Q1. You are reviewing the accounting records of Cathy's Antiques, Inc. owned by Cathy Miller. You have uncovered the following situations. Compose a memo to Ms. Miller that cites the appropriate accounting principle and the suggested action for each separate situation.
1. In August, a check for $500 was written to Wee Day Care Center. This amount represents child care for her son Brandon.
2. Cathy plans a Going out of Business Sale for May, since she will be closing her business for a month-long vacation in June. She plans to reopen July 1 and will continue operating Cathy's Antiques indefinitely.
3. Cathy received a shipment of pine furniture from Quebec, Canada. The invoice was stated in Canadian dollars.
4. Joseph Clark paid $1,500 for a dining table. The amount was recorded as revenue. The table will be delivered to Mr. Clark in six weeks.
Q2. Accounting principles and assumptions are the essential guidelines under which businesses prepare their financial statements. These principles guide the methods and decisions for a business over a short and long term. Cite the appropriate accounting principle or assumption for each separate idea
a. Under this principle revenue is to be recorded when it is realized (or realizable), and when it is earned and not when it is received. Revenue is realized when goods or services are exchanged, is realizable when assets received can be converted to cash, and is earned when all necessary requirements are met entitling the company to the benefits represented by the revenue (e.g. services performed).
b. The historical cost principle deals with the valuation of both assets and liabilities. The value at the time of acquisition is used to value most assets and liabilities. However, in accordance with the cost principle, the original (historical) price of the building is what is recorded as the cost of the building in the books of the business.
c. This principle mandates that the expenses of a business need to line up with its revenue. The expense or cost of doing business is recorded in the same period as the revenue that has been generated as the result of incurring that cost.
d. This principle states that all past, present and future information that may have had an impact on the financial performance of the company needs to be fully disclosed. The historical performance of a company is readily available, but examining the numbers does not always provide the entire financial picture of a company. Sometimes there are alternative situations that need to be reported. In addition, incomplete financial transactions or any other conditions that could impact the company's performance must also be disclosed. Most of these transactions are disclosed in the footnotes to the financial statements.
e. The accounting information reflects a presumption the business will continue operating.
f. We can express transactions in money.
g. The life of a company can be divided into time periods, such as months and years.
h. A business is accounted for separately from its owner or other business entities.
Q3. Flora Accounting Services completed these transactions in February:
a. Purchased office supplies on account, $300
b. Completed work for a client on credit, $500
c. Paid cash for the office supplies purchased in (a)
d. Completed work for a client and received $800 cash
e. Received $500 cash for the work described in (b).
Prepare journal entries to record the above transactions.
Q4. Use the accounting equation to analyze the following Transactions:
Mr. X invests $30,000 cash to start a new business, X limited, in return for stock.The X limited purchased supplies for $ 2,500 and paid in cashThe X limited purchased equipment for $ 26,000 on accountThe X limited paid $ 200 cash dividends to its owner.
Q5. Prepare general journal entries on December 31 to record the following unrelated year-end adjustments.
a. Estimated depreciation on office equipment for the year, $4,000
b. The Prepaid Insurance account has a $3,680 debit balance before adjustment. An examination of insurance policies shows $950 of insurance expired
c. The Prepaid Insurance account has a $2,400 debit balance before adjustment. An examination of insurance policies shows $600 of unexpired insurance
d. The company has three office employees who each earn $100 per day for a five-day workweek that ends on Friday. The employees were paid on Friday, December 26 and have worked full days on Monday, Tuesday and Wednesday, December 29, 30 and 31
e. On November 1, the company received 6 months' rent in advance from a tenant whose rent is $700 per month. The $4,200 was credited to the Unearned Rent account
f. The company collects rent monthly from its tenants. One tenant whose rent is $750 per month has not paid his rent for December
Q6. A machine that cost $55,000 was purchased on January 1. The asset has an estimated useful life of four years and an estimated salvage value of $3,000. Prepare the necessary adjusting journal entry for Depreciation at the end of the year.
Q 7. Match the following terms with the appropriate definition.
1. The expense created by allocating the cost of plant and equipment to the periods in which they are used
2. The principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses
3. Items paid for in advance of receiving their benefits
4. Allocates equal amounts of an asset's cost (less any salvage value) to depreciation expense during its useful life
5. The accounting system that recognizes revenues when earned and expenses when incurred
6. A principle that assumes that an organization's activities can be divided into specific time periods such as months, quarters or years
7. Revenues earned in a period that are both unrecorded and not yet received in cash or other assets
8. Net income divided by net sales
9. The accounting system where revenues are recognized when cash is received and expenses are recorded when cash is paid