Method Of Accounting Chapter 3

The account Unearned Revenue is classified as a liability because it represents money that has been received by a company in advance for goods or services that have not yet been provided. This liability is created because the company has an obligation to fulfill the promised goods or services in the future. Once the goods or services are delivered, the unearned revenue is recognized as revenue and moved from the liability section to the revenue section of the balance sheet.

The adjusting entry would be to debit supplies expense for $1,100. This is because the supplies expense account needs to be adjusted to reflect the amount of supplies that were used up during the year. Since Sullivan had $400 of supplies left at year end, it means that $1,100 worth of supplies were used up ($1,500 - $400 = $1,100). Therefore, the supplies expense account needs to be debited by $1,100 to accurately reflect the amount of supplies that were used.

An adjusting entry that debits an expense and credits a liability is classified as an accrued expense. This type of entry is made to recognize an expense that has been incurred but not yet paid or recorded. By debiting the expense account, it reflects the increase in expenses, and by crediting the liability account, it acknowledges the obligation to pay the expense in the future. This entry ensures that the financial statements accurately reflect the expenses incurred during the accounting period.

To accrue the interest earned on a note receivable, the adjusting entry should debit interest receivable and credit interest revenue. This entry recognizes the interest that has been earned but not yet received in cash. By debiting interest receivable, it increases the amount owed to the company for the interest, and by crediting interest revenue, it increases the revenue account to reflect the earned interest.

The expense reported on the income statement for the month of December will be $5,000. This is because accrual basis accounting recognizes expenses when they are incurred, not when they are paid. Since the company paid $15,000 on December 1 for a television campaign that will run over the next three months, only one-third of the total expense ($15,000/3 = $5,000) will be reported on the income statement for the month of December.

The adjusting entry on December 31 is needed to recognize the portion of the rent that has been earned during the current month. Since the tenant paid for four months of rent in advance, only one month's worth of rent has been earned by December 31. Therefore, the unearned rent revenue account needs to be reduced by the amount of rent that has been earned, which is $1,800. At the same time, the rent revenue account needs to be credited with the same amount to reflect the revenue that has been earned.

If a real estate company fails to accrue commission revenue, it means that the company has not recorded the revenue it has earned from commissions. This will result in the company's assets being understated because the revenue has not been recognized and added to the company's accounts. Additionally, since the revenue has not been recorded, the net income of the company will also be understated because the revenue is a part of the company's earnings. Therefore, the correct answer is that assets are understated, and net income is understated.

If service revenue has a debit balance on a trial balance, it indicates that an error has been made. Service revenue should normally have a credit balance, as it represents income earned by providing services. A debit balance suggests that the revenue has been understated or that a transaction has been recorded incorrectly. This error should be identified and corrected to ensure the accuracy of the financial statements.

Under the accrual method of accounting, revenue is recognized when the sale is made. This means that the company recognizes the revenue as soon as it makes the sale, regardless of when the cash is collected. This method allows the company to match the revenue with the expenses incurred to generate that revenue, providing a more accurate representation of the company's financial performance.

The entry to close Management Fee Revenue would be to debit Management Fee Revenue and credit retained earnings. This is because Management Fee Revenue is a revenue account, and at the end of the accounting period, revenue accounts are closed by transferring their balances to the retained earnings account. By debiting Management Fee Revenue and crediting retained earnings, we are reducing the revenue account and increasing the retained earnings account, effectively closing the revenue account and transferring its balance to retained earnings.

Using the accrual basis of accounting, expenses are recognized when they are incurred, regardless of when they are paid. Therefore, the expense incurred in 2010 should appear on the 2010 income statement, even if it is not paid until 2011. This is because the accrual basis of accounting focuses on matching expenses with the period in which they are incurred, rather than when they are actually paid.

Accumulated depreciation is not closed because it is a contra-asset account that is used to track the total depreciation expense of an asset over its useful life. Unlike other accounts such as dividend, interest revenue, and depreciation expense, which are closed at the end of an accounting period, accumulated depreciation carries a running balance that continues to accumulate over time as assets depreciate. This balance is then used to calculate the net book value of the asset on the balance sheet.

The correct answer is "Assets, net income, and stockholders' equity are overstated." This is because depreciation expense is an expense that should be recognized to allocate the cost of an asset over its useful life. By failing to record depreciation, the accountant is not accurately reflecting the decrease in the value of the asset over time. As a result, assets, net income, and stockholders' equity are all overstated because the value of the asset is not being properly reduced.

The statement "Adjusting entries are required for a business that uses cash basis" is false. Adjusting entries are not required for a business that uses cash basis accounting because cash basis accounting only recognizes revenue and expenses when cash is received or paid. Adjusting entries are used in accrual accounting to ensure that revenue and expenses are recorded in the correct accounting period, regardless of when cash is exchanged.

When FedEx earns service revenue of $750,000, it increases their current assets, which in turn improves their current ratio. The current ratio measures a company's ability to pay off its short-term liabilities using its short-term assets, so an improvement in this ratio indicates better liquidity. However, this transaction does not affect the company's debt, so the debt ratio remains the same. Therefore, the correct answer is that it improves the current ratio and hurts the debt ratio.