Chapter 4, Problem 4.1.1AAP

To determine

Introduction: Each financial transaction or economic event will affect either assets, liabilities, or owners’ equity. Thus, the basis for recording the transaction in the accounting system depends on the accounting equation. The accounting equation is:

$\text{Assets}\text{=}\text{Liabilities}\text{+}\text{Stockholder's}\text{Equity}$

Adjustments: Accrual basis accounting requires a number of adjustments at the end of the period. The adjustment is made for unearned revenue, accrued expenses, revenue received in advance, non-cash expenses, and prepaid expenses.

To prepare: The necessary adjusting journal entries to be recorded on June 30, 2017.

Explanation of Solution

The adjusting entries are prepared as follows:

Date	Account title & explanation	Debit ($)	Credit ($)
June 30, 2017	Interest receivable	33.33
	……Interest revenue		33.33
	(to record interest revenue accrued)
June 30, 2017	Supplies expense	5,568
	……Supplies		5,568
	(to record the supplies used)
June 30, 2017	Depreciation expense	3,500
	……Accumulated depreciation − machine		3,500
	(to record the depreciation expense)
June 30, 2017	Rent expense	1,550
	……Prepaid rent		1,550
	(to record the rent expense)
June 30, 2017	Salaries and wages expense	5,000
	……Salaries and wages payable		5,000
	(to record wages expense accrued)
June 30, 2017	Income tax expense	2,900
	……Income tax payable		2,900
	(to record income tax expense accrued)

  a. Adjustment for Interest receivable

  2 years note received for $10,000 at 4 per cent on June 1, 2017. The interest revenue should be recognized for one month. The interest revenue is calculated as follows:

  $\begin{array}{c}\text{Interest}\text{revenue}=\text{principal}\times \text{interest}\times \frac{\text{no}\text{.}\text{of}\text{months}\text{till}\text{June}}{\text{no}\text{.}\text{of}\text{months}\text{in}\text{year}}\\ =\$10,000\times 4\%\times \frac{1}{12}\\ =\$33.33\end{array}$

  b. Adjustment for supplies used during the month

Particular	Amount ($)
Supplies in hand on June 1, 2017	475
Add: Supplies purchased during the month	5,600
Less: Supplies in hand at the end of June 30, 2017	(507)
Supplies consumed	5,568

  c.The depreciation for the year is calculated as follows:

  $\begin{array}{c}\text{Depreciation}\text{=}\frac{\text{Cost}\text{of}\text{Asset}\text{-}\text{Salvage}\text{value}}{\text{Useful}\text{life}}\\ =\frac{\$170,000-\$2,000}{4}\\ =\$42,000\end{array}$

Monthly depreciation expense is calculated as follows:

  $\begin{array}{c}\text{Monthly}\text{depreciation}\text{=}\frac{\text{annual}\text{depreciation}}{\text{Number}\text{of}\text{months}\text{in}\text{a}\text{year}}\\ =\frac{\$42,000}{12}\\ =\$3,500\end{array}$

  d. Adjustment for prepaid rent.

  F R Inc. paid on June 1, 2017, three-month prepaid rent. As the accounts are closed every month, the rent of June will be recognized. The rent expense is calculated as follows:

  $\begin{array}{c}\text{Rent}\text{expense}=\frac{\text{prepaid}\text{rent}}{\text{number}\text{of}\text{months}}\\ =\frac{\$4,650}{3}\\ =\$1,550\end{array}$

  e. Adjustment for wages payable

  As wages are paid every Sunday and month-end is Friday, only five days from Monday to Friday require adjustment. The wages for five days are calculated as follows:

  $\begin{array}{c}\text{Wages}\text{expense}=\frac{\text{weekly}\text{wage}}{\text{number}\text{of}\text{days}\text{in}\text{a}\text{week}}\times \text{number}\text{of}\text{days}\text{from}\text{sunday}\text{to}\text{friday}\\ =\frac{\$7,000}{7}\times 5\\ =\$5,000\end{array}$

  f. Adjustment for federal income tax payable

  The amount of federal income tax expense during June is $2,900. It will be deducted in calculating the net income of the company.