CH 03

Chapter Three
Challenge Exercise 1
Expands on: E3-3
LO: 1
O’Brien Industries collected $200,000 from customers in 2020. Of the amount collected, $40,000 was from
revenue accrued from services performed in 2019, and $20,000 was received in advance for 2021 revenue. In
addition, O’Brien earned $70,000 of revenue in 2020, which will not be collected until 2020. O’Brien also
recognized $25,000 of revenue in 2019 which had been collected in 2019.
O’Brien Industries paid $140,000 for expenses in 2020. Of the amount paid, $50,000 was for expenses
incurred on account in 2020, $22,000 was paid in advance for 2021 expenses. In addition, O’Brien incurred
$78,000 of expenses in 2020, which will not be paid until 2021. O’Brien also incurred $29,000 of expenses in
2020 which had been paid in 2019.
Instructions :
(a) Compute 2020 cash-basis net income.
(b) Compute 2020 accrual-basis net income.
Copyright © 2018 WILEY Weygandt, Financial and Managerial Accounting 3e, Challenge Exercises
(For Instructor Use Only) Page 3-1
Expands on: E3-5
LO: 3, 4
Craig Ferguson Company has the following balances in selected accounts on December 31, 2020.
Accounts Receivable $ -0-

Accumulated Depreciation—Equipment 10,000
Interest Payable -0-
Notes Payable 20,000
Prepaid Insurance 2,700
Salaries and Wages Payable -0-
Supplies 3,500
Unearned Service Revenue 50,000
All the accounts have normal balances. The information below has been gathered at December 31, 2020.
1. Craig Ferguson Company borrowed $20,000 by signing a 12%, one-year note on August 1, 2020.
2. A count of supplies on December 31, 2020, indicates that supplies of $900 are on hand.
3. Depreciation on the equipment for 2020 is $2,000.
4. Craig Ferguson Company paid $2,700 for 12 months of insurance coverage on May 1, 2020.
5. On November 1, 2019, Craig Ferguson collected $50,000 for consulting services to be performed from
November 1, 2020, through March 31, 2021.
6. Craig Ferguson performed consulting services for a client in December 2020. The client will be billed $6,300.
7. Craig Ferguson Company pays its employees total salaries of $13,000 every Monday for the preceding 5-
day week (Monday through Friday). On Monday, December 29, employees were paid for the week ending
December 26. All employees worked the last 3 days of 2020.
Instructions:
A. Prepare adjusting entries for the seven items described above.

B. Prepare the 2021 entries for items 6 and 7.
Expands on: E3-7
LO: 2, 3
The ledger of Laurie Rental Agency on March 31 of the current year includes the following selected accounts
before adjusting entries have been prepared.
Debit Credit
Prepaid Insurance $ 5,400
Supplies 4,500
Equipment 40,000
Accumulated Depreciation—Equipment $12,600
Notes Payable 25,000
Unearned Rent Revenue 11,100
Rent Revenue 90,000
Interest Expense –0–
Salaries and Wages Expense 20,000
An analysis of the accounts shows the following.

1. The equipment depreciates $600 per month.
2. Two-thirds of the unearned rent revenue was earned during the quarter.
3. The note payable is dated January 1 and bears 12% interest.
4. Supplies on hand total $800.
5. The insurance policy is a two-year policy dated January 1.
Instructions:
A. Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional
accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.
B. Compute the ending balances for Prepaid Insurance, Unearned Rent Revenue, and Rent Revenue, and
indicate in which financial statement those items will be reported.
Expands on: E3-8
LO: 2, 3
Cyrene Sexton, D.D.S., opened a dental practice on January 1, 2020. During the first month of operations the
following transactions occurred.
1. Performed services for patients who had dental plan insurance. At January 31, $1,900 of such services were
performed but not yet recorded.
2. Utility expenses incurred but not paid prior to January 31 totaled $760.
3. Purchased dental equipment on January 1 for $92,000, paying $20,000 in cash and signing a $72,000, 12%,
3-year note payable. The equipment depreciates $750 per month.
4. Purchased a one-year malpractice insurance policy on January 1 for $13,200.
5. Purchased $1,900 of dental supplies. On January 31, determined that $400 of supplies were on hand.
Instructions:
A. Prepare the adjusting entries on January 31. Account titles are: Accumulated Depreciation—Equipment,
Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest
Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.
B. Prepare the following February journal entries.
1. The cash is received for the services described in transaction 1.
2. The utility bill from transaction 2 is paid.
3. On February 1, the interest accrued in transaction 3 and $2,000 in principal is paid.
Expands on: E3-10
LO: 1, 2, 3, 4
The income statement of Annette Co. for the month of July 2020 shows net income of $3,200 based on
Service Revenue $7,700, Salaries and Wages Expense $2,600, Supplies Expense $1,400, and Utilities
Expense $500. In reviewing the statement, you discover the following.
1. Insurance expired during July of $500 was omitted.

2. Supplies expense includes $300 of supplies that are still on hand at July 31.
3. Depreciation on equipment of $250 was omitted.
4. Accrued but unpaid salaries and wages at July 31 of $400 were not included.
5. Services provided but unrecorded totaled $700.
Instructions:
A. Prepare a correct income statement for July 2020.

B. What effect do the corrections have on the amount reported as total assets on the balance sheet?
B. What effect do the corrections have on the amount reported as total liabilities on the balance sheet?
Expands on: E3-20
LO: 5
Ryan Stiles Company has the following balances in selected accounts on December 31, 2020.
Service Revenue $54,000
Insurance Expense 3,120
Supplies Expense 3,350
All the accounts have normal balances. Ryan Stiles Company debits prepayments to expense accounts when
paid, and credits unearned revenues to revenue accounts when received. The following information below has
been gathered at December 31, 2020.
1. Ryan Stiles Company paid $3,120 for 12 months of insurance coverage on April 1, 2020.
2. On November 1, 2019, Ryan Stiles Company collected $54,000 for consulting services to be performed from
November 1, 2020, through April 30, 2021.
3. A count of supplies on December 31, 2020, indicates that supplies of $1,100 are on hand.
Instructions:
A. Prepare the adjusting entries needed at December 31, 2020.
B. Indicate the amounts to be reported in the 2020 income statement and the 12/31/20 balance sheet
for the items from the adjusting entries in part A.

CH 03

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CH 03

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Chapter Three

Accounts Receivable $ -0-

A. Prepare adjusting entries for the seven items described above.

An analysis of the accounts shows the following.

1. Insurance expired during July of $500 was omitted.

A. Prepare a correct income statement for July 2020.

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