Problem 1: On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially.
Instructions:
(a) What is the difference between accrual-basis accounting and cash-basis accounting?
(b) Why would politicians prefer the cash basis over the accrual basis?
(c) Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting.
Problem 2: Karen Tong, D.D.S., opened a dental practice on January 1, 2002. During the first month of operations the following transactions occurred.
1. Performed services for patients who had dental plan insurance. At January 31, $875 of such services was earned but not yet billed to the insurance companies.
2. Utility expenses incurred but not paid prior to January 31 totaled $520.
3. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000, 3-year note payable. The equipment depreciates $400 per month. Interest is $500 per month.
4. Purchased a one-year malpractice insurance policy on January 1 for $12,000.
5. Purchased $1,600 of dental supplies. On January 31, determined that $700 of supplies were on hand.
Instructions:
Prepare the adjusting entries on January 31. Account titles are: Accumulated Depreciation—Dental Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.
Problem 3: A review of the ledger of Greenberg Company at December 31, 2002, produces the following data pertaining to the preparation of annual adjusting entries.
1. Salaries Payable $0. There are eight salaried employees. Salaries are paid every Friday for the current week. Five employees receive a salary of $750 each per week, and three employees earn $500 each per week. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.
2. Unearned Rent $324,000. The company began subleasing office space in its new building on November 1. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease.
Date Term (in month) Monthly Rent Number of Leases
Nov. 1 6 $4,000 5
Dec. 1 6 $8,500 4
3. Prepaid Advertising $13,200. This balance consists of payments on two advertising contracts. The contracts provide for monthly advertising in two trade magazines. The terms of the contracts are as follows:
Contract Date Amount Number of Magazine Issues
A650 May 1 $6,000 12
B974 Oct. 1 7,200 24
The first advertisement runs in the month in which the contract is signed.
4. Notes Payable $100,000. This balance consists of a note for one year at an annual interest rate of 12%, dated June 1.
Instructions: Prepare the adjusting entries at December 31, 2002. (Show all computations.)