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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 and adjusted trial balances

Reece Financial Services Co., which specializes in appliance repair services, is owned and operated by Joni Reece. Reece Financial Services Co.’s accounting clerk prepared the following unadjusted trial balance at July 31, 2016:

Chapter 3, Problem 3.5BPR, Adjusting entries and adjusted trial balances Reece Financial Services Co., which specializes in

The data needed to determine year-end adjustments are as follows:

a. Depreciation of building for the year, $6,400.

b. Depreciation of equipment for the year, $2,800.

c. Accrued salaries and wages at July 31, $900.

d. Unexpired insurance at July 31, $1,500.

e. Fees earned but unbilled on July 31, $10,200.

f. Supplies on hand at July 31, $615.

g. 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 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)

To determine

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 July 31, 2016 of Company RFS.

Explanation

The adjusting entries of Company RFS are as follows:

Depreciation expense-Building

Date Account Titles and Explanation Debit ($) Credit ($)
2016 Depreciation expense 6,400
July, 31        Accumulated Depreciation- building6,400
(To record the depreciation on building for the current year.)

Table (1)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Asset-$6,400}=Liabilities+{Stockholders'equity-$6,400}

  • Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $6,400.
  • Accumulated depreciation is a contra asset account, and it decreases the asset value by $6,400. So credit accumulated depreciation by $6,400.

Depreciation expense-Equipment

Date Account Titles and Explanation Debit ($) Credit ($)
2016 Depreciation expense 2,800
July, 31        Accumulated Depreciation- equipment2,800
(To record the depreciation on equipment for the current year.)

Table (2)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Asset-$2,800}=Liabilities+{Stockholders'equity-$2,800}

  • Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $2,800.
  • Accumulated depreciation is a contra asset account, and it decreases the asset value by $2,800. So credit accumulated depreciation by $2,800.

Salary and wages expense:

Date Account Titles and Explanation Debit ($) Credit ($)
2016 Salary and wages expense 900
July, 31        Wages Payable900
(To record the salary and wages accrued but not paid at the end of the accounting period.)

Table (3)

The impact on the accounting equation for the above referred adjusting entry is as follows:

Assets={Liabilities+900}+{Stockholders'equity900}

  • Salary and wages expense is a component of Stockholders ‘equity, and it decreased it by $900. So debit wage expense by $900.
  • Salary and wages payable is a liability, and it is increased by $900. So credit Salary and wages payable by $900.

Unexpired insurance:

Date Description

Post.

Ref

Debit

($)

Credit

($)

2016 Insurance expense (1)    4,500  
July 31 Prepaid insurance     4,500
  (To record the insurance  expense incurred at the end of the year)      

Table (4)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Assets-$4,500}=Liabilities+{Owners'Equity-$4,500}

Working note:

Calculate the value of insurance expense at the end of the year

InsuranceExpenses=(Valueofprepaidinsurancebeforeadjustment)-(Unexpiredinsurance)=($6,500)-($1,500)=$4,500 (1)

  • Insurance expense is a component of owners’ equity, and decreased it by $4,500 hence debit the insurance expense for $4,500.
  • Prepaid insurance is an asset, and it decreases the value of asset by $4,500, hence credit the prepaid insurance for $4,500.

Accrued fees unearned on July 31

Date Account Titles and Explanation Debit ($) Credit ($)
2016 Accounts Receivable 10,200
July 31        Fees earned10,200
(To record the accounts receivable at the end of the year

(2)

To determine

To prepare: The adjusted trial balance of the Company RFS on July 31, 2016

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