Textbook Problem

Although you printed the trial balance and financial statements to get an idea of how All About You Spa is doing financially, some accounts are not accurate. You need to make adjusting entries to provide a clearer picture of how the spa is doing.

HOW TO COMPUTE THE ADJUSTMENTS

Compute the adjustment amounts for the month of June, using the following information:

Adjustment (a): Liability insurance for six months was purchased during the first days of the month. That protection for one month has been used or expended.

Adjustments (b) and (c): Office equipment and spa equipment have depreciated. That means they have been in use for a month and have, for accounting purposes, lost some usefulness. This is an estimate, of course, which allows us to expense the depreciation and, in effect, lowers the book value (value on the books) of both types of equipment.

(b): The owner, Anika Valli, purchased office equipment totaling $1,150. The office equipment will be depreciated using the straight-line method. The office equipment is estimated to have a salvage (trade-in) value of $550 and is expected to last five years. Remember, you want to compute the depreciation for one month, not one year.

(c): Anika Valli invested spa equipment totaling $7,393 in the business ($3,158 of her own spa equipment plus $4,235 of new spa equipment purchased). The spa equipment will be depreciated using the straight-line method. The spa equipment is estimated to have a trade-in, or salvage, value of $3,500 and is expected to last five years. Remember, you want to compute the depreciation for one month, not one year.

Adjustment (d): All About You Spa owes one day of wages to its employees. The month’s total wages paid in June amounted to $7,390. The employees worked 21 days but were paid for only 20 days because the payday for the last day worked is in the next pay period.

Adjustments (e) and (f): After a count of supplies at the end of the month, All About You Spa has $130 remaining in Office Supplies and $205 remaining in Spa Supplies.

Required

1. 1. Complete a work sheet for the month (if required by your instructor).
2. 2. Journalize the adjusting entries in the general journal.
   • If you are preparing the adjusting entries manually, enter your transactions beginning on page 4.
3. 3. Post the adjusting entries to the general ledger accounts.
   • Ignore this step if you are using QuickBooks or general ledger.
4. 4. Prepare an adjusted trial balance as of June 30, 20--.
5. 5. Prepare an income statement (after adjustment) for the month ended June 30, 20--.
6. 6. Prepare a statement of owner’s equity* (after adjustment) for the month ended June 30, 20--.
7. 7. Prepare a balance sheet (after adjustment) as of June 30, 20--.

Check Figures

4. Adjusted trial balance total, $39,197.38

5. Net income, $7,111.62

6. A. Valli, Capital, ending balance, $23,419.62

7. Total assets, $26,037.12