Concept explainers
Recording
North Star prepared the following unadjusted trial balance at the end of its second year of operations ending December 31.
Account Titles | Debit | Credit |
Cash | $12,000 | |
6,000 | ||
Prepaid Rent | 2,400 | |
Equipment | 21.000 | |
Accumulated |
$ 1,000 | |
Accounts Payable | 1.000 | |
Income Tax Pavable | 0 | |
Common Stock | 24,800 | |
2,100 | ||
Sales Revenue | 50.000 | |
Salaries and Wages Expense Utilities Expense | 25,000 12.500 |
|
Rent Expense | 0 | |
Depreciation Expense Income Tax Expense | 0 0 |
|
Totals | 578,900 | 578,900 |
Other data not yet recorded at December 31:
- a. Rent expired during the year, $1,200.
- b. Depreciation expense for the year, $ 1,000.
- c. Utilities owing, $9,000.
- d. Income tax expense, $390.
Required:
- 1. Using the format shown in the demonstration case, indicate the
accounting equation effects o each required adjustment. - 2. Prepare the adjusting
journal entries required at December 31. - 3. Summarize the adjusting journal entries in T-accounts. After entering the beginning balances and computing the adjusted ending balances, prepare an adjusted trial balance as o December 31.
- 4. Compute the amount of net income using (a) the preliminary (unadjusted) numbers, and (b) the final (adjusted) numbers. Had the adjusting entries not been recorded, would net income have been overstated or understated, and by what amount?
1.
Answer to Problem 15E
Following are the effects of accounting equation on the adjusting journal entries.
Figure (1)
Note:
E represents expenses
xA represents contra asset
Explanation of Solution
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
a.
- Prepaid rent is an asset. There is a decrease in the asset. Hence, the asset will be decreased by $1,200.
- Prepaid rent is an asset. Hence, there is no effect on liability account.
- Rent expense is an expense account which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, the stockholders’ equity will be decreased by $1,200.
b.
- Accumulated depreciation is a contra asset. There is a decrease in the asset. Hence, the asset account will be decreased by $1,000.
- Accumulated depreciation is a contra asset. Hence, there is no effect on liability account.
- Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, the stockholders’ equity is decreased by $1,000.
c.
- Accounts payable is a liability. Hence, there is no effect on the asset account.
- Accounts payable is a liability. There is an increase in the liability. Hence, the liability account will be increased by $9,000.
- Utilities expense is an expense account which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, the stockholders’ equity will be decreased by $9,000.
d.
- Income tax payable is a liability. Hence, there is no effect on the asset account.
- Income tax payable is a liability. There is an increase in liability. Hence, the liability account will be increased by $390.
- Income tax expense is an expense account which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, the stockholders’ equity is decreased by $390.
2.
To prepare: Adjusting journal entry required for each item at December 31.
Answer to Problem 15E
Prepare adjusted journal entries for each item at June 30:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
Rent expense (+E, -SE) (1) | 1,200 | |||
Prepaid rent (-A) | 1,200 | |||
(To record the adjusting entry for Rent expense) | ||||
Depreciation expense (+E, -SE) | 1,000 | |||
Accumulated Depreciation-Equipment(+xA, -A) | 1,000 | |||
(To record adjusting entry for depreciation expense) | ||||
Utilities expense (+E, -SE) | 9,000 | |||
Accounts payable(+L) | 9,000 | |||
(To record the adjusting entry for utilities expenses) | ||||
Income tax expense(+E, -SE) | 390 | |||
Income tax payable(+L) | 390 | |||
(To record the adjusting entry for income tax expense) |
a.
b.
c.
d.
Table (1)
Explanation of Solution
Adjusting entries:
Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.
a.
- Prepaid rent is an asset and it increases. Hence, debit prepaid expenses account with $1,200.
- Cash is an asset and it decreases. Hence, credit cash account with $1,200.
b.
- Depreciation expense is an expense which is the component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit Depreciation expense with $1,000.
- Accumulated depreciation is a contra asset. There is a decrease in the asset. Hence, credit the asset account by $1,000.
c.
- Utilities expense is an expense which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit the utilities expense by $9,000.
- Accounts payable is a liability. There is an increase in the liability. Hence, credit the accounts payable account by $9,000.
d.
- Income tax expense is an expense which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit the income tax expense by $390.
- Income tax payable is a liability. There is an increase in liability. Hence, credit the income tax payable account by $390.
3.
To Summarize: The adjusting journal entries in T-accounts after the beginning balances and computing the adjusted ending balances, and to prepare the adjusted trial balance as of December 31.
Explanation of Solution
T-account:
T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.
This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’. An account consists of the three main components which are as follows:
(a)The title of the account
(b)The left or debit side
(c)The right or credit side
Post the adjusted entries in T-account:
Prepaid rent (A) account | |||
Balance | 2,400 | ||
a | 1,200 | ||
Ending balance | 1,200 | ||
Rent expense (E) account |
|||
Balance | 0 | ||
a | 1,200 | ||
Ending balance | 1,200 |
Accumulated DepreciationEquipment -(xA) account | |||
Balance | 1,000 | ||
b | 1,000 | ||
Ending balance | 2,000 | ||
Depreciation expense (E) account |
|||
Balance | 0 | ||
b | 1,000 | ||
Ending balance | 1,000 | ||
Accounts payable (L) account |
|||
Balance | 1,000 | ||
c | 9,000 | ||
Ending balance | 10,000 | ||
Utilities expense(E) account |
|||
Balance | 12,500 | ||
c | 9,000 | ||
Ending balance | 21,500 |
Income tax payable (L) account |
|||
Balance | 0 | ||
d | 390 | ||
Ending balance | 390 | ||
Income tax expense(E) account | |||
Balance | 0 | ||
d | 390 | ||
Ending balance | 390 |
Prepare adjusted trial balance as of December 31:
Company NS | ||
Adjusted Trial balance | ||
As of December 31 | ||
Account Titles | Debit ($) | Credit ($) |
Cash | 12,000 | |
Accounts Receivable | 6,000 | |
Prepaid Rent | 1,200 | |
Equipment | 21,000 | |
Accumulated Depreciation–Equipment | 2,000 | |
Accounts Payable | 10,000 | |
Income Taxes Payable | 390 | |
Common Stock | 24,800 | |
Retained Earnings | 2,100 | |
Sales Revenue | 50,000 | |
Salaries and Wages Expense | 25,000 | |
Utilities Expense | 21,500 | |
Rent Expense | 1,200 | |
Depreciation Expense | 1,000 | |
Income Tax Expense | 390 | |
Totals | $ 89,290 | $ 89,290 |
Table (2)
4.
To Compute: The amount of net income using (a) the preliminary (unadjusted) numbers, and (b) the final (adjusted) numbers and to state without adjustments would net income have been overstated or understated and by what amount.
Explanation of Solution
- (a) Calculation of preliminary net income:
- (b) Calculation of adjusted net income:
Calculation of overstated preliminary net income:
Without adjustments, preliminary net income would have been overstated by $11,590.
Want to see more full solutions like this?
Chapter 4 Solutions
FUND OF FINANCIAL ACCOUNTING
- Ledger accounts, adjusting entries, financial statements, and closing entries; optional spreadsheet The unadjusted trial balance of Lakota Freight Co. at March 31, 20Y4, the end of the year, follows: The data needed to determine year-end adjustments are as follows: (a) Supplies on hand at March 31 are 7,500. (b) Insurance premiums expired during year are 1,800. (c) Depreciation of equipment during year is 8,350. (d) Depreciation of trucks during year is 6,200. (e) Wages accrued but not paid at March 31 are 600. Instructions 1. For each account listed in the trial balance, enter the balance in the appropriate Balance column of a four-column account and place a check mark () in the Posting Reference column. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (3) as needed. 3. Journalize and post the adjusting entries, inserting balances in the accounts affected. Record the adjusting entries on Page 26 of the journal. The following additional accounts from Lakota Freight Co.s chart of accounts should be used: Wages Payable, 22; Supplies Expense, 52; Depreciation ExpenseEquipment, 55; Depreciation ExpenseTrucks, 56; Insurance Expense, 57. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of stockholders equity, and a balance sheet. During the year ended March 31, 20Y4, additional common stock of 6,000 was issued. 6. Journalize and post the closing entries. Record the closing entries on Page 27 of the journal. Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry. 7. Prepare a post-closing trial balance.arrow_forwardT accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet The unadjusted trial balance of La Mesa Laundry at August 31, 20Y5, the end of the fiscal year, follows: The data needed to determine year-end adjustments are as follows: (a) Wages accrued but not paid at August 31 are 2,200. (b) Depreciation of equipment during the year is 8,150. (c) Laundry supplies on hand at August 31 are 2,000. (d) Insurance premiums expired during the year are 5,300. Instructions 1. For each account listed in the unadjusted trial balance, enter the balance in a T account. Identify the balance as Aug. 31 Bal. In addition, add T accounts for Wages Payable, Depreciation Expense, Laundry Supplies Expense, and Insurance Expense. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (1) as needed. 3. Journalize and post the adjusting entries. Identify the adjustments by Adj. and the new balances as Adj. Bal. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of stockholders equity, and a balance sheet. During the year ended August 31, 20Y5, common stock of 3,000 was issued. 6. Journalize and post the closing entries. Identify the closing entries by Clos. 7. Prepare a post-closing trial balance.arrow_forwardEXPENSE METHOD OF ACCOUNTING FOR PREPAID EXPENSES Ryans Fish House purchased supplies costing 3,000 for cash. This amount was debited to the supplies expense account. At the end of the year, December 31, 20--, an inventory showed that supplies costing 500 remained. Prepare the adjusting entry.arrow_forward
- The unadjusted trial balance of PS Music as of July 31, 2018, along with the adjustment data for the two months ended July 31, 2018, are shown in Chapter 3. Based upon the adjustment data, the following adjusted trial balance was prepared: PS Music Adjusted Trial Balance July 31, 2018 Account No. Debit Balances Credit Balances Cash................................................. 11 9,945 Accounts Receivable................................... 12 4,150 Supplies.............................................. 14 275 Prepaid Insurance..................................... 15 2,475 Office Equipment..................................... 17 7,500 Accumulated DepreciationOffice Equipment.......... 18 50 Accounts Payable..................................... 21 8,350 Wages Payable........................................ 22 140 Unearned Revenue.................................... 23 3,600 Common Stock....................................... 31 9,000 Dividends............................................ 33 1,750 Fees Earned........................................... 41 21,200 Music Expense........................................ 54 3,610 Wages Expense....................................... 50 2,940 Office Rent Expense................................... 51 2,550 Advertising Expense................................... 55 1,500 Equipment Rent Expense.............................. 52 1,375 Utilities Expense...................................... 53 1,215 Supplies Expense...................................... 56 925 Insurance Expense.................................... 57 225 Depreciation Expense................................. 58 50 Miscellaneous Expense................................ 59 1,855 42,340 42,340 Instructions 1. (Optional) Using the data from Chapter 3, prepare an end-of-period spreadsheet. 2. Prepare an income statement, a retained earnings statement, and a balance sheet. 3. Journalize and post the closing entries. The retained earnings account is #33 and the income summary account is #34 in the ledger of PS Music. Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry. 4. Prepare a post-dosing trial balance.arrow_forwardLedger accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet The unadjusted trial balance of Recessive Interiors at January 31, 20Y2, the end of the year, follows: The data needed to determine year-end adjustments are as follows: (a) Supplies on hand at January 31 are 2,850. (b) Insurance premiums expired during the year are 3,150. (c) Depreciation of equipment during the year is 5,250. (d) Depreciation of trucks during the year is 4,000. (e) Wages accrued but not paid at January 31 are 900. Instructions 1. For each account listed in the unadjusted trial balance, enter the balance in the appropriate Balance column of a four-column account and place a check mark () in the Posting Reference column. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (3) as needed. 3. Journalize and post the adjusting entries, inserting balances in the accounts affected. Record the adjusting entries on Page 26 of the journal. The following additional accounts from Recessive Interiors chart of accounts should be used: Wages Payable, 22; Depreciation Expense Equipment, 54; Supplies Expense, 55; Depreciation ExpenseTrucks, 56; Insurance Expense, 57. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of stockholders equity, and a balance sheet. During the year ended January 31, 20Y2, additional common stock of 7,500 was issued. 6. Journalize and post the closing entries. Record the closing entries on Page 27 of the journal. Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry. 7. Prepare a post-closing trial balance.arrow_forwardT accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet The unadjusted trial balance of Epicenter Laundry at June 30, 20Y6, the end of the fiscal year, follows: The data needed to determine year-end adjustments are as follows: (a) Laundry supplies on hand at June 30 are 8,600. (b) Insurance premiums expired during the year are 5,700. (c) Depreciation of laundry equipment during the year is 6,500. (d) Wages accrued but not paid at June 30 are 1,100. Instructions 1. For each account listed in the unadjusted trial balance, enter the balance in a T account. Identify the balance as June 30 Bal. In addition, add T accounts for Wages Payable, Depreciation Expense, Laundry Supplies Expense, and Insurance Expense. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (1) as needed. 3. Journalize and post the adjusting entries. Identify the adjustments by Adj. and the new balances as Adj. Bal. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of stockholders equity, and a balance sheet. During the year ended June 30, 20Y6, additional common stock of 7,500 was issued. 6. Journalize and post the closing entries. Identify the closing entries by Clos. 7. Prepare a post-closing trial balance.arrow_forward
- Adjusting entries and errors At the end of August, the first month of operations, the following selected data were taken from the financial statements of Tucker Jacobs, an attorney: In preparing the financial statements, adjustments for the following data were overlooked: Unbilled fees earned at August 31, 31,900. Depreciation of equipment for August, 7,500. Accrued wages at August 31, 5,200. Supplies used during August, 3,000. Instructions 1. Journalize the entries to record the omitted adjustments. 2. Determine the correct amount of net income for August and the total assets, liabilities, and stockholders equity at August 31. In addition to indicating the corrected amounts, indicate the effect of each omitted adjustment by setting up and completing a columnar table similar to the following. The first adjustment is presented as an example.arrow_forwardAdjusting entries Trident Repairs Service, an electronics repair store, prepared the following unadjusted trial balance at the end of its first year of operations: For preparing the adjusting entries, the following data were assembled: Fees earned but unbilled on November 30 were 7,000. Supplies on hand on November 30 were 1,300. Depreciation of equipment was estimated to be 7,200 for the year. The balance in unearned fees represented the November 1 receipt in advance for services to be provided. During November, 13,500 of the services were provided. Unpaid wages accrued on November 30 were 4,800. Instructions 1. Journalize the adjusting entries necessary on November 30, 20Y3. 2. Determine the revenues, expenses, and net income of Trident Repairs Service before the adjusting entries. 3. Determine the revenues, expense, and net income of Trident Repairs Service after the adjusting entries. 4. Determine the effect of the adjusting entries on Retained Earnings.arrow_forwardCornerstone 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_forward
- Adjustment process and financial statements Adjustment data for Ms. Ellen’s Laundry Inc. for the year ended December 31, 20Y8. are as follows: a. Wages accrued but not paid at December 31. $2150 h. Depreciation of equipment during the year. $12500 c. Laundry supplies on hand at December 31. $1,500 d. Insurance premiums expired. $4600 Instructions 1. Using the following integrated financial statement framework, record each adjustment to the appropriate accounts, identifying each adjustment by its letter. After all adjustments are recorded, determine the balances.arrow_forwardAdjusting entries and adjusted trial balances Reece Financial Services Co., which specializes in appliance repair services, is owned and operated by Joni Reece. Reece Financial Services accounting clerk prepared the following unadjusted trial balance at July 31, 20Y9: The data needed to determine year-end adjustments are as follows: Depreciation of building for the year, 6,400. Depreciation of equipment for the year, 2,800. Accrued salaries and wages at July 31, 900. Unexpired insurance at July 31, 1,500. Fees earned but unbilled on July 31, 10,200. Supplies on hand at July 31, 615. Rent unearned at July 31, 300. Instructions 1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Rent Revenue; Insurance Expense; Depreciation ExpenseBuilding; Depreciation Expense Equipment; and Supplies Expense. 2. Determine the balances of the accounts affected by the adjusting entries, and prepare an adjusted trial balance.arrow_forwardPrepare journal entries to record the following business transaction and related adjusting entry. A. January 12, purchased supplies for cash, to be used all year, $3,850 B. December 31, physical count of remaining supplies, $800arrow_forward
- Corporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning