Students Again

Identify the accounting concept or principle (there may be more than one) that gives the most direction on how to account for each of the following situations:

a. Expenses of $1,200 must be accrued at the end of the period to measure income properly.

Matching principle.

b. A customer states her intention to switch health clubs. Should the new health club record revenue based on this intention? Give the reason for your answer.

Revenue principle. The health club should only account for the revenue when the contract is signed and the health club performs the duty of allowing the new member to use their facilities.

c. The owner of a business desires monthly financial statements to measure the progress of the entity on an ongoing basis.

Time period concept and matching principle.

d. Expenses of the period total $6,700. This amount should be subtracted from revenue to compute the period's net income.

Matching principle.

Update the journal to reflect the adjusting entries for the following adjustments at January 31, end of the accounting period.

a. Employee salaries owed for Monday through Thursday of a five-day workweek; weekly payroll, $10,000.

b. Unearned service revenue earned, $500.

c. Depreciation, $3,000.

d. Prepaid rent expired, $300.

e. Interest revenue accrued, $3,800.

Suppose the adjustments from the previous example were not made. Compute the overall overstatement or understatement of net income as a result of the omission of these adjustments.

After Adjustments:

Revenues: $4,300
Expenses: $7,300
Net decrease: $3,000

No Adjustment:

Revenues: $3,800
Expenses: $13,800
Net Increase: $10,000

If no adjustment, $7,000 difference in adjustment and no adjustment
(understatement of expenses). Overstatement of NI by $7,000.

Blackhawk Data Processing began the year with capital of $90,000. On July 12, Kent Black (the owner) invested $12,000 cash in the business. On September 26, he transferred to the company land valued at $70,000. The income statement for the year ended December 31, 20X5, reported a net loss of $28,000. During this fiscal year, Black withdrew $1,500 each month for personal use.

1. Prepare Blackhawk's statement of owner's equity for the year ended December 31, 20X5.

2. Did the owner's equity of the business increase or decrease during the year? What caused this change?

Owner equity increased during the year because of the owner’s investment of land and cash.