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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Adjusting Entries The following are several transactions of Ardery Company that occurred during the current year and were recorded in permanent (that is, balance sheet) accounts unless indicated otherwise.

Chapter 3, Problem 5E, Adjusting Entries The following are several transactions of Ardery Company that occurred during the

The following information also is available:

  1. 1. On January 1, the Office Supplies account had a $250 balance. On December 31, an inventory count showed $190 of office supplies on hand.
  2. 2. The weekly (5 day) payroll of Ardery Company amounts to $2,000. All employees are paid at the close of business each Wednesday. A 2-day accrual is required for the current year.
  3. 3. Sales personnel travel cost reports indicate that $490 of advances had been used to pay travel expenses.
  4. 4. The income tax rate is 30% on current income and is payable in the first quarter of next year. The pretax income before the adjusting entries is $8,655.

Required:

On the basis of the above information, prepare journal entries to record whatever adjustments are necessary to bring the accounts up to date on December 31. Each journal entry explanation should show any related computations.

To determine

Prepare journal entries to record the given adjustments, and show the necessary calculations.

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.

Rules of Debit and Credit: Following rules are 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 and expenses.

Prepare journal entries to record the given adjustments, and show the necessary calculations as follows:

DateAccount Title & ExplanationDebit ($)Credit($)
December 31Depreciation expense (1)1,725 
 Accumulated depreciation 1,725
 (To record the depreciation expense incurred at the end of the accounting year)  
December 31Interest expense (2)810 
 Interest payable 810
 (To record the interest expense accrued at the end of the accounting year)  
December 31Office supplies expense (3)890 
 Office supplies 890
 (To record the office supplies used during the year)  
December 31Insurance expense (4)280 
 Prepaid insurance 280
 (To record the insurance expense incurred at the end of the accounting year)  
December 31Rent revenue260 
 Unearned rent 260
 (To record the rent revenue recognized at the end of the accounting year)  
December 31Selling expense490 
     Advances to sales personnel 490
 (To record the portion of selling expense used at the end of the accounting year)  
December 31Interest receivable120 
 Interest revenue (5) 120
 (To record the interest revenue earned at the end  of the accounting year)  
December 31Salaries expense800 
 Salaries payable (6) 800
 (To record the salaries expense accrued at the end of the accounting year)  
December 31Income tax expense (7)1,056
 Income tax payable1,056
 (To record the income tax expense incurred at the end of the accounting year)

Table (1)

Working note (1):

Calculate the depreciation expense.

Depreciation expense on building} = [(Cost of vanResidual valueUseful life of the assets)×(Number of months depreciation occruedNumber of months in a year)]=$10,000$8004 years×9 (April 1 to December 31)12=$1,725

Working note (2):

Calculate the value of interest expense.

Interest expense = [Value of note × Interest rete × (Number of months interest earnedNumber of months in a year)]=$9,000×12100×9 months (April 1 to December 31)12 months=$810

Working note (3):

Calculate the value of supplies expense

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