Book 2 - Chapter 9

Multiple Choice
1.	b
2.	c	$500 cash received comes from a revenue recorded in a prior period—June.
3.	b	Because cash is paid for a future expense.
4.	a	Because this is a payment for a previously accrued expense. (b involves unearned revenue; c involves supplies which are really an expense that is prepaid; d involves unearned revenue)
5.	d
6.	c
7.	b
8.	d
9.	b	If you have difficulty, try a simple example using the accounting equation: Assume assets are $10, liabilities are $3, and owner’s equity is $7. Now assume the amount of the adjustment is $1. Before adjustment: A $10 = L $3 + OE $7
		Then, the adjustment: A $10 = L $2 ↓ + OE $8 ( ↑ revenue)
		You can see that if you failed to make the adjustment, liabilities would be higher at $3, and owner’s equity would be lower at $7 because of less revenue. You can use this method for the next four questions as well.
10.	a
11.	d
12.	c
13.	d
14.	a	Unadjusted net income is $8,000. Then subtract: $4,700 insurance expense + $2,000 insurance expense + $3,500 rent expense.
15.	a
16.	b
17.	a
18.	b
19.	c
20.	b
21.	a
22.	d	Adjusting entries are never done in cash basis accounting because adjusting entries only recognize noncash revenues and noncash expenses. Cash basis accounting, therefore, would never record adjustments.
23.	d
24.	c

Discussion Questions and Brief Exercises

1. The two important principles are the revenue recognition principle and the matching principle. The revenue recognition principle requires that revenues be recorded in the period in which they were earned. The matching principle requires that expenses be matched against (meaning “subtracted from”) the revenues they helped to create. The matching is done by direct tracing or by identifying the period(s) in which benefits were received from the expense item. Adjusting entries record revenue and expense items that had not yet been recorded into the correct accounting periods.
2. Adjusting entries are recorded at the end of period after all transactions are completed for the period. Therefore, any event during the period that creates the need for an adjusting entry can be identified. In this way, as discussed in #1 above, all the revenues and expenses are recorded into the correct periods.

Learning Goal 9

SOLUTIONS

Learning Goal 9: Know Which Adjustment You Need to Do

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