A.
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 (
To prepare: The adjusting entries in the books of Company AC at the end of the year.
A.
Explanation of Solution
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:
Date | Description |
Post. Ref |
Debit ($) |
Credit ($) |
|
July | 31 | Accounts 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 $11,150.
An adjusting entry for Supplies expenses:
In this case, Company AC recognized the supplies expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the supplies expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Supplies 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
- 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 $2,450.
An adjusting entry for rent expenses:
In this case, Company AC recognized the rent expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the prepaid expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Rent 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.
- Prepaid rent is an asset, and it decreased the value of asset by $6,000, hence credit the prepaid rent for $6,000.
An adjusting entry for
In this case, Company AC recognized the depreciation expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the accrued expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Depreciation expenses | 8,950 | ||
Accumulated depreciation-Equipment | 8,950 | ||||
(To record the depreciation expenses incurred at the end of the year) | |||||
Table (4)
- Depreciation expense decreased the value of stockholders’ equity by $8,950; hence debit the depreciation expenses for $8,950.
- Accumulated depreciation is a contra-asset account, and it decreased the value of asset by $8,950, hence credit the accumulated depreciation for $8,950.
An adjusting entry for unearned fees revenue:
In this case, Company AC received cash in advance before the service provided to customer. So, the necessary adjusting entry that the Company AC should record for the unearned fees revenue at the end of the year is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Unearned fees revenue | 10,000 | ||
Fees earned (2) | 10,000 | ||||
(To record the unearned fees revenue at the end of the year) | |||||
Table (5)
Working note:
Calculate the value of accrued wages at end of the October
- Unearned fees revenue is a liability, and it decreased the value of liability by $10,000, hence debit the unearned fees revenue for $10,000.
- Fees earned increased stockholders’ equity by $10,000; hence credit the fees earned for $10,000.
An adjusting entry for wages expenses:
In this case, Company AC recognized the wages expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the accrued expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Wages expenses | 4,840 | ||
Wages payable | 4,840 | ||||
(To record the wages expenses incurred at the end of the year) | |||||
Table (6)
- Wages expense decreased the value of stockholders’ equity by $4,840; hence debit the wages expenses for $4,840.
- Wages payable is a liability, and it increased the value of liability by $4,840, hence credit the wages payable for $4,840.
B.
The effects on the income statement, if adjusting entries are not recorded.
B.
Answer to Problem 3.2APR
The effects on the income statement, if the adjusting entries are not recorded are as follows:
Adjustment Not Recorded | Income Statement | ||
Revenue | Expenses | Net income | |
Unbilled fees | Understated by $11,150 | Understated by $11,150 | |
Accrued wages | Understated by $4,840 | Overstated by $4,840 |
Table (7)
Explanation of Solution
Accrued fees (unbilled fees)
Given entry would increase the fees earned account, and increase the accounts receivable account, if adjusting entry for accrued fees is not recorded, and it will affect two accounts such as fees earned (revenue), and accounts receivable (asset). Hence the fees of $11,150 has been understated the value of total revenue of the Company AC, and it understated the value of net income by $11,150.
Accrued wages
Given entry would increase the wages expense account, and increase the wages payable account, if adjusting entry for accrued wages is not recorded, and it will affect two accounts such as wages expense (expense), and wages payable (liability). Hence the wages expense of $4,840 has been understated the value of total expense of the Company AC, and it overstated the value of net income by $4,840.
Hence, the revenues of the Company AC were understated by $11,150, and the expenses were understated by $4,840. Thus, the net income of Company AC was understated by $6,310
C.
The effects on the balance sheet, if adjusting entries are not recorded.
C.
Answer to Problem 3.2APR
The effects on the balance sheet, if the adjusting entries are not recorded are as follows:
Adjustment Not Recorded | Balance Sheet | ||
Assets | Liabilities | Stockholders’ Equity | |
Unbilled fees | Understated by $11,150 | Understated by $11,150 | |
Accrued wages | Understated by $4,840 | Overstated by $4,840 |
Table (8)
Explanation of Solution
Accrued fees (unbilled fees)
Given entry would increase the fees earned account, and increase the accounts receivable account, if adjusting entry for accrued fees is not recorded, and it will affect two accounts such as fees earned (revenue), and accounts receivable (asset). Hence the fees earned of $11,150 has been understated the value of assets of the Company AC, and understated accrued fees understates the stockholders’ equity by $11,150.
Accrued wages
Given entry would increase the wages expense account, and increase the wages payable account, if adjusting entry for accrued wages is not recorded, and it will affect two accounts such as wages expense (expense), and wages payable (liability). Hence the wages expense of $4,840 has been understated the value of liabilities of the Company AC, and understated accrued wages overstates the stockholders’ equity by $4,840.
Hence, the assets of the Company AC were understated by $11,150, and the liabilities were understated by $4,840. Thus, the total liabilities ($4,840) and owner’s equity ($6,310) of Company AC was understated by $11,150
D.
The effects on the “net increase or decrease in cash” on the statement of cash flow , if adjusting entries are not recorded.
D.
Explanation of Solution
There is no effect on the “net increase or decrease in cash” on the statement of cash flow because, the adjusting entries are prepared in accordance with the accrual basis of accounting. Hence, adjusting entries do not effect the cash flow statement of the company.
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Chapter 3 Solutions
Corporate Financial Accounting
- Ledger accounts, adjusting entries, financial statements, and closing entries; optional spreadsheet The unadjusted trial balance of Lakota Freight Co. at March 31, 20Y4, the end of the year, follows: The data needed to determine year-end adjustments are as follows: (a) Supplies on hand at March 31 are 7,500. (b) Insurance premiums expired during year are 1,800. (c) Depreciation of equipment during year is 8,350. (d) Depreciation of trucks during year is 6,200. (e) Wages accrued but not paid at March 31 are 600. Instructions 1. For each account listed in the trial balance, enter the balance in the appropriate Balance column of a four-column account and place a check mark () in the Posting Reference column. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (3) as needed. 3. Journalize and post the adjusting entries, inserting balances in the accounts affected. Record the adjusting entries on Page 26 of the journal. The following additional accounts from Lakota Freight Co.s chart of accounts should be used: Wages Payable, 22; Supplies Expense, 52; Depreciation ExpenseEquipment, 55; Depreciation ExpenseTrucks, 56; Insurance Expense, 57. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of stockholders equity, and a balance sheet. During the year ended March 31, 20Y4, additional common stock of 6,000 was issued. 6. Journalize and post the closing entries. Record the closing entries on Page 27 of the journal. Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry. 7. Prepare a post-closing trial balance.arrow_forwardAdjusting entries and adjusted trial balances Reece Financial Services Co., which specializes in appliance repair services, is owned and operated by Joni Reece. Reece Financial Services accounting clerk prepared the following unadjusted trial balance at July 31, 20Y9: The data needed to determine year-end adjustments are as follows: Depreciation of building for the year, 6,400. Depreciation of equipment for the year, 2,800. Accrued salaries and wages at July 31, 900. Unexpired insurance at July 31, 1,500. Fees earned but unbilled on July 31, 10,200. Supplies on hand at July 31, 615. Rent unearned at July 31, 300. Instructions 1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Rent Revenue; Insurance Expense; Depreciation ExpenseBuilding; Depreciation Expense Equipment; and Supplies Expense. 2. Determine the balances of the accounts affected by the adjusting entries, and prepare an adjusted trial balance.arrow_forwardAdjustment process and financial statements Adjustment data for Ms. Ellen’s Laundry Inc. for the year ended December 31, 20Y8. are as follows: a. Wages accrued but not paid at December 31. $2150 h. Depreciation of equipment during the year. $12500 c. Laundry supplies on hand at December 31. $1,500 d. Insurance premiums expired. $4600 Instructions 1. Using the following integrated financial statement framework, record each adjustment to the appropriate accounts, identifying each adjustment by its letter. After all adjustments are recorded, determine the balances.arrow_forward
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