Chapter 3, Problem 3AE

To determine

Provide the necessary adjusting entries.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Rules of Debit and Credit:

Following rules are to be 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.

Accrued expense: Accrued expense is the expense incurred but not yet paid. It is treated as liability until the expense is paid. Hence, accrued expenses require adjustment at the end of the accounting period.

Accrued revenue: Accrued revenue is the revenue earned but not yet received. It is treated as asset until the cash is received. Hence, accrued revenues require adjustment at the end of the accounting period.

Prepaid expenses:

Advance payment for future expenses is called as prepaid expenses. These prepaid expenses are considered as assets until they are expensed or used. Hence, prepaid expenses require adjustment at the end of the accounting period.

Unearned revenues:

Collection of cash in advance to render service or to deliver goods in future is known as unearned revenues. These unearned revenues are considered as liabilities until they are earned. Hence, unearned revenue requires adjustment at the end of the accounting period.

(a)

Prepare an adjusting entry for depreciation expense on equipment.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation Expense- Equipment		750
	Accumulated Depreciation -  Equipment			750
	(To record the amount of depreciation on equipment)

Table (1)

Description:

Cost of the tangible asset is adjusted at the end of each accounting period. Adjustments involve Accumulated Depreciation account and Depreciation Expense Account. Accumulated Depreciation is a contra-asset account which is used to accumulate the depreciation amount on the related tangible asset.

• Depreciation expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Accumulated Depreciation is a contra-asset account. There is a decrease in assets, and therefore it is credited.

(b)

Prepare an adjusting entry to recognize the supplies expensed during the period.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Supplies Expense		1,900
	Supplies			1,900
	(To record the amount of supplies used during the period)

Table (2)

Working note:

Calculate the amount of Supplies used during the period.

$\begin{array}{c}\text{Office}\text{Supplies used}=\left[\begin{array}{l}\text{U}\text{nadjusted Balance in Supplies account }-\\ \text{Supplies on hand at the end of the period}\end{array}\right]\\ =\$3,100-\$1,200\\ =\$1,900\end{array}$

Description:

For the portion of used supplies, supplies account balance (asset) has to be reduced by way of passing an adjusting entry. Office supplies expense of $1,900 for the used supplies must be recognized.

• Supplies expense is an expense. There is an increase in the expenses, therefore it is debited.
• Office Supplies is an asset. There is a decrease in assets, therefore it is credited.

(c)

Prepare an adjusting entry to recognize the estimated utilities expense.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Utility Expense		425
	Utility Payable			425
	(To record the amount of accrued utility expenses)

Table (3)

Description:

Incurred utilities expense has to be recognized at the end of the accounting period, by creating liabilities.

• Utility Expense is an expense. There is an increase in the expenses, and therefore, it is debited.
• Utility Payable is a liability account. There is an increase in liabilities, and therefore, it is credited.

(d)

Prepare an adjusting entry to recognize the rent expense for the expired period of prepaid rent.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Rent Expense		700
	Prepaid Rent			700
	(To record the amount of prepaid rent expired during the period)

Table (4)

Working note:

Calculate the amount of rent expense to be recognized.

$\begin{array}{c}\begin{array}{l}\text{Amount of rent expense}\\ \text{to be recognized}\end{array}\}\text{ = }\frac{\begin{array}{l}\text{Rent received in advance}\\ \text{for 4 months}\end{array}}{4\text{ months}}\times \left[1\text{ month expired}\right]\\ =\frac{\$2,800}{4}\times 1\\ \text{=\$700}\end{array}$

Description:

Prepaid rent is an asset, which should be adjusted with the amount equal to the cost of the prepaid rent expired at the end of the accounting period.

• Rent expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Prepaid Rent is an asset. There is a decrease in assets, and therefore it is credited.

(e)

Prepare an adjusting entry to recognize the earned unearned premium revenue for 9 months.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Unearned Premium Revenue		468
	Premium Revenue			468
	(To record the amount of unearned premium fees earned during the year)

Table (5)

Working note:

Calculate the amount of earned unearned premium revenue for 9 months.

$\begin{array}{c}\begin{array}{l}\text{Amount of earned unearned }\\ \text{premium revenue for 9 months}\end{array}\}\text{ = }\frac{\text{One-year policy}}{12\text{ months}}\times \left[9\text{ month expired}\right]\\ =\frac{\$624}{12}\times 9\\ \text{=\$468}\end{array}$

Description:

Premium revenue received in advance represents unearned Premium revenue. At the end of accounting period, earned unearned premium revenue of $468 must be recognized by decreasing the unearned premium revenue (liability account) and by increasing the premium revenue (revenue account). 

• Unearned Premium Revenue is a liability. There is a decrease in liabilities, and therefore it is debited.
• Premium Revenue is a component of Equity account. There is an increase in Equity, and therefore it is credited.

(f)

Prepare an adjusting entry to record the accrued wages expense.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Wages Expense		1,050
	Wages Payable			1,050
	(To record the amount of accrued wages expenses)

Table (6)

Description:

Incurred wages expense has to be recognized at the end of the accounting period, by creating liabilities.

• Wages Expense is an expense. There is an increase in the expenses, and therefore, it is debited.
• Wages Payable is a liability account. There is an increase in liabilities, and therefore, it is credited.

(g)

Prepare an adjusting entry to record the accrued interest revenue.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Interest Receivable		350
	Interest income			350
	(To record the amount of accrued interest revenue)

Table (7)

Description:

Accrued interest revenues are the revenues that have been earned, but the cash has not yet been collected for the earned revenue. These accrued revenues create assets and increases the revenue.

• Interest receivable is an asset. There is an increase in the asset, and therefore it is debited.
• Interest income is a revenue account. There is an increase in revenue, and therefore it is credited.