Chapter 2, Problem 2.16E

External transactions and adjusting entries

• 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.

To determine

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:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Owner's Equity}\\ +\text{\$12,000}\left(\text{Cash}\right)=+\$12,000\left(\text{Notes Payable}\right)\end{array}$

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:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Owner's Equity}\\ -\text{\$3,600 }\left(\text{Cash}\right)=\\ +\$3,600\left(\text{Prepaid Insurance}\right)=\end{array}$

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:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Owner's Equity}\\ +\$2,800\left(\text{Supplies}\right)=+\$2,800\left(\text{Accounts Payable}\right)\end{array}$

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:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Owner's Equity}\\ -\$6,000\left(\text{Cash}\right)=\\ +\$6,000\left(\text{Notes Receivable}\right)=\end{array}$

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.

To determine

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:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Stockholders'}\text{Equity}\\ =+\$1,100\left(\begin{array}{l}\text{Interest}\\ \text{Payable}\end{array}\right)-\$1,100\left(\begin{array}{l}\text{Interest}\\ \text{Expenses}\end{array}\right)\end{array}$

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):

$\begin{array}{c}\text{Interest = Principal }\times \text{ Rate of Interest }\times \text{ Period}\\ \text{=}\text{\$12,000}\times \frac{10}{100}\times \frac{11}{12}\\ =\$1,100\end{array}$

• 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:

$\begin{array}{c}\text{Assets}\text{=}\text{Liabilities}\text{+}\text{Stockholders'}\text{Equity}\\ -\text{\$1,350}\left(\text{Prepaid Insurance}\right)\text{=}-\text{\$1,350}\left(\text{Insurance Expense}\right)\end{array}$

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):

$\begin{array}{c}\text{Prepaid Insurance for 24 Months = \$3,600}\\ \text{Prepaid Insurance Expired }\left(\text{9 Months}\right)\text{= \$3,600}\times \frac{9}{24}\\ \text{=\$1,350}\end{array}$

• 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:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Stockholders'}\text{Equity}\\ -\$1,550\left(\text{Supplies}\right)=-\$1,550\left(\text{Supplies Expenses}\right)\end{array}$

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:

$\begin{array}{c}\text{Office}\text{Supplies used}=\text{Beginning balance}-\text{Balance}\text{in}\text{hand}\\ =\text{\$2,800}-\text{\$1,250}\\ =\text{\$1,550}\end{array}$

• 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:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Stockholders' Equity}\\ \text{+\$80}\left(\text{Interest Receivable}\right)=+\$80\left(\text{Interest Income}\right)\end{array}$

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):

$\begin{array}{c}\text{Interest = Principal }\times \text{ Rate of Interest }\times \text{ Period}\\ \text{=}\text{\$6,000}\times \frac{8}{100}\times \frac{2}{12}\\ =\$80\end{array}$

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.