Concept explainers
Rowland Company is a small editorial services company owned and operated by Marlene Rowland. On August 31, 2018, the end of the current year, Rowland Company’s accounting clerk prepared the following unadjusted
Rowland Company Unadjusted Trial Balance August 31,2018 | ||
Debit Balances | Credit Balances | |
Cash | 7,500 | |
Accounts Receivable | 38,400 | |
Prepaid Insurance | 7,200 | |
Supplies | 1,980 | |
Land | 112,500 | |
Building | 150,250 | |
87,550 | ||
Equipment | 135,300 | |
Accumulated Depreciation—Equipment | 97,950 | |
Accounts Payable | 12,150 | |
Unearned Rent | 6,750 | |
Common Stock | 75,000 | |
146,000 | ||
Dividends | 15,000 | |
Fees Earned | 324,600 | |
Salaries and Wages Expense | 193,370 | |
Utilities Expense | 42,375 | |
Advertising Expense | 22,800 | |
Repairs Expense | 17,250 | |
Miscellaneous Expense | 6,075 | |
750,000 | 750,000 |
The data needed to determine year-end adjustments are as follows:
- Unexpired insurance at August 31, $6,000.
- Supplies on hand at August 31, $480.
- Depreciation of building for the year, $7,500.
- Depreciation of equipment for the year, $4,150.
- Rent unearned at August 31, $1,550.
- Accrued salaries and wages at August 31, $3,200.
- Fees earned but unbilled on August 31, $11,330.
Instructions
- 1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Kent Revenue; Insurance Expense; Depreciation Expense—Building; Depreciation Expense—Equipment; and Supplies Expense.
- 2. Determine the balances of the accounts affected by the adjusting entries, and prepare an adjusted trial balance.
1.
Adjusting Entries
Adjusting entries indicates those entries, which are passed in the books of accounts at the end of one accounting period. These entries are passed in the books of accounts as per the revenue recognition principle and the expenses recognition principle to adjust the revenue, and the expenses of a business in the period of their occurrence.
Adjusted Trial Balance
Adjusted trial balance is a trial balance prepared at the end of a financial period, after all the adjusting entries are journalized and posted. It is prepared to prove the equality of the total debit and credit balances.
Rule of Debit and Credit:
Debit - Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.
Credit - Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.
To record: The adjusting entries on August 31, 2018 of Company RFS.
Explanation of Solution
The following entry shows the adjusting entry for unexpired insurance on August 31.
Date | Description |
Post. Ref |
Debit ($) |
Credit ($) |
August 31 | Insurance expense (1) | 1,200 | ||
Prepaid insurance | 1,200 | |||
(To record the insurance expense incurred at the end of the year) |
Table (1)
The impact on the accounting equation for the above referred adjusting entry is as follows:
Working note:
Calculate the value of insurance expense at the end of the year
- Insurance expense is a component of owners’ equity, and decreased it by $1,200 hence debit the insurance expense for $1,200.
- Prepaid insurance is an asset, and it decreases the value of asset by $1,200, hence credit the prepaid insurance for $1,200.
The following entry shows the adjusting entry for supplies on August 31.
Date | Account Titles and Explanation | Debit ($) | Credit ($) |
August 31 | Supplies Expense (2) | 1,500 | |
Supplies | 1,500 | ||
(To record the supplies expense at the end of the accounting period) |
Table (2)
The impact on the accounting equation for the above referred adjusting entry is as follows:
- Supplies expense is a component of stockholders’ equity, and it decreased the stockholders’ equity by $1,500. So debit supplies expense by $1,500.
- Supplies are an asset for the business, and it is decreased by $1,500. So credit supplies by $1,500.
Working Note:
Calculation of Supplies expense for the accounting period
The adjusting entry for recording depreciation is as follows:
Date | Account Titles and Explanation | Debit ($) | Credit ($) |
August 31 | Depreciation expense | 7,500 | |
Accumulated Depreciation- building | 7,500 | ||
(To record the depreciation on building for the current year.) |
Table (3)
The impact on the accounting equation for the above referred adjusting entry is as follows:
- Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $7,500.
- Accumulated depreciation is a contra asset account, and it decreases the asset value by $7,500. So credit accumulated depreciation by $7,500.
The adjusting entry for recording depreciation is as follows:
Date | Account Titles and Explanation | Debit ($) | Credit ($) |
August 31 | Depreciation expense | 4,150 | |
Accumulated Depreciation- equipment | 4,150 | ||
(To record the depreciation on equipment for the current year.) |
Table (4)
The impact on the accounting equation for the above referred adjusting entry is as follows:
- Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $4,150.
- Accumulated depreciation is a contra asset account, and it decreases the asset value by $4,150. So credit accumulated depreciation by $4,150.
The following entry shows the adjusting entry for Unearned Rent on August 31.
Date | Account Titles and Explanation | Debit ($) | Credit ($) |
August 31 | Unearned Rent | 5,200 | |
Rent revenue (3) | 5,200 | ||
(To record the Rent revenue from services at the end of the accounting period.) |
Table (5)
The impact on the accounting equation for the above referred adjusting entry is as follows:
- Unearned Rent is a liability, and it is decreased by $5,200. So debit unearned rent by $5,200.
- Rent revenue is a component of Stockholders’ equity, and it is increased by $5,200. So credit rent revenue by $5,200.
Working Notes:
Calculation of Rent Revenue for the accounting period
The following entry shows the adjusting entry for Salary and wages expense on August 31.
Date | Account Titles and Explanation | Debit ($) | Credit ($) |
August 31 | Salary and wages expense | 3,200 | |
Wages Payable | 3,200 | ||
(To record the salary and wages accrued but not paid at the end of the accounting period.) |
Table (6)
The impact on the accounting equation for the above referred adjusting entry is as follows:
- Salary and wages expense is a component of Stockholders ‘equity, and it decreased it by $3,200. So debit wage expense by $3,200.
- Salary and wages payable is a liability, and it is increased by $3,200. So credit Salary and wages payable by $3,200.
The following entry shows the adjusting entry for accrued fees unearned on August 31.
Date | Account Titles and Explanation | Debit ($) | Credit ($) |
August 31 | Accounts Receivable | 11,330 | |
Fees earned | 11,330 | ||
(To record the accounts receivable at the end of the year.) |
Table (7)
The impact on the accounting equation for the above referred adjusting entry is as follows:
- Accounts Receivable is an asset, and it is increased by $11,330. So debit Accounts receivable by $11,330.
- Fees earned are component of stockholders’ equity, and it increased it by $11,330. So credit fees earned by $11,330.
2.
To prepare: The adjusted trial balance of the Company R on August 31, 2018
Answer to Problem 3.5APR
The adjusted trial balance of the Company R is as follows:
Company KWW | ||
Trial Balance after Adjustments | ||
August 31, 2018 | ||
Particulars | Debit $ | Credit $ |
Cash | 7,500 | |
Accounts Receivable (7) | 49,730 | |
Prepaid Insurance | 6,000 | |
Supplies | 480 | |
Land | 112,500 | |
Building | 150,250 | |
Accumulated Depreciation - Building (3) | 95,050 | |
Equipment | 135,300 | |
Accumulated Depreciation - Equipment(4) | 102,100 | |
Accounts Payable | 12,150 | |
Unearned Rent | 1,550 | |
Salaries and Wages Payable | 3,200 | |
Common Stock | 75,000 | |
Retained Earnings | 146,000 | |
Dividend | 15,000 | |
Fees earned | 335,930 | |
Rent Revenue(5) | 5,200 | |
Salaries and Wages Expense (6) | 196,570 | |
Utilities Expense | 42,375 | |
Advertising Expense | 22,800 | |
Repairs Expense | 17,250 | |
Depreciation Expense - building | 7,500 | |
Depreciation Expense - equipment | 4,150 | |
Insurance Expense (1) | 1,200 | |
Supplies Expense (2) | 1,500 | |
Miscellaneous Expense | 6,075 | |
Total | 776,180 | 776,180 |
Explanation of Solution
Working Notes:
1. Calculation of insurance expense at the end of the year
2. Calculation of Supplies expense for the accounting period
3. Calculation of accumulated depreciation- building
4. Calculation of accumulated depreciation- equipment
5. Calculation of Rent Revenue for the accounting period
6. Calculation of Salaries and Wages expenses
7. Calculation of accounts receivable
Hence, the total of debit and credit column of the adjusted trial balance matches and they have a total balance of $776,180.
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