Chapter 3, Problem 5BP

To determine

Prepare the necessary adjusting entries at December 31.

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.

1.

Prepare adjusting entry for prepaid insurance.

Date		Accounts and Titles	Post Ref.	Debit ($)	Credit ($)
December	31	Insurance Expense		250
		Prepaid Insurance			250
		(To record insurance expense for three months)

Table (1)

• Insurance expense is an expense account. The amount has increased because the 250 for three months is recorded. Therefore, debit Insurance Expense account with $250.
• Prepaid Insurance is an asset account. The amount has been reduced because the insurance amount is transferred from prepaid account to expense account. Therefore, credit Prepaid Insurance account with $250.

Working Note:

Compute the amount of insurance expense for three months.

Prepaid insurance amount for three years (36 months) is $3,000

Number of months is 36 months

$\begin{array}{c}\text{Insurance for three months}=\frac{\text{Prepaid insurance amount}}{\text{ Number of months}}\\ =\frac{\text{\$3,000}}{\text{36 months}}\text{×3 months}\\ =\$250\end{array}$

2.

Prepare adjusting entry for accrued salaries expense.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
December	31	Salaries Expense		1,000
		Salaries Payable			1,000
		(To record accrued salaries for last 4 days for the year)

Table (2)

• Salaries expense is an expense account. The amount has increased because salaries are accrued and the increased expenses decrease equity value. Therefore, debit Salaries Expense account with $1000.
• Salaries Payable is a liability account. The amount has increased because salaries that are to be paid have increased. Therefore, credit Salaries Payable account with $1,000.

Working Notes:

Compute the salaries for four days (Monday and Thursday).

Salaries for 5 days is $1,250

Number of days is 4 days

$\begin{array}{c}\begin{array}{l}\text{Salaries for }\\ \text{two days}\end{array}\}=\frac{\text{Salaries for 5 days}}{\text{5 days}}\text{ × Number of days accrued}\\ =\frac{\text{\$1,250}}{\text{5 days}}\text{×4 days}\\ =\$1,000\end{array}$

3.

Prepare adjusting entry for unearned service revenue earned.

Date		Accounts and Titles	Post Ref.	Debit ($)	Credit ($)
December	31	Unearned Service Fees		1,600
		Service Fees			1,600
		(To record portion of advance earned in December)

Table (3)

• Unearned Service Fees is a liability account. The amount has increased because W Barrier has received service revenue in advance. Therefore, debit Unearned Service Fees with $1,600.
• Service Fees is a revenue account. The amount has increased because service is provided and the advance amount which was unearned has been earned. Therefore, credit Service Fees account with $1,600.

Working Note:

Compute earned unearned service fee.

Unearned revenue received in advance is $4,800

Part of unearned revenue earned in December is One-third

$\begin{array}{c}\text{Service revenue}=\text{Unearned revenue × Part of unearned revenue earned}\\ =\$4,800\times \frac{1}{3}\\ =\$1,600\end{array}$

4.

Prepare adjusting entry for accrued commission revenue.

Date		Accounts and Titles	Post Ref.	Debit ($)	Credit ($)
December	31	Commission Receivable		500
		Commission Revenue			500
		(To record accrued commission revenue)

Table (4)

• Commission Receivable is an asset account. The amount has increased because commission on sales is yet to be received. Therefore, debit Commission Receivable account with $500.
• Commission Revenue is a revenue account. The amount has increased because service revenue is to be received and revenues increase Equity value. Therefore, credit Commission Revenue account with $500.

Working Note:

Compute commission revenue.

Total sales is $10,000

Commission percent is 5% on sales.

$\begin{array}{c}\text{Commission revenue}=\text{Total sales × Commission percent}\\ =\$10,000\times 5\%\\ =\$500\end{array}$

5.

Prepare adjusting entry for utilities expense.

Date		Accounts and Titles	Post Ref.	Debit ($)	Credit ($)
December	31	Utilities Expense		650
		Utilities Payable			650
		(To record accrued utilities expense)

Table (5)

• Utilities Expense is an expense account. The amount has increased because utilities are incurred but not paid. Therefore, debit Utilities Expense account with $650.
• Utilities Payable is a liability account. The amount has increased because utilities are yet to be paid. Therefore, credit Utilities Payable account with $650.

6.

Prepare adjusting entry for supplies expensed during the period.

Date		Accounts and Titles	Post Ref.	Debit ($)	Credit ($)
December	31	Supplies Expense		14,000
		Supplies			14,000
		(To record expense of supplies used)

Table (6)

• Supplies expense is an expense account. Expenses decrease Equity value, therefore, debit Supplies Expense account with $14,000.
• Supplies are an asset account. The amount has been reduced because supplies are used. Therefore, credit Supplies account with $14,000.

Working Note:

Compute the amount of supplies expense.

Supplies account balance before adjustment is $17,500

Supplies on hand at the end of December 31 is $3,500

$\begin{array}{c}\text{Supplies expense}=\text{Supplies purchased – Supplies on hand}\\ =\$17,500–\$3,500\\ =\$14,000\end{array}$

7.

Prepare adjusting entry for accrued interest expense.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
December	31	Interest Expense		95
		Interest Payable			95
		(To record accrued interest)

Table (7)

• Interest expense is an expense account. The amount has increased because interest is outstanding on the note is accrued and the increased expenses decrease equity value. Therefore, debit Interest Expense account with $95.
• Interest Payable is a liability account. The amount has increased because salaries that are to be paid have increased. Therefore, credit Interest Payable account with $95.

8.

Prepare adjusting entry for Unearned Parking Fees earned.

Date		Accounts and Titles	Post Ref.	Debit ($)	Credit ($)
December	31	Unearned Parking Fees		2,000
		Parking Fee Revenue			2,000
		(To record portion of advance earned in December)

Table (8)

• Unearned Parking Fees are a liability account. The amount has increased because W Barrier has received parking rent revenue in advance. Therefore, debit Unearned Parking Fees account with $2,000.
• Parking Fee Revenue is a revenue account. The amount has increased because parking revenue is provided and the advance amount which was unearned has been earned. Therefore, credit Parking Fee Revenue account with $2,000.

Working Note:

Compute parking fees revenue.

Unearned parking fees for 4 months is $8,000

Number of months is 4 months (December to March)

$\begin{array}{c}\text{Parking fees revenue}=\frac{\text{Unearned parking fees }}{\text{Number of months}}\\ =\frac{\text{\$8,000}}{\text{4 months}}\\ =\$2,000\end{array}$