Concept explainers
Concept Introduction:
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.
Answer to Problem 53E
The adjusting entries as on Dec. 31 for the given transactions are 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 | ||||
b. | Dec. 31 | Insurance Expense | $ 2,040 | ||
Prepaid Insurance | $ 2,040 | ||||
c. | Dec. 31 | $ 5,450 | |||
Service Revenue | $ 5,450 | ||||
c. | Dec. 31 | Rent Expense | $390 | ||
Rent Payable | $390 | ||||
d. | Dec. 31 | Unearned Rent Revenue | $ 1,810 | ||
Rent Revenue | $ 1,810 |
Explanation of Solution
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. | Dec. 31 | Accounts Receivables | $ 5,450 | ||
Service Revenue | $ 5,450 | ||||
(being adjustment made for the revenue accrued) | |||||
c. | Dec. 31 | Rent Expense (12*65/2) | $390 | ||
Rent Payable | $390 | ||||
(being adjustment made for the expense accrued) | |||||
d. | Dec. 31 | Unearned Rent Revenue | $ 1,810 | ||
Rent Revenue | $ 1,810 | ||||
(being adjustment made for the revenue accrued) |
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.
Answer to Problem 53E
The effect of omission of the above adjusting entry on balance sheet and income statement is as follows:
# | Effect of Omission |
a. | Understatement of Expense |
Overstatement of Assets | |
b. | Understatement of Expense |
Overstatement of Assets | |
c. | Understatement of Assets |
Understatement of Revenue | |
c. | Understatement of Expenses |
Understatement of Liabilities | |
d. | Overstatement of Liabilities |
Understatement of Revenue | |
Explanation of Solution
The effect of omission of the above adjusting entry on balance sheet and income statement is explained as follows:
Reynold Computer Service | ||||||
Adjusting entries | ||||||
As on Dec. 31, 2019 | ||||||
# | Date | Account titles | Debit | Credit | Effect of Omission | |
a. | Dec. 31 | Depreciation Expense- Equipment | $ 132,500 | Understatement of Expense | ||
Accumulated Depreciation- Equipment | $ 132,500 | Overstatement of Assets | ||||
(being adjustment made for the expense accrued) | ||||||
b. | Dec. 31 | Insurance Expense (12240*4/24) | $ 2,040 | Understatement of Expense | ||
Prepaid Insurance | $ 2,040 | Overstatement of Assets | ||||
(being adjustment made for the expense accrued) | ||||||
c. | Dec. 31 | Accounts Receivables | $ 5,450 | Understatement of Assets | ||
Service Revenue | $ 5,450 | Understatement of Revenue | ||||
(being adjustment made for the revenue accrued) | ||||||
c. | Dec. 31 | Rent Expense (12*65/2) | $390 | Understatement of Expenses | ||
Rent Payable | $390 | Understatement of Liabilities | ||||
(being adjustment made for the expense accrued) | ||||||
d. | Dec. 31 | Unearned Rent Revenue | $ 1,810 | Overstatement of Liabilities | ||
Rent Revenue | $ 1,810 | Understatement of Revenue | ||||
(being adjustment made for the revenue accrued) |
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Chapter 3 Solutions
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- Expense Adjustments Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities: On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for 3 months' sponsorship-November 2019, December 2019, and January 2020-in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months' advertising has been and I month remains unused. Required: Prepare adjusting entries at December 31 for these four activities. CONCEPTUAL CONNECTION What would be the effect on expenses if the adjusting entries were not made?arrow_forwardExercise 3-46 Identification and Analysis of Adjusting Entries Medina Motor Service is preparing adjusting entries for the year ended December 31, 2019. The following items describe Medina s continuous transactions during 2019: Medinas salaried employees are paid on the last day of every month. Medinas hourly employees are paid every other Friday for the 2 weeks' work. The next payday falls on January 5, 2020. In November 2019, Medina borrowed $600,000 from Bank One, giving a 9% note payable with interest due in January 2020. The note was properly recorded. Medina rents a portion of its parking lot to the neighboring business under a long-term lease agreement that requires payment of rent 6 months in advance on April 1 and October 1 of each year. The October 1, 2019, payment was made and recorded as prepaid rent. Medinas department recognizes the entire revenue on every auto service job when the job is complete. At December 31, several service jobs are in process. Medina recognizes depreciation on shop equipment annually at the end of each year. Medina purchases all of its office supplies from Office Supplies Inc. All purchases are recorded in the supplies account. Supplies expense is calculated and recorded annually at the end of each year. Required: Indicate whether or not each item requires an adjusting entry at December 31, 2019. If an item requires an adjusting entry, indicate which accounts are increased by the adjustment and which are decreased.arrow_forwardExercise 3-45 Identification of Adjusting Entries Conklin Services prepares financial statements only once per year using an annual accounting ending on December 31. Each of the following statements describes an entry made by Conklin on December 31 of a recent year. On December 31, Conklin completed a service agreement for Pizza Planet and recorded the related revenue. The job started in August. Conklin provides weekly service visits to the local C.J. Nickel department store to check and maintain various pieces of computer printing equipment. On December 31, Conklin recorded revenue for the visits completed during December. The cash will not be received until January. Conklins salaried employees are paid on the last day of every month. On December 31, Conklin recorded the payment Of December salaries. Conklins hourly wage employees are paid every Friday. On 31, Conklin recorded as payable the wages for the first three working days of the week in which the year ended. On December 31, Conklin recorded the receipt of a shipment of office supplies from Office Supplies Inc. to be paid for in January. On December 31, Conklin recorded the estimated use of supplies for the year. The supplies were purchased for cash earlier in the year. Early in December, Conklin was in by Parker Enterprises for 2 months of weekly visits. Conklin recorded the advance payment as a liability. On December 31 , Conklin recorded revenue for the service visits to Parker Enterprises that were completed during December. On December 3 1, Conklin recorded depreciation expense on office equipment for the year. Required: Indicate whether each entry is an adjusting entry or a regular journal entry, and, if it is an adjusting entry, identify it as one of the following types: (1) revenue recognized before collection of cash, (2) expense recognized before payment of cash, (3) revenue recognized after collection of cash, or (4) expense recognized after payment of cash.arrow_forward
- Brief Exercise 3-31 Adjusting Entries-Accruals Nichols Company had the following items that required adjustment at 31, 2019. Electricity used during December was estimated to $320. This amount will paid in January. Owed wages to employees of $3,250 that were earned in December but unrecorded and unpaid as of the end of the year. Services of $4,900 were performed in December but unbilled and unpaid as of year end. Required: Prepare the adjusting entries needed at December 31. CONCEPTUAL CONNECTION What is the effect on the financial statements if these adjusting entries were not made?arrow_forwardExercise 3-40 Revenue and Expense Recognition Electronic Repair Company repaired a high-definition television for Sarah Merrifield in December 2019. Sarah paid $80 at the time of the repair and agreed to pay Electronic Repair $80 each month for 5 months beginning on January 15, 2020. Electronic Repair used $120 of supplies, which were purchased in November 2020, to repair the television. Assume that Electronic Repair uses accrual-basis accounting. Required: In what month or months should revenue from this service be recorded by Electronic Repaid? In what month or months should the expense related to the repair of the television be recorded by Electronic Repair? CONCEPTUAL CONNECTION Describe the accounting principles used to answer the above questions.arrow_forwardBrief Exercise 3-32 Adjusting Entries-Deferrals Tyndal Company had the following items that required adjustment at December 31, 2019. Purchased equipment for $40,000 on January 1, 2019. Tyndal estimates annual depreciation to be $3,100. Paid $2,400 for a 2-year insurance policy on July 1, 2019. The amount was debited to Pre-paid Insurance when paid. Collected $1,200 rent for the period December 1, 2019 to March 30, 2020. The amount was credited to Unearned Service Revenue when received. Required: Prepare the adjusting entries needed at December 31. CONCEPTUAL CONNECTION What is the effect on the financial statements if these adjusting entries were not made?arrow_forward
- Cornerstone Exercise 3-18 Accrued Expense Adjusting Entries Manning Manufacturing Inc. had the following items that require adjustment at year end. Salaries of $5,320 that were earned in December are unrecorded and unpaid. Used $1,970 Of utilities in December, which are unrecorded and unpaid. Interest of $925 on a note payable has not been or paid. Required: Prepare the adjusting entries needed at December 31. What is the effect on the financial statements if these adjusting entries are not made?arrow_forwardExercise 3-47 Revenue Adjustments Sentry Transport Inc. of Atlanta provides in-town parcel delivery services in addition to a full range of passenger services. Sentry engaged in the following activities during the current year: Sentry received $5,000 cash in advance from Richs Department Store for an estimated 250 deliveries during December 2019 and January and February of 2020. The entire amount was recorded as unearned revenue when received. During December 2019, 110 deliveries were made for Richs. Sentry operates several small buses that take commuters from suburban communities to the central downtown area of Atlanta. The commuters purchase, in advance, tickets for 50 one-way rides. Each So-ride ticket costs S500. At the time of purchase, Sentry credits the cash received to unearned revenue. At year end, Sentry determines that 10,160 one-way rides have been taken. Sentry operates buses that provide transportation for the clients of a social agency in Atlanta. Sentry bills the agency quarterly at the end of January, April, July, and October for the that quarter. The contract price is S7,500 per quarter. Sentry follows the practice of recognizing revenue from this contract in the in which the service is On December 23, Delta Airlines chartered a bus to transport its marketing group to a meeting at a resort in southern Georgia. The meeting will be held during the last week in January 2020, and Delta agrees to pay for the entire trip on the day the bus departs. At year end, none Of these arrangements have been recorded by Sentry. Required: Prepare adjusting entries at December 31 for these four activities. CONCEPTUAL CONNECTION What would be the effect on revenue if the adjusting entries were not made?arrow_forwardExercise 3-44 Revenue Expense and Recognition Carrico Advertising Inc. performs advertising services for several Fortune 500 companies. The following information describes Carricos activities during 2019. At the beginning of 2019, customers owed Carrico $45,800 for advertising services formed during 2018. During 2019, Carrico performed an additional $695,100 of advertising services on account. Carrico collected $708,700 cash from customers during 2019. At the beginning of 2019, Carrico had $13,350 of supplies on hand for which it owed suppliers SS, 150. During 2019, Carrico purchased an additional $14,600 of supplies on account. Carrico also paid $19,300 cash owed to suppliers for goods previously purchased on credit. Carrico had of supplies on hand at the end of 2019. Carricos 2019 operating and interest were $437 and $133,400, respectively. Required: Calculate Carricos 2019 income before taxes. Calculate the ending balance of receivable, the supplies used, and the ending balance of accounts payable. CONCEPTUAL CONNECTION Explain the underlying principles behind why the three accounts computed in Requirement 2 exist.arrow_forward
- Exercise 3-55 Effect of Adjustments on the Financial Statements VanBrush Enterprises, a painting contractor, prepared the following adjusting entries at year end: a. Wages Expense ................ 2,550 Wages Payable 2,550 b. Accounts Receivable ....... 8,110 Service Revenue .............. 8,110 c. Unearned Service Revenue ………………… 5,245 Service Revenue ………..... 5.245 d. Rent Expense ............. 3,820 Prepaid Rem .......... 3,820 Required: 1. Show the effect of these adjustments on assets, liabilities, equity, revenues, expenses, and net Income. 2. CONCEPTUAL CONNECTION If these adjustments were made with estimates that were considered conservative, how would this affect your interpretation of earnings quality?arrow_forwardProblem 3-71B Preparing a Worksheet (Appendix 3A) Flint Inc. operates a cable television System. At December 31, 2019, the following unadjusted account balances were available: The following data are available for adjusting entries: At year end, $1,500 Of office supplies remain unused. Annual depreciation on the building is $20,000. Annual depreciation on the equipment is $150,000 The interest rate on the note is 8%. Four months' interest is unpaid and unrecorded at December 31, 2019. At December 31, 2019, services of $94,000 have performed but are unbilled and unrecorded. Utility bills of $2,800 are unpaid and unrecorded at December 31, 2019. Income taxes of $49,633 were unpaid and unrecorded at year end.  Required: Prepare a worksheet for Flint. Prepare an income statement, a retained earnings statement, and a classified balance sheet for Flint. Prepare the closing entries.arrow_forwardProblem 3-65B Preparation of Adjusting Entries West Beach Resort operates a resort complex that specializes in hosting small business and professional meetings. West Beach closes its fiscal year on January 31, a time when it has few meetings under way. At January 31, 2020, the following data are available: A training meeting is under way for 16 individuals from Fashion Design. Fashion Design paid $4,500 in advance for each attending the 10-day training session. The meeting began on January 28 and will end on February 6. Twenty-one people from Northern Publishing are attending a sales meeting. The daily fee for each person attending the meeting is $280 (charged for each night a stays at the resort). The meeting began on January 29, and guests will depart on February 2. Northern will be billed at the end of the meeting. Depreciation on the golf carts used to transport the guests' luggage to and from their rooms is $11,250 for the year. West Beach records depreciation yearly. At January 31, Friedrich Catering is owed $1,795 for food provided for guests through that date. This amount is unrecorded. West Beach classifies the cost of food as an other expense on the income statement. An examination indicates that the cost of office supplies on hand at January 31 is $189. During the year, $850 of office supplies was purchased from Supply Depot. The cost of supplies purchased was debited to Office Supplies Inventory. No office supplies were on hand on January 31, 2019. Required: Prepare adjusting entries at January 31 for each of these items. CONCEPTUAL CONNECTION By how much would net income be overstated or understated if the accountant failed to make the adjusting entries?arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning