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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Adjusting Entries Your examination of Sullivan Company’s records provides the following information for the December 31, year-end adjustments:

  1. Bad debts are to be recorded at 2% of sales. Sales made on credit totaled $25,000 for the year.
  2. Salaries at year-end that have accumulated but have not been paid total $1,400.
  3. Annual straight-line depreciation for the company’s equipment is based on a cost of $30,000, an estimated life of 8 years, and an estimated residual value of $2,000.
  4. Prepaid insurance in the amount of $800 has expired.
  5. Interest that has been earned but not collected totals $500.
  6. The company has satisfied performance obligations entitling it to rent m the amount of $1,000.
  7. Interest on a note payable that has accumulated but has not been paid totals $600.
  8. The income tax rate is 30% on current income and is payable in the first quarter of the next year. The pretax income before the preceding adjusting entries is $6,800.

Required:

Prepare the adjusting entries to record the preceding information.

To determine

Prepare the adjusting entries to record the given transactions.

Explanation

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.

1. Prepare an adjusting entry to record the bad debt expense at the end of the year.

DateAccount Title and Explanation

Debit

($)

Credit

($)

December 31Bad debt expense500 
 Allowance for doubtful accounts (1) 500
 (To record the bad debts expense estimated at the end of the accounting year)  

Table (1)

  • Bad expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the bad expense with $500.
  • Allowance for doubtful accounts is a contra-asset account, and it decreases the value of assets. Hence, credit the allowance for doubtful account with $500.

Working note (1):

Calculate the value of bad debts expense.

Bad debts expense = (Total amount of sales × Rate of bad debts expense)= $25,000×2100=$500

2. Prepare an adjusting entry to record the salaries expense accrued at the end of the year.

DateAccount Title and Explanation

Debit

($)

Credit

($)

December 31Salaries expense1,400 
     Salaries payable 1,400
 (To record the salaries expense accrued at the end of the accounting year)  

Table (2)

  • Salaries expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the salaries expense with $1,400.
  • Salaries payable is a liability account and it increases in the value of liabilities. Hence, credit the salaries payable with $1,400.

3. Prepare an adjusting entry to record the depreciation expense incurred at the end of the year.

DateAccount Title and Explanation

Debit

($)

Credit

($)

December 31Depreciation expense3,500 
 Accumulated depreciation-Equipment (2) 3,500
 (To record the depreciation expense incurred at the end of the accounting year)  

Table (3)

  • Depreciation expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the depreciation expense with $3,500.
  • Accumulated depreciation is a contra-asset account, and it decreases the value of assets. Hence, credit the accumulated depreciation expense with $3,500.

Working note (2):

Calculate the depreciation expense on equipment at the end of the year.

Depreciation expense on equipment} = Cost of equipmentResidual valueUseful life of the assets=$30,000$2,0008 years=$3,500

4. Prepare an adjusting entry to record the insurance expense occurred at the end of the year.

DateAccount Title and Explanation

Debit

($)

Credit

($)

December 31Insurance expense800 
 Prepaid insurance 800
 (To record the insurance expense incurred at the end of the accounting year)  

Table (4)

  • Insurance expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the insurance expense with $800.
  • Prepaid insurance is an asset account, and it decreases the value of assets. Hence, credit the prepaid insurance account with $800

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