Week Two Exercise Assignment

Week Two Exercise Assignment

Revenue and Expenses

1. Revenue and Expenses. Dave Morris began a law practice several years ago, shortly after graduating from law school. During 19X1, he was approached by Delores Silva, who had recently suffered a back injury in an automobile accident. Morris accepted Silva as a client, and in 19X2 proceeded with a lawsuit against Maddox Motors. The suit alleged that Maddox had knowingly sold Silva an automobile with defective brakes. Late in 19X2, the courts awarded Silva $240,000 in damages. Morris was entitled to 40% of this settlement for his fees. In 19X3, Maddox Motors paid Silva and Morris their respective shares of the judgment. Morris incurred secretarial and photocopy charges in 19X2 of $12,000— all related to the Silva case. Of this amount, $8,000 was paid in 19X2 and the balance was paid in 19X3. Assuming that Morris uses the accrual basis of accounting, in what year(s) should the revenue and expense amounts be recognized? Why?

2. Accrual and modified cash basis.The following information pertains to Beta Company for October:

Services rendered during October to customers on account


Cash receipts from

Owner investment


Customers on account


Cash customers for services rendered in October


Cash payments to

Creditors for expenses incurred during October


Creditors for expenses incurred prior to October


Monroe Equipment for purchase of new machinery on

October 1


Expenses incurred during October, to be paid in future



The machinery is expected to have a service life of five years.


Calculate Beta’s net income for October, using the following methods:

a. Accrual basis of accounting.

b. Modified cash basis of accounting.

3. Accounting for prepaid expenses and unearned revenues. Hawaii-Blue began business on January 1 of the current year and offers deep sea fishing trips to tourists. Tourists pay $125 in advance for an all-day outing off the coast of Maui. The company collected monies during January for 210 outings, with 30 of the tourists not planning to take their trips until early February. Hawaii-Blue rents its fishing boat from Pacific Yacht Supply. An agreement was signed at the beginning of the year, and $72,000 was paid for the rights to use the boat for two full years.

a. Prepare journal entries to record (1) the collection of monies from tourists and (2) the revenue generated during January.

b. Calculate Hawaii-Blue’s total obligation to tourists at the end of January. On what financial statement and in which section would this amount appear?

4. Recognition of concepts. Ron Carroll operates a small company that books entertainers for theaters, parties, conventions, and so forth. The company’s fiscal year ends on June 30 Consider the items that follow and classify each as either (1) prepaid expense, (2) unearned revenue, (3} accrued expense, (4) accrued revenue, or (5) none of the foregoing.

a. Amounts paid on June 30 for a one-year insurance policy.

b. Professional fees earned but not billed as of June 30.

c. Repairs to the firm’s copy machine, incurred and paid in June.

d. An advance payment from a client for a performance next month at a convention.

e. The payment in item (d) from the client’s point of view.

f. Interest owed on the company’s bank loan, to be paid in early July.

g. The bank loan payable in item (f).

h. Office supplies on hand at year-end.

i. Bank reconciliations: Missing amounts

j. The following independent cases relate to bank reconciliations. Compute the missing amounts, assuming that no other reconciling items exist.

Case A

Case B

Case C

Balance per bank $6,000


$ ?

Outstanding checks $500



Deposits in transit $2,000



Balance per company records ?



5. Bank reconciliation and entries.The following information was taken from the accounting records of Palmetto Company for the month of January:

Balance per bank


Balance per company records


Bank service charge for January


Deposits in transit


Interest on note collected by bank


Note collected by bank


NSF check returned by the bank with the

bank statement


Outstanding checks


a.Prepare Palmetto’s January bank reconciliation.

b.Prepare any necessary journal entries for Palmetto.

6. Allowance method: Income statement and balance sheet approaches.Tempe Company reported accounts receivable of $300,000 and an allowance for uncollectible accounts of $31,000 (credit) on the December 31, 19X2, balance sheet. The following data pertain to 19X3 activities and operations:

Sales on account


Cash collections from credit customers


Sales discounts


Sales returns & allowances


Uncollectible accounts written off


Collections on accounts that were previously written off



a. Prepare journal entries to record the sales- and receivables-related transactions from 19X3.

b. Prepare the December 31, 19X3, adjusting entry for uncollectible accounts assuming that uncollectibles are estimated to be 2% of net credit sales.

c. Prepare the December 31, 19X3, adjusting entry for uncollectible accounts assuming that uncollectibles are estimated at 1% of year-end accounts receivable.

d. Compute the amount of the adjusting entry in part (c) assuming that $46,000, rather than $29,000, of accounts were written off in 19X3.

7. Income Statement Review. Using the annual report of the company that you selected in week 1 please review the company’s income statement over a three year period. Did sales increase during this time? Did Cost of Good Sold increase significantly? Has the company been profitable? Do you notice any positives based on your analysis of the income statement? Are there any negatives that potential investors should be aware of? Write a 150-200 summary of the results of your income statement analysis.

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