Concept explainers
Adjusting the Accounting Records
Assume it is now December 31, 2015, and Nicole has just completed her first year of operations at Nicole’s Getaway Spa. After looking through her
- a. Nicole’s Getaway Spa is renting its space at a cost of $600 per month. On September 1, 2015, Nicole paid eight months’ rent in advance using cash. This prepayment was recorded in the account Prepaid Rent back in September.
- b. The building, purchased at the beginning of the year for $47,000 cash, has estimated depreciation of $2,000 for 2015, but none has been recorded yet.
- c. Salaries and wages to the support staff at Nicole’s Getaway Spa have been paid up to December 26, 2015. The support staff worked both December 27 and 28 and will be paid on January 5, 2016. Salaries and wages amount to $ 1,000 per day. The spa was closed December 29-31.
- d. The insurance policy, purchased on June 1 for $3,000 cash, provides coverage for 12 months. The insurance coverage since June has now been used up.
- e. The unadjusted amount in the Spa Supplies account was $2,000 at December 31. 2015. for supplies purchased on account. A year-end count showed $700 of supplies remain on hand.
- f. On the last day of December, a customer obtained spa services by using a $90 gift certificate that was purchased earlier in the month. Use of the gift certificate to pay for these services had not yet been recorded.
Required:
- 1. For each of the items listed above, identify whether an accrual adjustment, a deferral adjustment or no adjustment is required.
- 2. For each of the deferral adjustments, prepare the initial
journal entry that would have been recorded. - 3. Prepare the
adjusting journal entries that should be recorded for Nicole’s Getaway Spa at December 31, 2015, assuming that the items have not been adjusted prior to December 31, 2015.
1.
To identify: From the list of items whether it is an accrual adjustment, deferral adjustment or no adjustment is required.
Answer to Problem 4.1CC
List of items show whether it is an accrual adjustment, deferral adjustment or no adjustment is required:
List of items | Type of adjustment |
a) | Deferral adjustment |
b) | Deferral adjustment |
c) | Accrual adjustment |
d) | Deferral adjustment |
e) | Deferral adjustment |
f) | Deferral adjustment |
Table (1)
Explanation of Solution
Deferral adjustments:
These are the adjustments which are used to increase the income statement accounts and to decrease the corresponding balance sheet. The deferral adjustments include liability and revenue account or asset and expense account.
- Revenues: The liabilities that are recorded previously need to be adjusted at the end of the period to replicate the earned revenues. Example: The revenue that is unearned should be adjusted for the portion of sales revenue that is earned during the period.
- Expenses: The assets that are recorded previously need to be adjusted at the end of the period to replicate the incurred expenses. Example: The prepaid insurance should be adjusted for the portion of insurance expense that is incurred during the period.
Accrual adjustments:
These are the adjustments that are used to record the revenues or expenses when they occur previously while paying or receiving the cash and to adjust the corresponding accounts in the balance sheet. These accrual adjustments involve liability and revenue or asset and expense account.
- Revenues: The revenues that are earned at the end of the accounting period are the revenues will be collected in the future accounting period. Example: Recording the interest receivable for the interest that is earned but not yet collected during the period.
- Expenses: The expenses that are incurred at the end of the accounting period, and the payment for those expenses will be paid in the future period. Example: Recording the accounts payable for the utilities that are used during the current period and the payment is not made in the current period.
a)
In this transaction rent has been paid in advancethe prepaid rent should be adjusted for the portion of rent expense that is incurred during the period.
b)
In this transaction building has been purchased in the beginning of the year the assets that are recorded previously need to be adjusted at the end of the period to replicate the incurred expenses
c)
In this transaction salaries and wages has been paid in the future where the services has been rendered at the end of the accounting period.
d)
In this transaction insurance policy has been purchased before for the period of 12 months for cash and the insurance coverage is being used in the current year. Which is considered as a earned revenue.
e)
In this transaction gift certificate was purchased in the previous month and those services is being used in the current year but that transaction had not been recorded.
2.
To prepare: Initial journal entry for each of the deferral adjustment.
Answer to Problem 4.1CC
The initial journal entry for deferral adjustment is as follows:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a) | Prepaid rent (+A)(1) | 4,800 | ||
Cash (-A) | 4,800 | |||
(To record prepaid rent) | ||||
b) | Building (+A) | 47,000 | ||
Cash (-A) | 47,000 | |||
(To record purchase of building) | ||||
c) | This transaction requires an accrual adjustment | |||
d) | Prepaid insurance(+A) | 3,000 | ||
Cash (-A) | 3,000 | |||
(To record prepaid insurance) | ||||
e) | Supplies (+A) | 2,000 | ||
Cash (-A) | 2,000 | |||
(To record supplies purchased on account) | ||||
f) | Cash (+A) | 90 | ||
Unearned revenue (+L) | 90 | |||
(To record unearned revenue) |
Table (2)
Explanation of Solution
- a. Calculation of prepaid rent:
- Prepaid rent is an asset and it increases. Hence debit the prepaid rent account by $4,800.
- Cash is an asset and it decreases. Hence credit the cash account by $4,800.
b.
- Building is an asset and it increases. Hence debit the building account by $47,000.
- Cash is an asset and it decreases. Hence credit the cash account by $47,000.
d.
- Prepaid insurance is an asset and it increases. Hence debit the prepaid insurance account by $3,000.
- Cash is an asset and it decreases. Hence credit the cash account by $3,000.
e.
- Supplies are an asset and it increases. Hence debit the supplies account by b$2,000.
- Accounts payable is a liability and it increases. Hence credit the accounts payable account by $ 2,000.
f.
- Cash is an asset and it increases. Hence debit the cash account by $90.
- Unearned revenue is a liability and it increases. Hence credit the unearned revenue account by $90.
3.
To prepare: The adjusting journal entries that should be recorded for Company NGS at December 31, 2015, by assuming that the items have not been adjusted prior to December 31, 2015.
Answer to Problem 4.1CC
Prepare adjusting entries for each item at December 31, 2015:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a. | Rent expense (+E, -SE)(2) | 2,400 | ||
Prepaid rent (-A) | 2,400 | |||
(To record adjusting entry for prepaid rent) | ||||
b. | Depreciation expense (+E, -SE) | 2,000 | ||
Accumulated Depreciation-Equipment(+xA, -A) | 2,000 | |||
(To record adjusting entry for depreciation expense) | ||||
c. | Salaries and wages expense (+E, -SE)(3) | 2,000 | ||
Salaries and wages payable (+L) | 2,000 | |||
(To record adjusting entry for salaries and wages expense) | ||||
d. | Insurance expense (+E, -SE)(4) | 1,750 | ||
Prepaid insurance (-A) | 1,750 | |||
(To record the adjusting entry for insurance expense) | ||||
e. | Supplies expense (+E, -SE)(5) | 1,300 | ||
Supplies (-A) | 1,300 | |||
(To record the use of supplies) | ||||
f. | Unearned revenue (-L) | 90 | ||
Service revenue (+R, +SE) | 90 | |||
(To record adjusting entry for unearned revenue) |
Table (3)
Explanation of Solution
- a) Calculation of rent expense:
c) Calculation of salaries and wages expense:
d) Calculation of insurance expense:
e) Calculation of supplies expense:
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Chapter 4 Solutions
FUNDAMENTALS OF FINANCIAL ACCOUNTING
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