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Chapter 3: Q.3-18Q (page 128)

Question: What are reversing entries, and why are they used?

Short Answer

Expert verified

Answer

Reversing entry is termed as an alternative journal entry made at the beginning of a financial period. The purpose of these entries is to ease day-to-day accounting methods, and they relate only to specific adjusting entries, that is, to accrued expenses and revenues.

Step by step solution

01

Reversing entry

Reversing entries are prepared by firms before recording journal entries for the transactions of a new period. A reversing entry is the opposite of an adjusting entry. A firm normally prepares to reverse entries soon after listing closing entries or at the commencing of the next period. It reverses the effect of adjusting entries.

02

Purpose of reversing entry

Reversing entries make the listing of resulting transactions related to adjusting entry simple. A reversing entry assists the firm in recording day-to-day resulting transactions without regarding the probable impact of the previous adjusting entry.

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Most popular questions from this chapter

When converting to IFRS, a company must:

(a) recast previously issued financial statements in accordance with IFRS.

(b) use GAAP in the reporting period but subsequently use IFRS.

(c) prepare at least three years of comparative statements.

(d) use GAAP in the transition year but IFRS in the reporting year.

Selected accounts of Urdu Company are shown below.

Supplies
Beg. Bal	800	10 ⁄ 31	470

Salaries and Wages Expense
10 ⁄ 15	800
10 ⁄ 31	600

Unearned Service Revenue
10 ⁄ 31	400	10 ⁄ 20	650

Service Revenue
		10 ⁄ 17	2,400
		10 ⁄ 31	1,650
		10 ⁄ 31	400

Accounts Receivable
10 ⁄ 17	2,400
10 ⁄ 31	1,650

Salaries and Wages Payable
		10 ⁄ 31	600

Supplies Expense
10 ⁄ 31	470

Instructions

From an analysis of the T-accounts, reconstruct

(a) the October transaction entries, and

(b) the adjusting journal entries that were made on October 31, 2017. Prepare explanations for each journal entry

Jurassic Park Co. prepares monthly financial statements from a worksheet. Selected portions of the January worksheet showed the following data.

JURASSIC PARK CO. Worksheet (PARTIAL) For The Month Ended Jan. 31, 2017
	Trial Balance		Adjustment		Adjusted trial balance
Account Titles	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.
Supplies	3,256			a) 1,500	1,756
Accumulated Depreciation—Equipment		6,682		(b) 257		6,939
Interest Payable				(c) 50		150
Supplies Expense			(a) 1,500		1,500
Depreciation Expense			(b) 257		257
Interest Expense			(c) 50		50

During February, no events occurred that affected these accounts. But at the end of February, the following information was available.

Supplies on hand \(715
Monthly depreciation \)257
Accrued interest $ 50

Instructions

Reproduce the data that would appear in the February worksheet, and indicate the amounts that would be shown in the February income statement.

Kellogg Company has its headquarters in Battle Creek, Michigan. The company manufactures and sells ready-to-eat breakfast cereals and convenience foods including cookies, toaster pastries, and cereal bars.

Selected data from Kellogg Company’s 2014 annual report follows (dollar amounts in millions).

	2014	2013	2012
Sales	\(14,580	\)14,792	$14,197
Gross profit %	34.73%	41.26%	38.28%
Operating profit	1,024	2,837	1,562
Net cash flow less capital expenditure	1,211	1,170	1,225
Net earnings	633	1,808	961

In its annual reports, Kellogg Company has indicated that it plans to achieve sustainability of its operating results with operating principles that emphasize profit-rich, sustainable sales growth, as well as cash flow and return on invested capital. Kellogg believes its steady earnings growth, strong cash flow, and continued investment during a multi-year period demonstrates the strength and flexibility of its business model.

Instructions

(a) Compute the percentage change in sales, operating profit, net cash flow less capital expenditures, and net earnings from year to year for the years presented.

(b) Evaluate Kellogg’s performance. Which trend seems most favorable? Which trend seems least favorable? What are the implications of these trends for Kellogg’s sustainable performance objectives? Explain.

E3-3 (L02) (Corrected Trial Balance) The following trial balance of Blues Traveler Corporation does not balance.

BLUES TRAVELER CORPORATION

TRIAL BALANCE

Cash \( 5,912Accounts Receivable 5,240Supplies 2,967Equipment 6,100Accounts Payable \) 7,044Common Stock 8,000Retained Earnings 2,000Service Revenue 5,200Office Expense 4,320

Total \(24,539 \)22,244

An examination of the ledger shows these errors.1. Cash received from a customer on account was recorded (both debit and credit) as \(1,380 instead of \)1,830.2. The purchase on account of a computer costing \(3,200 was recorded as a debit to Office Expense and a credit to AccountsPayable.3. Services were performed on account for a client, \)2,250, for which Accounts Receivable was debited \(2,250 and ServiceRevenue was credited \)225.4. A payment of \(95 for telephone charges was entered as a debit to Office Expense and a debit to Cash.5. The Service Revenue account was totaled at \)5,200 instead of $5,280.InstructionsFrom this information prepare a corrected trial balance.

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