1. Revenue and Expenses. Dave Morris began a law practiceseveral years ago, shortly after graduating from law school. During19X1, he was approached by Delores Silva, who had recently suffereda back injury in an automobile accident. Morris ac¬cepted Silva asa client, and in 19X2 proceeded with a lawsuit against MaddoxMotors. The suit alleged that Maddox had knowingly sold Silva anautomobile with defective brakes. Late in 19X2, the courts awardedSilva $240,000 in damages. Morris was entitled to 40% of thissettlement for his fees. In 19X3, Maddox Motors paid Silva andMorris their respective shares of the judgment. Morris incurredsecretarial and photocopy charges in 19X2 of $12,000— all relatedto the Silva case. Of this amount, $8,000 was paid in 19X2 and thebalance was paid in 19X3. Assuming that Morris uses the accrualbasis of accounting, in what year(s) should the revenue and expenseamounts be recognized? Why?
2. Accrual and modified cash basis. The following informationpertains to Beta Company for October:
Services rendered during October to customers on account$14,380
Cash receipts from
Owner investment 7,000
Customers on account 5,650
Cash customers for services rendered in October 6,800
Cash payments to
Creditors for expenses incurred during October 4,400
Creditors for expenses incurred prior to October 2,100
Monroe Equipment for purchase of new machinery on
October 1 8,400
Expenses incurred during October, to be paid in future
months 3,725
The machinery is expected to have a service life of five years.
Instructions
Calculate Beta’s net income for October, using the followingmethods:
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 andoffers deep sea fishing trips to tourists. Tourists pay $125 inadvance for an all-day outing off the coast of Maui. The companycollected monies during January for 210 outings, with 30 of thetourists not planning to take their trips until early February.Hawaii-Blue rents its fishing boat from Pacific Yacht Supply. Anagree¬ment was signed at the beginning of the year, and $72,000 waspaid for the rights to use the boat for two full years.
a. Prepare journal entries to record (1) the collection of moniesfrom tourists and (2) the revenue generated during January.
b. Calculate Hawaii-Blue’s total obligation to tourists at the endof January. On what financial statement and in which section wouldthis amount appear?
4. Recognition of concepts. Ron Carroll operates a small companythat books entertainers for theaters, parties, conventions, and soforth. The company’s fiscal year ends on June 30 Consider the itemsthat 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 inJune.
d. An advance payment from a client for a performance next month ata 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 earlyJuly.
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 reconcilingitems exist.
Case A Case B Case C
Balance per bank $6,000 $4,000 $ ?
Outstanding checks 500 2,100 1,400
Deposits in transit 2,000 7 1,000
Balance per company records ? 8,000 450
5. Bank reconciliation and entries. The following information wastaken from the accounting records of Pal¬metto Company for themonth of January:
Balance per bank $6,150
Balance per company records 3,580
Bank service charge for January 20
Deposits in transit 940
Interest on note collected by bank 100
Note collected by bank 1,000
NSF check returned by the bank with the
bank statement 650
Outstanding checks 3,080
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 anallow¬ance for uncollectible accounts of $31,000 (credit) on theDecember 31, 19X2, balance sheet. The following data pertain to19X3 activities and operations:
Sales on account $2,000,000
Cash collections from credit customers 1,600,000
Sales discounts 50,000
Sales returns & allowances 100,000
Uncollectible accounts written off 29,000
Coll
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