Concept explainers
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
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 and prepaid expenses.
To identify and analyze: The necessary adjustments for each of the preceding situation on December 31, 2017.
Explanation of Solution
- Adjustment for the office furniture purchased last year
- Adjustment for supplies used during the year
- Adjustments for customer paid in advance.
- Adjustment for prepaid rent.
- Adjustment for Notes payable
- Adjustment for wages payable
Activity:Operating
Accounts:Accumulated
Depreciation expense − Furniture. Increase
Statements:Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Accumulated Depreciation − Furniture ($3,000) | ($3,000) | Depreciation Expense − Furniture $3,000 | ($3,000) |
The depreciation for the year is calculated as follows:
Activity:Operating
Accounts:Supplies. Decrease
Supplies expense. Increase
Statements:Balance sheet and Income statement
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Supply inventory ($13,200) | ($13,200) | Supply expenses $13,200 | ($13,200) |
Supplies consumed during the year:
Particular | Amount ($) |
Supplies in hand on January 1, 2017 | 1,200 |
Supplies purchased during the year | 12,900 |
Less: Supplies in hand at the end of December 31, 2017 | (900) |
Supplies consumed | 13,200 |
Activity:Operating
Accounts:Customer deposits in advance. Decreases.
Revenue. Increase
Statements:Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets= | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Customer deposit in advance ($6,600) | $6,600 | $6,600 | $6,600 |
Customer deposits for $8,800 received on July 1, 2017, to be used for eight months.
As O enterprises close accounts in December every year. Hence deposits of six months from July to December will be recognized during the year:
Activity:Operating
Accounts:Prepaid rent. Decreases
Rent expense. Increases
Statements:Balance sheet and income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Prepaid rent ($16,000) | ($16,000) | Rent expense $16,000 | ($16,000) |
O rented warehouse on September 1, 2017, with six-month prepaid rent. As the accounts are closed in December, the rent of September to December will be recognized during the year. The rent expense is calculated as follows:
Activity:Financing
Accounts:Interest payable. Increases
Interest expense. Increases
Statements:Balance sheet and Income Statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Interest payable $300 | ($300) | $300 | ($300) |
90 days note taken for $30,000 at 6 percent interest payable at maturity in November. Hence interest for only the first two months will be taken for the year. The interest expense is calculated as follows:
Activity:Operating
Accounts:Wages payable. Increases
Wages expense. Increases
Statements:Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Wages payable $830 | ($830) | $830 | ($830) |
Wages are paid every Thursday and month-end is Sunday. Therefore, the wages expense of one day (Friday) will be adjusted. The amount of wages expenses is calculated as follows:
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Chapter 4 Solutions
Bundle: Using Financial Accounting Information: The Alternative to Debits and Credits, Loose-Leaf Version, 10th + CengageNOWv2, 1 term Printed Access Card
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