Chapter 3, Problem 2P

To determine

Prepare journal entries to adjust Company CG’s accounts as of December 31.

Explanation of Solution

Adjusting entries:

Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare journal entries to adjust Company CG’s accounts as of December 31.

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Supplies Expense $\left(\$129+\$480-\$174\right)$	435
	Office Supplies		435
	(To record the amount of supplies used during the period)
December 31	Prepaid Rent	300
	Rent Expense $\left(\$3,600\times \frac{1}{12}\right)$		300
	(To record the amount of prepaid rent recognized)
December 31	Discount on Notes Payable	200
	Interest Expense $\left(\$1,200\times \frac{2}{12}\right)$		200
	(To record the amount of prepaid interest recognized)
December 31	Depreciation Expense	11,800
	Accumulated Depreciation – Building (1)		4,600
	Accumulated Depreciation-Store equipment (2)		6,300
	Accumulated Depreciation -  Office equipment (3)		900
	(To record the amount of depreciation expense for the period)
December 31	Interest Expense (4)	960
	Interest Payable		960
	(To record the accrued  interest expense on notes payable)
December 31	Insurance Expense (5)	140
	Prepaid Insurance		140
	(To record the insurance expense for the period)
December 31	Interest Receivable	292
	Interest Revenue (6)		292
	(To record the interest earned but uncollectible)
December 31	Rent Revenue $\left(\$960\times \frac{5}{8}\right)$	600
	Unearned Rent		600
	(To record the amount of revenue earned for the period
December 31	Travel Expenses	787
	Prepaid Expenses		787
	(To record the amount of prepaid expense for the person airfare the period)
December 31	Property Tax Expense	2,300
	Property Tax Payable		2,300
	(To record the property tax expense for the year)
December 31	Utilities expense	302
	Utilities payable		302
	(To record the unpaid utility bill)
December 31	Salaries expense	927
	Salaries payable		927
	(To record the accrued salaries at the end of the accounting period)
December 31	Income tax expense (7)	3,087
	Income tax payable		3,087
	(To record the income tax expense)

Table (1)

Working note (1):

Calculate the amount of accumulated depreciation for building:

$\begin{array}{c}\text{Accumulated depreciation for building =}\left[\frac{\left(\begin{array}{l}\text{ Cost of building}\\ -\text{Residual value}\end{array}\right)}{\text{Life of asset}}\right]\\ =\left[\frac{\left(\text{ \$100,000}-\$8,000\right)}{\text{20 years}}\right]\\ =\left[\frac{\$92,000}{\text{20 years}}\right]\\ =\$4,600\end{array}$

Working note (2):

Calculate the amount of accumulated depreciation for store equipment:

$\begin{array}{c}\begin{array}{l}\text{Accumulated depreciation }\\ \text{for store equipment}\end{array}\}\text{ =}\left[\frac{\left(\begin{array}{l}\text{ Cost of store equipment}\\ -\text{Residual value}\end{array}\right)}{\text{Life of asset}}\right]\\ =\left[\frac{\left(\text{ \$65,000}-\$2,000\right)}{\text{10 years}}\right]\\ =\left[\frac{\$63,000}{\text{10 years}}\right]\\ =\$6,300\end{array}$

Working note (3):

Calculate the amount of accumulated depreciation for office equipment:

$\begin{array}{c}\begin{array}{l}\text{Accumulated depreciation }\\ \text{for office equipment}\end{array}\}\text{ =}\left[\begin{array}{l}\frac{\left(\begin{array}{l}\text{ Cost of office equipment}\\ -\text{Residual value}\end{array}\right)}{\text{Life of asset}}\times \\ \text{Period from May 1 to December 31}\end{array}\right]\\ =\left[\frac{\left(\text{ \$15,000}-\$1,500\right)}{\text{10 years}}\times \frac{8}{12}\right]\\ =\left[\frac{\$13,500}{\text{10 years}}\times \frac{8}{12}\right]\\ =\$900\end{array}$

Working note (4):

Calculate the amount of interest expense:

$\begin{array}{c}\text{Interest expense = }\left(\begin{array}{l}\text{Office equipment less down payment}\times \\ \text{Annual rate of interest}\times \frac{\text{Number of months}}{\text{Months in a year}}\end{array}\right)\\ =\left[\$12,000\left(\$15,000-\$3,000\right)\times 12\%\times \frac{8}{12}\right]\\ \text{=\$960}\end{array}$

Working note (5):

Calculate the amount of insurance expense:

$\begin{array}{c}\text{Insurance expense = }\left[\frac{\left(\text{Insurance policy amount}\right)}{3\text{ years policy}}\times \frac{\text{Number of months}}{\text{Months in a year}}\right]\\ =\left[\frac{\text{\$720}}{3\text{ years}}\times \frac{7}{12}\left(\text{May to December}\right)\right]\\ =\$140\end{array}$

Working note (6):

Calculate the amount of interest revenue:

$\begin{array}{c}\text{Interest revenue =}\left(\begin{array}{l}\text{Sold amount of land less down payments}\times \\ \text{Annual rate of interest}\times \frac{\text{Number of months}}{\text{Months in a year}}\end{array}\right)\\ =\left(\text{\$7,000}\times \text{10\%}\times \frac{5}{12}\right)\\ =\$292\end{array}$

Working note (7):

Calculate the amount of income tax:

$\begin{array}{c}\text{Income tax expense = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Pre-tax income}-\text{Rent expense}-\text{Interest expense}-\\ \text{Depreciation expense}-\\ \text{Interest expense}-\text{Insurance expense}+\text{Interest revenue}+\\ \text{Rent revenue}-\text{Travel expenses}-\\ \text{Property tax expenses}-\\ \text{Utility expense}-\text{Salaries expense}\end{array}\right)\\ \times \text{Income tax rate}\end{array}\right]\\ \text{=}\left[\left(\begin{array}{l}\$27,749-\$435+\$300+\$200-\$11,800-\\ \$960-\$140+\$292-\$600-\$787-\$2,300-\\ \$302-\$927\end{array}\right)\times 30\%\right]\\ =\left[\$10,290\times 30\%\right]\\ =\$3,087\end{array}$

1. To record the supplies expense:

• Supplies expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit supplies expenses with $435.
• Office supplies are an asset account and it is decreased. Thus, credit office supplies with $435.

2. To record the rent expense:

• Rent expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit rent expenses with $300.
• Prepaid rent is an asset account and it is decreased. Thus, credit prepaid rent with $30.

3. To record the discount on note payable:

• Discount on notes payable is a contra-liability and it decreases the value of the liability. Thus, debit discount on notes payable with $200.
• Ø 
• Interest expense is an expense account and it is decreased. Thus, credit interest expense with $200.

4. To record the depreciation expense:

• Depreciation expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit depreciation expenses with $11,800.
• Accumulated depreciation-Building is a contra-asset and it decreases the value of the asset. Thus, credit accumulated depreciation-Building with $4,600.
• Accumulated depreciation- Store equipment is a contra-asset and it decreases the value of the asset. Thus, credit accumulated depreciation-Store equipment with $6,300.
• Accumulated depreciation-Office equipment is a contra-asset and it decreases the value of the asset. Thus, credit accumulated depreciation-Office equipment with $900.

5. To record interest expense:

• Interest expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit interest expense with $960.
• Interest payable is a liability and it is increased. Thus, credit interest payable with $960.

6. To record the insurance expense:

• Insurance expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit insurance expenses with $140.
• Prepaid insurance is an asset account and it is decreased. Thus, credit prepaid insurance with $140.

7. To record the interest receivable:

• Interest receivable is an asset account and it is increased. Thus, debit interest receivable with $292.
• Interest revenue is a revenue account and it increases the value of the stockholders’ equity. Therefore, credit interest revenue with $292.

8. To record the rent revenue:

• Rent revenue is a revenue account and it is decreased. Thus, debit rent revenue with $600.
• Unearned rent is a liability account and it is increased. Therefore, credit unearned rent with $600.

9. To record the travel expense:

• Travel expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit travel expenses with $787.
• Prepaid expense is an asset account and it is decreased. Thus, credit prepaid expense with $787.

10. To record the property tax expense:

• Property tax expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit property tax expense with $2,300.
• Property tax payable is a liability account and it is increased. Therefore, credit property tax payable with $2,300.

11. To record the utilities expense:

• Utilities expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit utilities expense with $302.
• Utilities payable is a liability account and it is increased. Therefore, credit utilities payable with $2,300.

12. To record the salaries expense:

• Salaries expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit salaries expense with $927.
• Salaries payable is a liability account and it is increased. Therefore, credit salaries with $2,300.

13. To record the income tax expense:

• Income tax expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit income tax expense with $3,087.
• Income tax payable is a liability account and it is increased. Therefore, credit income tax payable with $2,300.