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Adjustments, transactions and depreciation

1. Give an example of an adjusting journal entry for each of the following transactions.

Equal growth of an expense and a liability.

Earning of revenue that was previously recorded as unearned revenue.

Equal growth of an asset and revenue.

Increase in an expense and decrease in an asset.

2. Classify the following items as (a) prepaid expense, (b) unearned revenue, (c) accrued revenue, or (d) accrued expense :

A three-year premium paid on a fire insurance policy.

Fees earned but not yet received.

Fees received but not yet earned.

Salary owed but not yet paid.

Subscriptions received in advance by a magazine publisher.

Supplies on hand at the end of an accounting period.

Taxes owed but payable in the following accounting period.

Utilities owed but not yet paid.

3. Describe the difference between depreciation expense and accumulated depreciation.

Describe the formula used for computing the straight line depreciation for a depreciable asset. Explain how to calculate an asset's book value.

4. The balance in the equipment account is $1,375,000, and the balance in the accumulated depreciation—equipment account is $725,000.

What is the book value of the equipment and does that amount mean that the equipment has a loss in real value of $725,000? Explain your response.

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Solution Preview

1. Examples of adjusting entries for various transactions.

Debit Expense
Credit Liability
To increase expense and liability for equal growth; typical entry for accounts payable.

Debit Unearned revenue
Credit Revenue
To decrease a liability and increase revenue to recognize revenue as earned

Debit Asset
Credit Revenue
To record either cash or an accounts receivable for revenue that was earned; typical entry for sales of products or services

Debit Expense
Credit Assets
To record an expense and decrease an asset; typical entry would be check to pay the electric bill

2. Classify type of transactions

A three-year premium paid on a fire insurance policy is (a) prepaid expense

Fees earned but not yet received would be (c) accrued revenue

Fees received but not yet earned is (b) unearned revenue

Salary owed but not yet paid is (d) accrued expense

Subscriptions received in advance by a ...

Solution Summary

The solution of 624 words explains the basic accounting concepts of adjusting entries, classification of types of entries and depreciation and book value of fixed assets.