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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjusting entries

Selected account balances before adjustment for Intuit Realty at November 30, the end of the current year, follow:

  Debits Credits
Accounts Receivable $75,000  
Equipment 250,000  
Accumulated Depreciation- Equipment   $12,000
Prepaid Rent 12,000  
Supplies 3,170  
Wages Payable  
Unearned Fees   10,000
Fees Earned   400,000
Wages Expense 140,000  
Rent Expense  
Depreciation Expense  
Supplies Expense  

Data needed for year-end adjustments are as follows:

  • Supplies on hand at November 30, $550.
  • Depreciation of equipment during year, $1,675.
  • Rent expired during year, $8,500.
  • wages accrued but not paid at November 30, $2,000.
  • Unearned fees a t November 30, $4,000.
  • Unbilled fees at November 30, $5,380.

Instructions

  1. 1. Journalize the six adjusting entries required at November 30, based on the data presented.
  2. 2. What would be the effect on the income statement if the adjustments for equipment depreciation and unearned fees were omitted at the end of the year?
  3. 3. What would be the effect on the balance sheet if the adjustments for equipment depreciation and unearned fees 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 equipment depreciation and unearned fees were omitted at the end of the year?

(a)

To determine

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:

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.

Explanation

Working note:

Calculate the value of supplies expense

Suppliesexpense=(Theamountofsuppliesbegining of the year)(Theamountofsuppliesonhandattheendofthe year)=($3,170$550)=$2,620 (1)

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 depreciation expenses:

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  
          Accumulated depreciation-Equipment     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

(b)

To determine
The effects on the income statement, if adjusting entries are not recorded.

(c)

To determine
The effects on the balance sheet, if adjusting entries are not recorded.

(d)

To 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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