Exercise 3-53

Adjusting Entries

Reynolds Computer Service offers data processing services to retail clothing stores. The following data have been collected to aid in the preparation of adjusting entries for Reynolds Computer Service for 2019:

1. Computer equipment was purchased from IBM in 2016 at a cost of $540,000. Annual depreciation is $132,500.
2. A fire insurance policy for a 2-year period beginning 1, 2019, was purchased from Good Hands Insurance Company for $12,240 cash. The entire amount of the prepayment was debited to prepaid insurance. (Assume that the beginning balance of prepaid insurance was $0 and that there were no other debits or credits to that account

during 2019.)

1. Reynolds has a contract to perform the payroll accounting for Dayton’s Department Stores. At the end of 2019, $5,450 Of services have been performed under this contract but are unbilled.
2. Reynolds rents 12 computer terminals for $65 per month per terminal from Extreme Terminals Inc. At December 31, 2019, Reynolds owes Extreme Terminals for half a month’s rent om each terminal. The amount owed is unrecorded.
3. Perry’s Tax Service prepays rent for time on Reynolds' computer. When payments are received from Perry’s Tax Service, Reynolds credits unearned rent revenue. At December 31, 2019, Reynolds has earned $1,810 for computer time used by Perry’s Tax Service during December 2019.

Required:

1. Prepare adjusting entries for each of the transactions.
2. CONCEPTUAL CONNECTION What would be the effect on the balance sheet and the income statement if the accountant failed to make the above adjusting entries?

Concept Introduction:

Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.

The business activity for each type of adjusting entry is explained as follows:

• Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
• Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
• Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
• Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
• Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period.
Requirement-1:

To prepare:

The adjusting entries as on Dec. 31 for the given transactions.

The adjusting entries as on Dec. 31 for the given transactions are explained as follows:

Reynold Computer Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Depreciation Expense- Equipment	$ 132,500
		Accumulated Depreciation- Equipment		$ 132,500
		(being adjustment made for the expense accrued)
b.	Dec. 31	Insurance Expense (12240*4/24)	$ 2,040
		Prepaid Insurance		$ 2,040
		(being adjustment made for the expense accrued)
c...

Concept Introduction:

Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.

The business activity for each type of adjusting entry is explained as follows:

• Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
• Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
• Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
• Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
• Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period.
Requirement-2:

To Indicate:

The effect of omission of the above adjusting entry on balance sheet and income statement.