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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Case 3-81 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT

Cam and Anna are very satisfied with their first month of operations. Their major effort centered on signing various artists to live performance contracts, and they had more success than they had anticipated. In addition to Charm City, they were able to use their contacts in the music industry to sign 12 other artists. With the tours starting in February, Cam and Anna were eager to hold their first big event. Over the next month, the following transactions occurred.

Feb. 1 Collected advance ticket sales of S28,400 relating to various concerts that were being promoted.

1 Paid S800 to rent office space in February.

2 Paid Equipment Supply Services $1,500, the balance remaining from the January 3 purchase of supplies.

6 Paid $30, 150 to secure venues for future concerts. (These payments are recorded as Prepaid Rent.)

9 Received S325 related to the festival held on January 25.

12 Purchased S475 of supplies on credit from Equipment Supply Services.

15 Collected S3,400 of ticket sales for the first Charm City concert on the day of the concert.

15 Paid Charm City $9,000 for performing the Feb. I S concert. (Remember: Front Row records the fees paid to the artist in the Artist Fee Expense account.)

20 Collected advance ticket sales of $10, 125 relating to various concerts that were being promoted.

21 Collected $5,100 of ticket sales for the second Charm City concert on the day Of the concert.

21 Paid Charm City $12,620 for performing the Feb. 21 concert.

At the end of February, Cam and Anna felt like their business was doing well; however, they decided that they needed to prepare financial statements to better understand the operations of the business. Anna gathered the following information relating to the adjusting entries that needed to be prepared at the end of February.

  1. Two months of interest on the note payable is accrued. The interest rate is 9%.
  2. A Count of the supplies revealed that $1,825 of supplies remained on hand at the end of February.
  3. Two months of the annual insurance has expired.
  4. Depreciation related to the office equipment was $180 per month.
  5. The rental of the venues for all four Charm City concerts was paid in advance on January 8. As of the end of February, Charm City has performed two of the four concerts in the contract.
  6. An analysis of the unearned sales revenue account reveals that $8,175 of the balance relates to concerts that have not yet been performed.
  7. Neither Cam nor Anna have received their salary of $1,200 each for February.
  8. A utility bill of $435 relating to utility service on Front Row’s office for January and February was received but not paid by the end of February.

Required:

Prepare and post the adjusting entries needed at February 28, 2019.

To determine

To prepare: Adjusting entries.

Introduction: Adjusting entries are made at the end of reporting period at the time of preparation of financial statements. Adjusting entries are recorded to reflect the correct picture of financial position of the organization in the financial statements.

Explanation

Journalizing:

Journalizing is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the accounts are posted to the relevant ledger accounts.

Accounting rules for journal entries:

  • To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
  • To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Recording interest expense:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    Interest expense375
    Interest Payable375
    (to record interest expense)

   Table (1)

  • Since interest expense is an expense, expense is increased. Hence, interest expense account is debited.
  • Since interest payable is a liability, liability is increased. Hence, interest payable account is credited.

Recording adjustment of supplies:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    Supplies Expense

    ($2,975$1,825)

    1,150
    Supplies1,150
    (to record adjustment of supplies)

   Table (2)

  • Since supplies expense is an expense, expense is increased. Hence, supplies expense account is debited.
  • Since supplies is an asset, asset is decreased. Hence, supplies account is credited.

Recording adjustment of prepaid insurance:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    Insurance Expense

    ($3,600×212)

    600
    Prepaid insurance600
    (to record adjustment of prepaid insurance)

   Table (3)

  • Since insurance expense is an expense, expense is increased. Hence, insurance expense account is debited.
  • Since prepaid insurance is an asset, asset is decreased. Hence, prepaid insurance account is credited.

Recording depreciation expense:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    Depreciation

    ($180×2)

    360
    Accumulated depreciation360
    (to record depreciation expense)

   Table (4)

  • Since depreciation is an expense, expense is increased. Hence, depreciation account is debited.
  • Since accumulated depreciation is a contra asset, contra asset is increased. Hence, accumulated depreciation account is credited.

Recording adjustment of prepaid rent:

    DateAccount Title and ExplanationPost Ref

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