Comments:
1. This is an example of accounting capturing organization history on an event-by-event basis. This
means that whenever an event happens, the accounting system records the event.
2. The contract on March 1 is an example of an executory contract. Nothing has happened as of March
1. except an exchange of promises. Everthing about the contract remains to be executed. The typical
accounting response is to wait until something happens, say, we do the work. With this in mind:
March 1: no entry
December 31: Accounts Receivable $150,000
Revenue $150,000
(We’ve done the work and we have the right
to collect $150,000. We will collect the money
in January.)
3. The other transactions to keep in mind are the rent and the wage costs. These are opposites of each
other.
The rent is a cash outlay of $24,000 that covers the rent expense for the current year and the next
year. The entire cash is paid out now, and only $12,000 is an expense for this year.
Wages have been paid of $66,000. In addition, the employees have worked for an additional $6,000
in this year and we will pay them in January when the next payroll day comes around.
These transactions are opposites in the sense that the rent is, at least partly, cash outlay that is not yet
an expense, and wages include an expense of $6,000 that is not yet a cash outlay.
4. Here are some check figures:
Net Income is $56,000
Total Assets are $282,000
Total Liabilities are $26,000
Shareholders’ Equity is $256,000
Transactions:
a. On January 1, 20X1, Frances Corporation started doing business and the owners contributed $200,000
capital in cash.
b.The company paid $24,000 to cover the rent for the office space for the 24-month period from
January 1, 20X1,to December 31, 20X2.
c. On March 1, 20X1, MSK Inc. entered into a consulting contract under which Frances Corporation
promised to provide consulting to MSK Inc. In return, MSK promised to pay a fee of $150,000, which
was to be paid in January 20X2. Frances fulfulled its contractual obligation during 20X1.
d. On July 1, 20X1, Frances purchased office equipment for $100,000 cash. The equipment has an
estimated useful life of five years and no salvage value. The equipment was immediately placed into
use. Frances uses the straight-line method of depreciation. It records depreciation expense in
proportion to the number of months’ usage.
e. Through November 30, 20X1, the company had paid $66,000 to its employees for 11 months of
salaries. Accrued salaries on December 31, 20X1, were $6,000.
f. On December 31, 20X1, Norbert Corporation advanced $20,000 to Frances Corporation for consulting
services to be provided during 20X2.
Required:
1. Provide journal entries for each of these transactions.
2. Provide adjusting entries at the end of the year.
3. Preparing an income statement for year ended December 31, 20X1. Ignore income taxes.
4. Prepare a balance sheet as of December 31, 20X1