chapter 1,2 and 3

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MONTHLY AND QUARTERLY TIME PERIODS ARE CALLED
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INTERIM PERIODS
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THE TIME PERIOD ASSUMPTION STATES THAT
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THE ECONOMIC LIFE OF A BUSINESS CAN BE DIVIDED INTO ARTIFICIAL TIME PERIOD
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ADJUSTMENTS WOULD NOT BE NECESSARY IF FINANCIAL STATEMENTS WERE PREPARED TO REFLECT NET INCOME FROM
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LIFETIME OPERATIONS
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THE FISCAL YEAR OF A BUSINESS IS USUALLY DETERMINED BY
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THE BUSINESS
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THE REVENUE RECOGNITION PRINCIPLE DICTATES THAT REVENUE SHOULD BE RECOGNIZED IN THE ACCOUNTING RECORDS
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WHEN IT IS EARNED
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THE EXPENSE RECOGNITION PRINCIPLE MATCHES
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EXPENSES WITH REVENUES
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RON’S HOT ROD SHOP FOLLOWS THE REVENUE RECOGNITION PRINCIPLE. RON SERVICES A CAR ON JULY 31. THE CUSTOMER PICKS UP THE VEHICLE ON AUGUST 1 AND MAILS THE PAYMENT TO RON ON AUGUST 5. RON RECEIVES THE CHECK IN THE MAIL ON AUGUST 6. WHEN SHOULD RON SHOW THAT THE REVENUE WAS EARNED?
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JULY 31
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THE EXPENSE RECOGNITION PRINCIPLE STATES THAT EXPENSES SHOULD BE MATCHED WITH REVENUES. ANOTHER WAY OF STATING THE PRINCIPLE IS TO SAY THAT
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EFFORTS SHOULD BE MATCHED WITH ACCOMPLISHMENTS
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A FLOWER SHOP MAKES A LARGE SALE $1,000 ON NOVEMBER 30. THE CUSTOMER IS SENT A STATEMENT ON DECEMBER 5 AND A CHECK IS RECEIVED ON DECEMBER 10. THE FLOWER SHOP FOLLOWS GAAP AND APPLIES THE REVENUE RECOGNITION PRINCIPLE. WHEN IS THE $1,000 CONSIDERED TO BE EARNED?
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NOVEMBER 30
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UNDER ACCRUAL-BASIS ACCOUNTING
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EVENTS THAT CHANGE A COMPANY’S FINANCIAL STATEMENTS ARE RECOGNIZED IN THE PERIOD THEY OCCUR RATHER THAN IN THE PERIOD IN WHICH CASH IS PAID OR RECEIVED
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ADJUSTING ENTRIES ARE REQUIRED
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EVERY TIME FINANCIAL STATEMENTS ARE PREPARED
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THE FOLLOWING IS SELECTED INFORMATION FROM ALPHA-BETA-GAMMA CORPORATION FOR THE FISCAL YEAR ENDING OCTOBER 31, 2011
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$134,000
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LAMB COMPANY HAD THE FOLLOWING TRANSACTIONS DURING 2011 – SALES $9,000 ON ACCOUNT – COLLECTED $4,000 FOR SERVICES TO BE PERFORMED IN 2012 – PAID $1,250 CASH IN SALARIES – PURCHASED AIRLINE TICKET FOR $500 IN DECEMBER FOR A TRIP TO TAKE PLACE IN 2012 WHAT IS LAMB’S 2011 NET INCOME USING ACCRUAL ACCOUNTING
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$7,750
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LAMB COMPANY HAD THE FOLLOWING TRANSACTIONS DURING 2011 – SALES $9,000 ON ACCOUNT – COLLECTED $4,000 FOR SERVICES TO BE PERFORMED IN 2012 – PAID $1,250 CASH IN SALARIES – PURCHASED AIRLINE TICKET FOR $500 IN DECEMBER FOR A TRIP TO TAKE PLACE IN 2012 WHAT IS LAMB’S 2010 NET INCOME USING CASH BASIS ACCOUNTING
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$2,250
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AN ADJUSTING ENTRY
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AFFECTS A BALANCE SHEET ACCOUNT AND AN INCOME STATEMENT ACCOUNT
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EXPENSES INCURRED BUT NOT YET PAID OR RECORDED ARE CALLED
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ACCRUED EXPENSES
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A LAW FIRM RECEIVED $2,000 CASH FOR LEGAL SERVICES TO BE RENDERED IN THE FUTURE. THE FULL AMOUNT WAS CREDITED TO THE LIABILITY ACCOUNT UNEARNED LEGAL FEES. IF THE LEGAL SERVICES HAVE BEEN RENDERED AT THE END OF THE ACCOUNTING PERIOD AND NO ADJUSTING ENTRY IS MADE THIS WOULD CAUSE
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REVENUES TO BE UNDERSTATED
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ADJUSTING ENTRIES CAN BE CLASSIFIED AS
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ACCRUALS AND DEFERRALS
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PREPAID EXPENSES ARE
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PAID AND RECORDED IN AN ASSET ACCOUNT BEFORE THEY ARE USED OR CONSUMED
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ACCRUED EXPENSES ARE
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INCURRED BUT NOT YET PAID OR RECORDED
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BEE-IN-THE BONNET COMPANY PURCHASED OFFICE SUPPLIES COSTING $8K AND DEBITED OFFICE SUPPLIES FOR THE FULL AMOUNT. AT THE END OF THE ACCOUNTING PERIOD, A PHYSICAL COUNT OF OFFICE SUPPLIES REVEALED $3,200 STILL ON HAND. THE APPROPRIATE ADJUSTING JOURNAL ENTRY TO BE MADE AT THE END OF THE PERIOD WOULD BE
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DEBIT OFFICE SUPPLIES EXPENSES $4,800; CREDIT OFFICE SUPPLIES $4,800
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ACCUMULATED DEPRECIATION IS
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A CONTRA ASSET ACCOUNT
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HERCULES COMPANY PURCHASED A COMPUTER FOR $3,600 ON DECEMBER 1. IT IS ESTIMATED THAT ANNUAL DEPRECIATION ON THE COMPUTER WILL BE $720. IF FINANCIAL STATEMENTS ARE TO BE PREPARED ON DECEMBER 31, THE COMPANY SHOULD MAKE THE FOLLOWING ADJUSTING ENTRY;
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DEBIT DEPRECIATION EXPENSE $60, CREDIT ACCUMULATED DEPRECIATION $60
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ACTION REAL ESTATE RECEIVED A CHECK FOR $18K ON JULY1 WHUCH REPRESENTS A 6 MONTH ADVANCE PAYMENT OF RENT ON A BUILDING IT RENTS TO A CLIENT. UNEARNED RENT WAS CREDITED FOR THE FULL $18K. FINANCIAL STATEMENTS WILL BE PREPARED ON JULY 31. ACTION REAL ESTATE SHOULD MAKE THE FOLLOWING ADJUSTING ENTRY ON JULY 31
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DEBIT UNEARNED RENT $3K, CREDIT RENTAL REVENUE $3K
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AT DECEMBER 31, 2011, BEFORE ANY YEAR-END ADJUSTMENTS, CABLE CAR COMPANY’S INSURANCE EXPENSE ACCOUNT HAD A BALANCE OF $1,450 AND ITS PREPAID INSURANCE ACCOUNT HAD A BALANCE OF $3,800. IT WAS DETERMINED THAT $3K OF THE PREPAID INSURANCE HAD EXPIRED. THE ADJUSTED BALANCE FOR INSURANCE EXPENSE FOR THE YEAR WOULD BE
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$4,450
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ON JANUARY 1, 2011, GRILLS AND GRATES INC. PURCHASED EQUIPMENT FOR $45K. THE COMPANY IS DEPRECIATING THE EQUIPMENT AT THE RATE OF $600 PER MONTH. AT JANUARY 31, 2012, THE BALANCE IN ACCUMULATED DEPRECIATION IS
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$7,800
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TURNER COMPANY COLLECTED $6,500 IN MAY OF 2011 FOR 5 MONTHS OF SERVICE WHICH WOULD TAKE PLACE FROM OCTOBER OF 2011 THROUGH FEBRUARY 2012. THE REVENUE REPORTED FROM THIS TRANSACTION DURING 2011 WOULD BE
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$3,900
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BETTY CARSON HAS PERFORMED $500 OF CPA SERVICES FOR A CLIENT BUT HAS NOT BILLED THE CLIENT AS OF THE END OF THE ACCOUNTING PERIOD. WHAT ADJUSTING ENTRY MUST BETTY MAKE?
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DEBIT ACCOUNTS RECEIVABLE AND CREDIT SERVICE REVENUE
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JOYCE’S GIFTS SIGNS A THREE-MONTH NOTE PAYABLE TO HELP FINANCE INCREASES IN INVENTORY FOR THE CHRISTMAS SHOPPING SEASON. THE NOTE IS SIGNED ON NOVEMBER 1 IN THE AMOUNT OF $50K WITH ANNUAL INTEREST OF 12%. WHAT IS THE ADJUSTING ENTRY TO BE MADE ON DECEMBER 31 FOR THE INTEREST EXPENSE ACCRUED TO THAT DATE, IF NO ENTRIES HAVE BEEN MADE PREVIOUSLY FOR THE INTEREST
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INTEREST EXPENSE $1,000 / INTEREST PAYABLE $1,000
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A COMPANY SHOWS A BALANCE IN SALARIES PAYABLE OF $40K AT THE END OF THE MONTH. THE NEXT PAYROLL AMOUNTING TO $45K IS TO BE PAID IN THE FOLLOWING MONTH. WHAT WILL BE THE JOURNAL ENTRY TO RECORD THE PAYMENT OF SALARIES
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SALARIES EXPENSE $5K – SALARIES PAYABLE $40K / CASH $45K
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BECKI JEAN CORPORATION ISSUED A ONE-YEAR, 6%, $200K NOTE ON APRIL 30, 2011. INTEREST EXPENSE FOR THE YEAR ENDED DECEMBER 31, 2011
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$8,000
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A 12 MONTH ACCOUNTING PERIOD
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FISCAL YEAR
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EXPENSES PAID BEFORE THEY ARE INCURRED
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PREPAID EXPENSES
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COST LESS ACCUMULATED DEPRECIATION
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BOOK VALUE
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DIVIDES THE ECONOMIC LIFE OF A BUSINESS INTO ARTIFICIAL TIME PERIODS
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TIME PERIOD ASSUMPTION
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EFFORTS ARE RELATED TO ACCOMPLISHMENTS
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EXPENSE RECOGNITION PRINCIPLE
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A CONTRA ASSET ACCOUNT
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ACCUMULATED DEPRECIATION
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RECOGNITION OF REVENUE WHEN IT IS RECORDED WHEN EARNED
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REVENUE RECOGNITION PRINCIPLE
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REVENUES EARNED BUT NOT YET RECEIVED
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ACCRUED REVENUES
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EXPENSES INCURRED BUT NOT YET PAID
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ACCRUED EXPENSES
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A COST ALLOCATION PROCESS
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DEPRECIATION

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