(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:
Ø Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and owners’ equities.
Ø Credit, all increase in liabilities, revenues, and owners’ 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 is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.
To prepare: The adjusting entries in the books of Company IR at the end of the year.
(a)
Answer to Problem 3.2BPR
An adjusting entry for Supplies expenses:
In this case, Company IR recognized the supplies expenses at the end of the year. So, the necessary adjusting entry that the Company IR should record to recognize the supplies expense is as follows:
Date | Description |
Post Ref. | Debit ($) | Credit ($) | |
November | 30 | Supplies expenses (1) | 2,620 | ||
Supplies | 2,620 | ||||
(To record the supplies expenses incurred at the end of the year) | |||||
Table (1)
Explanation of Solution
Working note:
Calculate the value of supplies expense
Explanation:
- Supplies expense decreased the value of owner’s equity by $2,620; hence debit the supplies expenses for $2,620.
- Supplies are an asset, and it decreased the value of asset by $2,620, hence credit the supplies for $2,620.
An adjusting entry for
In this case, Company IR recognized the depreciation expenses at the end of the year. So, the necessary adjusting entry that the Company IR should record to recognize the accrued expense is as follows:
Date | Description |
Post Ref. | Debit ($) | Credit ($) | |
November | 30 | Depreciation expenses | 1,675 | ||
| 1,675 | ||||
(To record the depreciation expenses incurred at the end of the year) | |||||
Table (2)
Explanation:
- Depreciation expense decreased the value of owner’s equity by $1,675; hence debit the depreciation expenses for $1,675.
- Accumulated depreciation is a contra-asset account, and it decreased the value of asset by $1,675, hence credit the accumulated depreciation for $1,675.
An adjusting entry for rent expenses:
In this case, Company IR recognized the rent expenses at the end of the year. So, the necessary adjusting entry that the Company IR should record to recognize the prepaid expense is as follows:
Date | Description |
Post Ref. | Debit ($) | Credit ($) | |
November | 30 | Rent expenses | 8,500 | ||
Prepaid rent | 8,500 | ||||
(To record the rent expenses incurred at the end of the year) | |||||
Table (3)
Explanation:
- Rent expense decreased the value of owner’s equity by $8,500; hence debit the rent expenses for $8,500.
- Prepaid rent is an asset, and it decreased the value of asset by $6,000, hence credit the prepaid rent for $8,500.
An adjusting entry for wages expenses:
In this case, Company IR recognized the wages expenses at the end of the year. So, the necessary adjusting entry that the Company IR should record to recognize the accrued expense is as follows:
Date | Description |
Post Ref. | Debit ($) | Credit ($) | |
November | 30 | Wages expenses | 2,000 | ||
Wages payable | 2,000 | ||||
(To record the wages expenses incurred at the end of the year) | |||||
Table (4)
Explanation:
- Wages expense decreased the value of owner’s equity by $2,000; hence debit the wages expenses for $2,000.
- Wages payable is a liability, and it increased the value of liability by $2,000, hence credit the wages payable for $2,000.
An adjusting entry for unearned fees revenue:
In this case, Company IR received cash in advance before the service provided to customer. So, the necessary adjusting entry that the Company IR should record for the unearned fees revenue at the end of the year is as follows:
Date | Description |
Post Ref. | Debit ($) | Credit ($) | |
November | 30 | Unearned fees revenue | 6,000 | ||
Fees earned (2) | 6,000 | ||||
(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
Explanation:
- Unearned fees revenue is a liability, and it decreased the value of liability by $6,000, hence debit the unearned fees revenue for $6,000.
- Fees earned increased owner’s equity by $6,000; hence credit the fees earned for $6,000.
An adjusting entry for accrued fees:
In this case, the Company IR recognized the fees at the end of the year. So, the necessary adjusting entry that the business should record for the accrued at end of the year is as follows:
Date | Description |
Post. Ref |
Debit ($) |
Credit ($) | |
November | 30 | Accounts receivable | 5,380 | ||
Fees earned | 5,380 | ||||
(To record the fees earned at end of the year) | |||||
Table (6)
Explanation:
- Account receivable is an asset, and it increased the value of asset by $5,380, hence debit the accounts receivable for $5,380.
- Fees earned increased the value of owner’s equity by $5,380; hence credit the fees earned for $5,380.
(b)
The effects on the income statement, if adjusting entries are not recorded.
(b)
Answer to Problem 3.2BPR
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 | |
Depreciation expense | Understated by $1,675 | Overstated by $1,675 | |
Unearned fees | Understated by $6,000 | Understated by $6,000 |
Table (7)
Explanation of Solution
Depreciation expense
Given entry would increase the depreciation expense account, and increase the accumulated depreciation account, if adjusting entry for depreciation expense is not recorded, and it will affect two accounts such as depreciation expense (expense), and accumulated depreciation (contra-asset). Hence the depreciation expense of $1,675 has been understated the value of total expense of the Company IR, and it overstated the value of net income by $1,675.
Unearned fees
Given entry would increase the fees earned account, and decrease the unearned fees account, if adjusting entry for unearned fees is not recorded, and it will affect two accounts such as fees earned (revenue), and unearned fees (liability). Hence the fees earned of $6,000 has been understated the value of total revenue of the Company IR, and it understated the value of net income by $6,000.
Hence, the revenues of the Company IR were understated by $6,000, and the expenses were understated by $1,675. Thus, the net income of Company AC was understated by $4,325
(c)
The effects on the balance sheet, if adjusting entries are not recorded.
(c)
Answer to Problem 3.2BPR
The effects on the balance sheet, if the adjusting entries are not recorded are as follows:
Adjustment Not Recorded | Balance Sheet | ||
Assets | Liabilities | Owner’s Equity | |
Depreciation expense | Overstated by $1,675 | Overstated by $1,675 | |
Unearned fees | Overstated by $6,000 | Understated by $6,000 |
Table (8)
Explanation of Solution
Depreciation expense
Given entry would increase the depreciation expense account, and increase the accumulated depreciation account, if adjusting entry for depreciation expense is not recorded, and it will affect two accounts such as depreciation expense (expense), and accumulated depreciation (contra-asset). Hence the depreciation expense of $1,675 has been overstated the value of assets of the Company IR, and understated depreciation expense overstates the owner’s equity by $1,675.
Unearned fees
Given entry would increase the fees earned account, and decrease the unearned fees account, if adjusting entry for unearned fees is not recorded, and it will affect two accounts such as fees earned (revenue), and unearned fees (liability). Hence the fees earned of $6,000 has been overstated the value of total liabilities of the Company IR, and understated fees earned understates the owners’ equity by $6,000.
Conclusion:
Hence, the assets of the Company IR were overstated by $1,675, and the liabilities were overstated by $6,000. Thus, the total liabilities ($6,000) and owner’s equity ($4,325) of Company IR was overstated by $1,675
(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 under the 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
Accounting, Chapters 18-26 - Solution Manual
- 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_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_forwardLedger accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet The unadjusted trial balance of Recessive Interiors at January 31, 20Y2, the end of the year, follows: The data needed to determine year-end adjustments are as follows: (a) Supplies on hand at January 31 are 2,850. (b) Insurance premiums expired during the year are 3,150. (c) Depreciation of equipment during the year is 5,250. (d) Depreciation of trucks during the year is 4,000. (e) Wages accrued but not paid at January 31 are 900. Instructions 1. For each account listed in the unadjusted 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 Recessive Interiors chart of accounts should be used: Wages Payable, 22; Depreciation Expense Equipment, 54; Supplies Expense, 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 January 31, 20Y2, additional common stock of 7,500 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_forward
- EXPENSE METHOD OF ACCOUNTING FOR PREPAID EXPENSES Ryans Fish House purchased supplies costing 3,000 for cash. This amount was debited to the supplies expense account. At the end of the year, December 31, 20--, an inventory showed that supplies costing 500 remained. Prepare the adjusting entry.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_forwardT accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet The unadjusted trial balance of La Mesa Laundry at August 31, 20Y5, the end of the fiscal year, follows: The data needed to determine year-end adjustments are as follows: (a) Wages accrued but not paid at August 31 are 2,200. (b) Depreciation of equipment during the year is 8,150. (c) Laundry supplies on hand at August 31 are 2,000. (d) Insurance premiums expired during the year are 5,300. Instructions 1. For each account listed in the unadjusted trial balance, enter the balance in a T account. Identify the balance as Aug. 31 Bal. In addition, add T accounts for Wages Payable, Depreciation Expense, Laundry Supplies Expense, and Insurance Expense. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (1) as needed. 3. Journalize and post the adjusting entries. Identify the adjustments by Adj. and the new balances as Adj. Bal. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of stockholders equity, and a balance sheet. During the year ended August 31, 20Y5, common stock of 3,000 was issued. 6. Journalize and post the closing entries. Identify the closing entries by Clos. 7. Prepare a post-closing trial balance.arrow_forward
- Prepare adjusting journal entries, as needed, considering the account balances excerpted from the unadjusted trial balance and the adjustment data. A. supplies actual count at year end, $6,500 B. remaining unexpired insurance, $6,000 C. remaining unearned service revenue, $1,200 D. salaries owed to employees, $2,400 E. depreciation on property plant and equipment, $18,000arrow_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 b. Depreciation of equipment during the year. $12500 c. Laundry supplies on hand at December 31. $1,500 d. Insurance premiums expired. $4600 Instructions 2. Prepare an income statement and statement of stockholders equity for the year ended December 31. 20Y8. The common stock balance as of January 1. 20Y8. was $25000. The retained earnings balance as of January 1, 20Y8, was $101,500.arrow_forwardAdjusting entries Trident Repairs Service, an electronics repair store, prepared the following unadjusted trial balance at the end of its first year of operations: For preparing the adjusting entries, the following data were assembled: Fees earned but unbilled on November 30 were 7,000. Supplies on hand on November 30 were 1,300. Depreciation of equipment was estimated to be 7,200 for the year. The balance in unearned fees represented the November 1 receipt in advance for services to be provided. During November, 13,500 of the services were provided. Unpaid wages accrued on November 30 were 4,800. Instructions 1. Journalize the adjusting entries necessary on November 30, 20Y3. 2. Determine the revenues, expenses, and net income of Trident Repairs Service before the adjusting entries. 3. Determine the revenues, expense, and net income of Trident Repairs Service after the adjusting entries. 4. Determine the effect of the adjusting entries on Retained Earnings.arrow_forward
- Adjustment 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 b. Depreciation of equipment during the year. $12500 c. Laundry supplies on hand at December 31. $1,500 d. Insurance premiums expired. $4600 Instructions Prepare a classified balance sheet as of December 31, 20Y8.arrow_forwardT accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet The unadjusted trial balance of Epicenter Laundry at June 30, 20Y6, the end of the fiscal year, follows: The data needed to determine year-end adjustments are as follows: (a) Laundry supplies on hand at June 30 are 8,600. (b) Insurance premiums expired during the year are 5,700. (c) Depreciation of laundry equipment during the year is 6,500. (d) Wages accrued but not paid at June 30 are 1,100. Instructions 1. For each account listed in the unadjusted trial balance, enter the balance in a T account. Identify the balance as June 30 Bal. In addition, add T accounts for Wages Payable, Depreciation Expense, Laundry Supplies Expense, and Insurance Expense. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (1) as needed. 3. Journalize and post the adjusting entries. Identify the adjustments by Adj. and the new balances as Adj. Bal. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of stockholders equity, and a balance sheet. During the year ended June 30, 20Y6, additional common stock of 7,500 was issued. 6. Journalize and post the closing entries. Identify the closing entries by Clos. 7. Prepare a post-closing trial balance.arrow_forwardCOMPLETION OF A WORK SHEET SHOWING A NET INCOME The trial balance for the Venice Beach Kite Shop, a business owned by Molly Young k shown on page 550. Year-end adjustment information is as follows: (a and b)Merchandise inventory costing 35,000 is on hand as of December .31, 20--. (The periodic inventory system is used.) (c)Supplies remaining at the end of the year, 3,300. (d)Unexpired insurance on December 31, S3,800. (e)Depreciation expense on the building foe 20--, 2,500. (f)Depreciation expense on the store equipment for 20--, 3,500. (g)Unearned rent revenue as of December 31, 4,00. (h)Wages earned but not paid as of December 31, 800. 1. Complete the Adjustments columns, identifying each adjustment with its corresponding letter. 2. Complete the work sheet. 3. Enter the adjustments m a general journal.arrow_forward
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