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Adjusting entries Selected account balances before adjustment for Atlantic Coast Realty at July 31, the end of the current year, are as follows: Data needed for year-end adjustments are as follows: Unbilled fees at July 31, $11,150. Supplies on hand at July 31, $900. Rent expired, $6,000. Depreciation of equipment during year, $8,950. Unearned fees at July 31, $2,000. Wages accrued but not paid at July 31, $4,840. Instructions 1. Journalize the six adjusting entries required at July 31, based on the data presented. 2. What would be the effect on the income statement if the adjustments for unbilled fees and accrued wages were omitted at the end of the year? 3. What would be the effect on the balance sheet if the adjustments for unbilled fees and accrued wages were omitted at the end of the year? 4. What would be the effect on the “Net increase or decrease in cash” on the statement of cash flows if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 3, Problem 2PA
Textbook Problem
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Adjusting entries

Selected account balances before adjustment for Atlantic Coast Realty at July 31, the end of the current year, are as follows:

Chapter 3, Problem 2PA, Adjusting entries Selected account balances before adjustment for Atlantic Coast Realty at July 31,

Data needed for year-end adjustments are as follows:

  • Unbilled fees at July 31, $11,150.
  • Supplies on hand at July 31, $900.
  • Rent expired, $6,000.
  • Depreciation of equipment during year, $8,950.
  • Unearned fees at July 31, $2,000.
  • Wages accrued but not paid at July 31, $4,840.

Instructions

  1. 1. Journalize the six adjusting entries required at July 31, based on the data presented.
  2. 2. What would be the effect on the income statement if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?
  3. 3. What would be the effect on the balance sheet if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?
  4. 4. What would be the effect on the “Net increase or decrease in cash” on the statement of cash flows if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

A.

To determine

Prepare the adjusting entries in the books of Company AC at the end of the year.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Accrual basis of accounting:

Accrual basis of accounting refers to recognizing the financial transactions during the period in which the event occurs, even if the cash is not exchanged.

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

An adjusting entry for accrued fees:

In this case, the Company AC recognized the fees at the end of the year. So, the necessary adjusting entry that the business should record for the accrued at end of the year is as follows:

DateDescription

Post.

Ref

Debit

($)

Credit

($)

July31Accounts receivable 11,150 
 Fees earned  11,150
 (To record the fees earned at end of the year)   

Table (1)

  • • Account receivable is an asset, and it increased the value of asset by $11,150, hence debit the accounts receivable for $11,150. 
  • • Fees earned increased the value of stockholders’ equity by $11,150; hence credit the fees earned for $11,150.

An adjusting entry for Supplies expenses:

In this case, Company AC recognized the supplies expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the supplies expense is as follows:

DateDescription

Post

Ref.

Debit ($)Credit ($)
July31Supplies expenses  (1) 2,450 
         Supplies  2,450
 (To record the supplies expenses incurred at the end of the year)   

Table (2)

Working note:

Calculate the value of supplies expense

Suppliesexpense=(Theamountofsuppliesbegining of the year)(Theamountofsuppliesonhandattheendofthe year)=($3,350$900)=$2,450 (1)

  • • Supplies expense decreased the value of stockholders’ equity by $2,450; hence debit the supplies expenses for $2,450.
  • • Supplies are an asset, and it decreased the value of asset by $2,450, hence credit the supplies for $2,450.  

An adjusting entry for rent expenses:

In this case, Company AC recognized the rent expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the prepaid expense is as follows:

DateDescription

Post

Ref.

Debit ($)Credit ($)
July31Rent expenses  6,000 
         Prepaid rent  6,000
 (To record the rent expenses incurred at the end of the year)   

Table (3)

  • • Rent expense decreased the value of stockholders’ equity by $6,000; hence debit the rent expenses for $6,000

B.

To determine

Determine the effects on the income statement, if adjusting entries are not recorded.

C.

To determine

Determine the effects on the balance sheet, if adjusting entries are not recorded.

D.

To determine

Determine the effects on the “net increase or decrease in cash” on the statement of cash flow, if adjusting entries are not recorded.

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Chapter 3 Solutions

Financial And Managerial Accounting
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