Chapter 3: Q2ISTQ (page 150)
Information in a company’s first IFRS statements must:
(a) have a cost that does not exceed the benefits.
(b) be transparent.
(c) provide a suitable starting point.
(d) All the above.
The correct option is “d”.
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(LO5) (Closing Entries) Presented below is information related to Gonzales Corporation for the month of January 2017.
Cost of Goods sold \( 208,000 Salaries and wages expenses \)61,000
Delivery expenses \( 7,000 Sales discounts \) 8,000
Insurance expenses \( 12,000 Sales returns and allowances \)13,000
Rent expenses \( 20,000 Sales revenue \)350,000
Instructions:
Prepare the necessary closing entries.
Santo Design was founded by Thomas Grant in January 2011. Presented below is the adjusted trial balance as of December 31, 2017.
SANTO DESIGN ADJUSTED TRIAL BALANCE DECEMBER 31, 2017 | ||
Dr. | Cr. | |
Cash | \( 11,350 | |
Accounts Receivable | 21,500 | |
Supplies | 5,000 | |
Prepaid Insurance | 2,500 | |
Equipment | 60,000 | |
Accumulated Depreciation—Equipment | \) 35,000 | |
Accounts Payable | 5,000 | |
Interest Payable | 150 | |
Notes Payable | 5,000 | |
Unearned Service Revenue | 5,600 | |
Salaries and Wages Payable | 1,300 | |
Common Stock | 10,000 | |
Retained Earnings | 3,500 | |
Service Revenue | 61,500 | |
Salaries and Wages Expense | 11,300 | |
Insurance Expense | 850 | |
Interest Expense | 150 | |
Depreciation Expense | 7,000 | |
Supplies Expense | 3,400 | |
Rent Expense | 4,000 | |
\(127,050 | \)127,050 | |
Instructions
a. Prepare an income statement and a statement of retained earnings for the year ending December 31, 2017, and an unclassified balance sheet at December 31.
b. Answer the following questions.
1.If the note has been outstanding for 6 months, what is the annual interest rate on that note?
2.If the company paid $17,500 in salaries in 2017, what was the balance in Salaries and Wages Payable on December 31, 2016?
What are adjusting entries and why are they necessary?
Question: The Amato Theater is nearing the end of the year and is preparing for a meeting with its bankers to discuss the renewal of a loan. The accounts listed below appeared in the December 31, 2017, trial balance.
Debit | Credit | |
Prepaid advertising | \(6,000 | |
Equipment | 192,000 | |
Accumulated depreciation | \)60,000 | |
Note payable | 90,000 | |
Unearned service revenue | 17,500 | |
Ticket revenue | 360,000 | |
Advertising expenses | 18,680 | |
Salaries and wages expenses | 67,600 | |
Interest expenses | 1,400 |
Additional information is available as follows.
1. The equipment has an estimated useful life of 16 years and a salvage value of \(40,000 at the end of that time. Amato uses the straight-line method for depreciation.
2. The note payable is a one-year note given to the bank January 31 and bearing interest at 10%. Interest is calculated on a monthly basis.
3. Late in December 2017, the theater sold 350 coupon ticket books at \)50 each. Two hundred of these ticket books have been used by year-end. The cash received was recorded as Unearned Service Revenue.
4. Advertising paid in advance was \(6,000 and was debited to Prepaid Advertising. The company has used \)2,500 of the advertising as of December 31, 2017.
5. Salaries and wages accrued but unpaid at December 31, 2017, were $3,500.
Accounting
Prepare any adjusting journal entries necessary for the year ended December 31, 2017.
Analysis
Determine Amato’s income before and after recording the adjusting entries. Use your analysis to explain why Amato’s bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal.
Principles
Although Amato’s bankers are willing to wait for the adjustment process to be completed before they receive financial information, they would like to receive financial reports more frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful representation, are inherent in preparing financial statements for shorter accounting time periods?
Why are revenue and expense accounts called temporary or nominal accounts?
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