenues and expenses correctly. However,
here are two errors to correct.
(1) Unearned revenue is not a revenue. Revenue is recorded on the Income Statement to
reflect services that have been provided or products delivered. Unearned revenue is a
liability that is recorded on the Balance Sheet. Unearned revenue is recorded for cash
that has been received in advance for services or goods to be provided or delivered in the
future.
(2) Prepaid expense (also called Prepaids) is not an expense recorded on the Income
Statement. Prepaid expense is an asset recorded on the balance sheet. Prepaid
expense represents payments in advance for future benefit. An expense is something
that has already been used up and does not have future benefit.
4. Answers will vary, but may include:
Prepaying for a one-year gym membership.
Prepaying for a one-year magazine subscription.
Prepaying for one-year of car insurance.
Companies want customers to prepay because it decreases the risk of not receiving
payment later. Prepaying guarantees companies revenue for a certain length of time.
Receiving cash earlier also allows companies to have more cash to run their operations.
5. Not posting year-end adjusting entries means that the financial statements are missing
information and are not accurate. Adjusting entries impact Revenue and Expenses and
thus, impact profit. Since the Marketing and Human Resources department are basing
their decision partly on the financial statements, they risk making the wrong decision. The
Marketing department could spend too much or too little on the advertising campaign and
the Human Resource department could hire too many or too few employees. Posting the
year-end adjusting journal entries ensure complete information to make good business
decisions.
6. The accumulated depreciation contra account is used. It is used to provide statement users
with additional information about the cost of assets and the total amount of depreciation
charged to date. Without the contra account information, the reader would not be able to
determine the amount of depreciation expense for all prior periods when the assets were
being used.
7. An accrued revenue is a revenue that is not recorded until end-of-period adjustments are
made because cash is not received or the customer is not billed prior to the end of the
period. An example is interest income that has been earned but not collected.
8. For Spin Master, property, plant and equipment require adjustment for depreciation.
Depreciation expense would be understated on the income statement if Spin Master fails
to adjust this asset account resulting in profit being overstated.
9. The depreciation recorded during the year equals the depreciation of $102,782,000
shown on Recipe Unlimited Corporation’s income statement for the year ended December
27, 2020.
Recipe would depreciate property, plant and equipment such as equipment, buildings and
leasehold improvements.
Recipe could also depreciate (or amortize) intangible assets.
*10. If prepaid expenses are initially recorded with debits to expense accounts, asset accounts
are debited in the adjusting entries.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-3
, Last revised: December 2021.
QUICK STUDY
Quick Study 3-1
Cash Accounting
Revenues (cash receipts) ........................................................................... $37,000
Expenses (cash payments: $20,250 + $6,750) .......................................... 27,000
Net income ................................................................................................. $10,000
Accrual Accounting
Revenues (earned) .................................................................................... $45,000
Expenses (incurred) ................................................................................... 25,500
Net income.................................................................................................. $19,500
Quick Study 3-2
1. The timeliness principle has been violated since businesses must report at regular
intervals which is normally in one year intervals or less.
2. The matching principle has been violated because the supplies purchased on
September 30 will probably not have been used entirely on that date. Allard has not
accurately matched the expense of using the supplies to the accounting period in which
they were/will be used.
3. The revenue recognition principle has been violated. Although Nikos has collected the
cash it is not revenue until it has been earned. The $3,000 will not begin to be earned
until June 1, therefore, it should not be recorded as a revenue on May 3. Therefore, the
$3,000 should be recorded as a liability (i.e., unearned revenue).
4. The matching principle has been violated. Scooter Town has rented the equipment
therefore an expense has been incurred although cash will not be paid until sometime in
the future.
Quick Study 3-3
1. March – Revenue should be recorded in March because that is when Starbucks earns
revenue by delivering coffee to their customer. Unearned revenue should be recorded in
February.
2. September to December – Tuition revenue should be recorded each month as the
professor delivers the classes.
Quick Study 3-4
1. Cash basis:
Revenues (cash receipts)................................................................. $33,000
Expenses (cash payments) ($22,500 – $2,250 + $3,750)................ 24,000
Profit ................................................................................................. $ 9,000
2. Accrual basis:
Revenues (earned)........................................................................... $39,000
Expenses (incurred) ......................................................................... 22,500
Profit ................................................................................................. $16,500
3. The difference between the cash basis and the accrual basis is $7,500.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-4
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Revised for the 17th Edition by:
John Harris, Seneca College
Technical checks by: Rhonda Heninger, SAIT
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-1
,Last revised: December 2021.
Chapter 3 Adjusting Accounts for
Financial Statements
Chapter Opening Critical Thinking Challenge Questions*
Riot Micro should consider the matching principle discussed in Chapter 1, where a company will
match the expenses relating to the revenue it generated in the period in which the revenue is
recorded. These expenses would include a portion of any development costs that were
capitalized as well as any direct manufacturing costs of building the product.
*The Chapter 3 Critical Thinking Challenge questions are asked at the beginning of this chapter.
Students are reminded at the conclusion of the chapter, to refer to the Critical Thinking
Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking
Challenge questions are available here in the Solutions Manual as well as the print book and
ebook.
Knowledge Check-Up Questions
1. d) 2. c) 3. b) 4. c) 5. b)
6. c) 7. a) 8. b) 9. a) 10. d)
Concept Review Questions
1. The cash basis reports revenues when cash is received while the accrual basis reports
revenues when they are earned.
The cash basis reports expenses when cash is paid while the accrual basis reports
expenses when economic benefits are used.
Accrual basis of accounting provides a better picture of a company’s performance. This is
because it records revenue and expenses in the period they most closely relate to. The
timing of when cash is received or paid can vary. These timing differences can distort the
true picture of a company’s performance. Also, accrual accounting increases the
comparability of the financial statements from one period to another.
Accrual basis of accounting follows generally accepted accounting principles (GAAP) and
is based on the GAAP principles of revenue recognition, matching, and timeliness. Cash
basis accounting is not allowed under GAAP.
2. Revenue should be recorded in the period it is earned. Earning revenue is when services
are provided or products are delivered. For example, you should record revenue when
you complete a graphic design project, such as designing cards for a customer. Once
you deliver your design service, you can record revenue, even if you have not received
the cash payment.
Expenses should be recorded in the period they are incurred. Expenses are incurred
when they are used. For example, you need to use your cell phone to discuss design
projects with customers. Your cell phone expense should be recorded in the month you
used the service. The expense can be recorded even if you do not need to pay the bill
until the next month.
Answers will vary for examples.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-2
,Last revised: December 2021.
3. Hannah, you have identified most of the revenues and expenses correctly. However,
here are two errors to correct.
(1) Unearned revenue is not a revenue. Revenue is recorded on the Income Statement to
reflect services that have been provided or products delivered. Unearned revenue is a
liability that is recorded on the Balance Sheet. Unearned revenue is recorded for cash
that has been received in advance for services or goods to be provided or delivered in the
future.
(2) Prepaid expense (also called Prepaids) is not an expense recorded on the Income
Statement. Prepaid expense is an asset recorded on the balance sheet. Prepaid
expense represents payments in advance for future benefit. An expense is something
that has already been used up and does not have future benefit.
4. Answers will vary, but may include:
Prepaying for a one-year gym membership.
Prepaying for a one-year magazine subscription.
Prepaying for one-year of car insurance.
Companies want customers to prepay because it decreases the risk of not receiving
payment later. Prepaying guarantees companies revenue for a certain length of time.
Receiving cash earlier also allows companies to have more cash to run their operations.
5. Not posting year-end adjusting entries means that the financial statements are missing
information and are not accurate. Adjusting entries impact Revenue and Expenses and
thus, impact profit. Since the Marketing and Human Resources department are basing
their decision partly on the financial statements, they risk making the wrong decision. The
Marketing department could spend too much or too little on the advertising campaign and
the Human Resource department could hire too many or too few employees. Posting the
year-end adjusting journal entries ensure complete information to make good business
decisions.
6. The accumulated depreciation contra account is used. It is used to provide statement users
with additional information about the cost of assets and the total amount of depreciation
charged to date. Without the contra account information, the reader would not be able to
determine the amount of depreciation expense for all prior periods when the assets were
being used.
7. An accrued revenue is a revenue that is not recorded until end-of-period adjustments are
made because cash is not received or the customer is not billed prior to the end of the
period. An example is interest income that has been earned but not collected.
8. For Spin Master, property, plant and equipment require adjustment for depreciation.
Depreciation expense would be understated on the income statement if Spin Master fails
to adjust this asset account resulting in profit being overstated.
9. The depreciation recorded during the year equals the depreciation of $102,782,000
shown on Recipe Unlimited Corporation’s income statement for the year ended December
27, 2020.
Recipe would depreciate property, plant and equipment such as equipment, buildings and
leasehold improvements.
Recipe could also depreciate (or amortize) intangible assets.
*10. If prepaid expenses are initially recorded with debits to expense accounts, asset accounts
are debited in the adjusting entries.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-3
, Last revised: December 2021.
QUICK STUDY
Quick Study 3-1
Cash Accounting
Revenues (cash receipts) ........................................................................... $37,000
Expenses (cash payments: $20,250 + $6,750) .......................................... 27,000
Net income ................................................................................................. $10,000
Accrual Accounting
Revenues (earned) .................................................................................... $45,000
Expenses (incurred) ................................................................................... 25,500
Net income.................................................................................................. $19,500
Quick Study 3-2
1. The timeliness principle has been violated since businesses must report at regular
intervals which is normally in one year intervals or less.
2. The matching principle has been violated because the supplies purchased on
September 30 will probably not have been used entirely on that date. Allard has not
accurately matched the expense of using the supplies to the accounting period in which
they were/will be used.
3. The revenue recognition principle has been violated. Although Nikos has collected the
cash it is not revenue until it has been earned. The $3,000 will not begin to be earned
until June 1, therefore, it should not be recorded as a revenue on May 3. Therefore, the
$3,000 should be recorded as a liability (i.e., unearned revenue).
4. The matching principle has been violated. Scooter Town has rented the equipment
therefore an expense has been incurred although cash will not be paid until sometime in
the future.
Quick Study 3-3
1. March – Revenue should be recorded in March because that is when Starbucks earns
revenue by delivering coffee to their customer. Unearned revenue should be recorded in
February.
2. September to December – Tuition revenue should be recorded each month as the
professor delivers the classes.
Quick Study 3-4
1. Cash basis:
Revenues (cash receipts)................................................................. $33,000
Expenses (cash payments) ($22,500 – $2,250 + $3,750)................ 24,000
Profit ................................................................................................. $ 9,000
2. Accrual basis:
Revenues (earned)........................................................................... $39,000
Expenses (incurred) ......................................................................... 22,500
Profit ................................................................................................. $16,500
3. The difference between the cash basis and the accrual basis is $7,500.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw-Hill Education Ltd. 3-4
