Chapter 3: 17DQ (page 139)
Explain whether an error has occurred if a post-closing trial balance includes a Depreciation Expense account.
Answer:
Yes, an error has occurred because post-closing trail balance only include the permanent account while depreciation is temporary account.
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Cal Consulting follows the practice that prepayments are debited to expense when paid, and unearned
revenues are credited to revenue when cash is received. Given this company’s accounting practices,
which one of the following applies to the preparation of adjusting entries at the end of its first accounting
period?
a. Unearned fees (on which cash was received in advance earlier in the period) are recorded with a debit
to Consulting Fees Earned of \(500 and a credit to Unearned Consulting Fees of \)500.
b. Unpaid salaries of \(400 are recorded with a debit to Prepaid Salaries of \)400 and a credit to Salaries
Expense of \(400.
c. Office supplies purchased for the period were \)1,000. The cost of unused office supplies of \(650 is
recorded with a debit to Supplies Expense of \)650 and a credit to Office Supplies of \(650.
d. Earned but unbilled (and unrecorded) consulting fees for the period were \)1,200, which are recorded
with a debit to Unearned Consulting Fees of \(1,200 and a credit to Consulting Fees Earned
of \)1,200.
The following information is taken from Camara Company’s unadjusted and adjusted trial balances.
Unadjusted Adjusted Credit Debit Credit
Prepaid insurance \(4,100 \)3,700
Interest payable \(0 \)800
Given this information, which of the following is likely included among its adjusting entries?
a. A \(400 debit to Insurance Expense and an \)800 debit to Interest Payable.
b. A \(400 debit to Insurance Expense and an \)800 debit to Interest Expense.
c. A \(400 credit to Prepaid Insurance and an \)800 debit to Interest Payable.
Damita Company reported net income of \(48,025 and net sales of \)425,000 for the current year. Calculate
the company’s profit margin and interpret the result. Assume that its competitors earn an average profit
margin of 15%.
Prepare adjusting journal entries for the year ended (date of) December 31, 2017, for each separate situation.
(Entries can draw from the following partial chart of accounts: Cash; Accounts Receivable; Supplies;
Prepaid Insurance; Equipment; Accumulated Depreciation—Equipment; Wages Payable; Unearned Revenue;
Revenue; Wages Expense; Supplies Expense; Insurance Expense; Depreciation Expense—Equipment.)
a. Depreciation on the company’s equipment for 2017 is computed to be \(18,000.
b. The Prepaid Insurance account had a \)6,000 debit balance at December 31, 2017, before adjusting for
the costs of any expired coverage. An analysis of the company’s insurance policies showed that \(1,100
of unexpired insurance coverage remains.
c. The Office Supplies account had a \)700 debit balance on December 31, 2016; and \(3,480 of office
supplies were purchased during the year. The December 31, 2017, physical count showed \)300 of supplies
available.
d. Two-thirds of the work related to \(15,000 of cash received in advance was performed this period.
e. The Prepaid Insurance account had a \)6,800 debit balance at December 31, 2017, before adjusting for the
costs of any expired coverage. An analysis of insurance policies showed that \(5,800 of coverage had expired.
f. Wage expenses of \)3,200 have been incurred but are not paid as of December 31, 2017.
What is a company’s operating cycle?
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