Chapter 3, Problem 1GLP

To determine

Adjusting Entries: Adjusting entries are made at the end of the year to adjust the financial position of the enterprise according to accrual basis of accounting.

Accounting rules regarding journal entries:

• Balance increase when: Assets, losses and expenses get debited and liabilities, gains, and revenue get credited.
• Balance decrease when: Assets, losses and expenses get credited and liabilities, gains, and revenue get debited.

Income Statement: It is a financial statement which show the profit and loss made by the firm in a particular accounting period.

Retained Earnings: It is a financial statement which show the amount of profit retained by the company for their future unforeseen events.

Balance sheet: It shows the financial position of a firm. It consists of asset and liabilities.

To prepare: Adjusting entry, financial statement and explain impact of adjusting entry on net income

Answer to Problem 1GLP

Solution:

Prepare adjusting entries:

a.

Date	Particulars	Post ref	Debit($)	Credit($)
Dec. 31	Insurance Expense		100
	Prepaid Insurance			100
	(Being insurance coverage worth $100has expired)

Explanation of Solution

• Insurance expense is an expense. Since, expense reduces equity, debit insurance expense account.
• Prepaid Insurance is an asset. Since, some of the insurance is used up, it reduces asset. Hence, credit prepaid insurance account.

b.

Date	Particulars	Post ref	Debit($)	Credit($)
Dec. 31	Supplies Expense		1,050
	Supplies			1,050
	(Being $1,050 worth of computer Supplies got exhausted)

• Supplies expense is an expense. Since, expense reduces equity, debit supplies expense account.
• Supplies are an asset. Since, some of asset used up, it reduces asset. Hence, credit supply account.

c.

Date	Particulars	Post ref	Debit($)	Credit($)
Dec. 31	Depreciation Expense-Equipment		300
	Accumulated Depreciation-Equipment			300
	(Being depreciation is recorded)

• Depreciation Expense is an expense. Since, expense reduces equity, debit depreciation expense- equipment account.
• Accumulated Depreciation- equipment is a Contra asset. Since, it has a normal credit balance. Hence, credit accumulated depreciation-equipment account.

d.

Date	Particulars	Post ref	Debit($)	Credit($)
Dec. 31	Unearned consulting revenue		250
	Consulting revenue			250
	(Being revenue is earned)

• Unearned consulting revenue is a liability. Since, revenue is earned, it decreases liability. Hence, debit unearned consulting revenue account.
• Consulting revenue is an income. Since, obligation is fulfilled, it increases income. Hence, credit consulting revenue account.

e.

Date	Particulars	Post ref	Debit($)	Credit($)
Dec. 31	Salary Expense		210
	Salary Payable			210
	(Being salaries worth $600 due to be paid)

• Salary expense is an expense. Since, expense reduces equity, debit salary expense account.
• Salary Payable is a liability. Since, expense has occurred but not paid yet, it increases liability. Hence, credit salary payable account.

f.

Date	Particulars	Post ref	Debit($)	Credit($)
Dec. 31	Accounts receivable		1,800
	Consulting revenue			1,800
	(Being revenue is earned)

• Accounts receivable is an asset. Since, revenue is earned but not received yet, it increase asset. Hence, debit accounts receivable account.
• Consulting revenue is an income. Since, obligation is fulfilled, it increases income. Hence, credit consulting revenue account.

Prepare income statement.

F.F. Company
Income Statement
For the year ended December 31, 2017
Particulars	Amount($)	Amount($)
Revenue:
Service Revenue	7,850
Rental revenue	300
Total Revenue		8,150
Expenses:
Depreciation Expense- equipment	300
Salaries Expenses	1,610
Insurance Expense	100
Rent Expenses	1,000
Supply Expense	1,050
Utilities expense	305	4,365
Net income		3,785

Net income of B.S. Company is $3,485.

Prepare Retained Earnings Statement.

F.F. Company
Retained Earnings Statement
For the year ended December 31, 2017
Particulars	Amount($)
Opening balance	0
Net income	3,785
Dividends	(200)
Retained earnings	3,585

Therefore, Retained earnings of B.S. Company are $3,285.

Prepare Balance sheet.

F.F. Company
Balance sheet
As on December 31, 2017
Particulars		Amount($)
Assets
Cash		4,275
Accounts Receivable		1,800
Supplies		8,670
Prepaid Insurance		2,300
Equipment	26,000
Accumulated Depreciation-equipment	(300)	25,700
Total Assets		42,745
Liabilities and Stockholder’s Equity
Liabilities
Accounts payable		6,200
Salaries Payable		210
Unearned consulting revenue		2,750
Stockholder’s Equity
Common Stock	30,000
Retained earnings	3,585
Total stockholders’ equity		33,585
Total Liabilities and Stockholder’s equity		42,745

Balance sheet of F.F. Company as on 31 December 2017 stood for $42,745.

Effects of adjusting entries on net income:

a.

Insurance expense is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

b.

Supplies expense is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

c.

Depreciation expense-equipment is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

d.

Consulting fees earned is an income. Since, it is credited; it increases the income of the firm.

e.

Salaries expense is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

f.

Consulting fees earned is an income. Since, it is credited; it increases the income of the firm.