Concept explainers
External transactions and
• LO2–2, LO2–5
The following transactions occurred during 2018 for the Beehive Honey Corporation:
Feb. 1 | Borrowed $12,000 from a bank and signed a note. Principal and interest at 10% will be paid on January 31, 2019. |
Apr. 1 | Paid $3,600 to an insurance company for a two-year fire insurance policy. |
July 17 | Purchased supplies costing $2,800 on account. The company records supplies purchased in an asset account. At the year-end on December 31, 2018, supplies costing $1,250 remained on hand. |
Nov. 1 | A customer borrowed $6,000 and signed a note requiring the customer to pay principal and 8% interest on April 30, 2019. |
Required:
1. Record each transaction in general journal form. Omit explanations.
2. Prepare any necessary adjusting entries at the year-end on December 31, 2018. No adjusting entries were recorded during the year for any item.
1.
Journal:
Journal is the book, where the debit and credit entries of the accounting transactions are recorded in a chronological order. Every company must follow at least the basic form of journal called the ‘General journal’.
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Accounting rules for Journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
Adjusting entries:
Adjusting entries are the journal entries, which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.
Accounting rules for journal/adjusting entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
To Record: Each transaction in general journal form.
Explanation of Solution
Transaction occurred on February 1:
The following is the accounting equation for the entry:
Record the following journal entry in the general journal on February 1:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
February 1 | Cash (A+) | 12,000 | ||
Notes Payable (L+) | 12,000 | |||
(To record the issuance of common stock) |
Table (1)
- Cash is an asset account, and increased by $12,000. Therefore, debit cash account with $12,000.
- Notes Payable is liability account, and increased by $12,000. Therefore, credit liability with $12,000.
Transaction occurred on April 1:
The following is the accounting equation for the entry:
Record the following journal entry in the general journal on April 1:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
April 1 | Prepaid Insurance (A+) | 3,600 | ||
Cash (A–) | 3,600 | |||
(To record the payment of Rent in advance) |
Table (2)
- Prepaid Insurance is an asset account, and increased by $3,600. Therefore, debit the prepaid Insurance account with $3,600.
- Cash is an asset account, and decreased by $3,600. Therefore, credit cash account with $3,600.
Transaction occurred on July 17:
The following is the accounting equation for the entry:
Record the following journal entry in the general journal on July 17:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
July 17 | Supplies (A+) | 2,800 | ||
Accounts Payable (L+) | 2,800 | |||
(To record the purchase of supplies on account.) |
Table (3)
- Supplies are asset account, and increased by $2,800. Therefore, debit supplies account with $2,800.
- Accounts payable is a liability account, and increased by $2,800. Therefore, credit accounts payable account with $2,800.
Transaction occurred on November 1:
The following is the accounting equation for the entry:
Record the following journal entry in the general journal on November 1:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
November 1 | Notes Receivable (A+) | 6,000 | ||
Cash (A–) | 6,000 | |||
(To record the issue of notes receivable for cash.) |
Table (4)
- Notes Receivable is asset account, and increased by $6,000. Therefore, debit Notes Receivable account with $6,000.
- Cash is an asset account, and decreased by $6,000. Therefore, credit cash account with $6,000.
2.
To Prepare: The necessary adjusting entries as on December 31, 2018.
Explanation of Solution
Prepare the necessary adjusting entries as on December 31, 2018.
Adjusting entry for accrued interest:
The following is the accounting equation for the adjustment entry of accrued interest on notes payable:
The following is the adjusting entry for the accrued interest for the year:
Date | Accounts title and explanation | Post Ref. | Debit ($) | Credit ($) |
December 31 | Interest Expense (E–) | 1,100 | ||
Interest Payable (L+) | 1,100 | |||
(To record the amount of accrued interest for the year) |
Table (5)
Working Note:
Compute the amount of accrued interest for 11 months (February 1, to December 31):
- Interest Expense is an expense. There is an increase in the expenses, and therefore it is debited.
- Interest Payable is a liability account. There is an increase in liabilities, and therefore it is credited.
Adjusting entry of Prepaid Insurance:
The following is the accounting equation for the adjustment entry of prepaid Rent:
The following is the adjusting entry for the Prepaid Advertising expired during December:
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31 | Insurance Expense (E–) | 1,350 | ||
Prepaid Insurance (A–) | 1,350 | |||
(To record the amount of Prepaid Advertising expired during the period) |
Table (6)
Working Note:
Compute the Insurance expense for the 9 months (April 1 to December 31):
- Insurance Expense is an expense. There is an increase in the expenses, and therefore it is debited.
- Prepaid Insurance is an asset. There is a decrease in assets, and therefore it is credited.
Adjusting entry for Office Supplies
The following is the accounting equation for the adjustment entry of Office Supplies:
The following is the adjusting entry for the office supplies used during the year:
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31 | Office Supplies Expense (E–) | 1,550 | ||
Office Supplies (A–) | 1,550 | |||
(To record the amount of office supplies used during the period) |
Table (7)
Working Note:
Calculate the Office Supplies used during the year:
- Office Supplies Expense is an expense. There is an increase in the expenses, and therefore it is debited.
- Office Supplies is an asset. There is a decrease in assets, and therefore it is credited.
Adjusting entry for accrued interest:
The following is the accounting equation for the adjustment entry of accrued interest:
The following is the adjusting entry for the accrued interest for the year:
Date | Accounts title and explanation | Post Ref. | Debit ($) | Credit ($) |
December 31 | Interest Receivable (A+) | 80 | ||
Interest Income (L+) | 80 | |||
(To record the amount of accrued interest for the year) |
Table (8)
Working Note:
Compute the amount of accrued interest for 2 month (November 1, to December 31):
Explanation:
- Interest receivable is an asset. There is an increase in the asset, and therefore it is debited.
- Interest income is a revenue account. There is an increase in revenue, and therefore it is credited.
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Chapter 2 Solutions
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