Chapter 4, Problem 4.3AP

(a)

To determine

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To prepare:  The adjusting journal entries in the book of Hotel M at May 31, 2017.

Explanation of Solution

The adjusting journal entries in the book of Hotel M at the end of the May month are as follows:

1. An adjusting entry for insurance expense:

In this case, Hotel M recognized the insurance expenses at the end of the May month. So, the necessary adjusting entry that the Hotel M should record to recognize the insurance expense is as follows:

Date	Account Titles and Description	Debit ($)	Credit ($)
May 31, 2017	Insurance expense	450
	Prepaid insurance		450
	(To record the insurance expenses incurred at the end of the May)

Table (1)

Description:

• Insurance expense decreases the value of stockholders’ equity by $450; hence debit the insurance expense for $450.
• Prepaid insurance is an asset, and it decreases the value of asset by $450, hence credit the prepaid insurance for $450. 

2. An adjusting entry for Supplies expenses:

In this case, Hotel M recognized the supplies expenses at the end of the May month. So, the necessary adjusting entry that the Hotel M should record to recognize the supplies expense is as follows:

Date	Account Titles and Description	Debit ($)	Credit ($)
May 31, 2017	Supplies expenses (1)	1,550
	Supplies		1,550
	(To record the supplies expenses incurred at the end of the May)

Table (2)

Working note:

Calculate the value of supplies expense at end of the May month

$\begin{array}{c}\text{Supplies}\text{expense}\text{=}\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\\ \text{begining of May}\end{array}\right)-\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\text{on}\text{hand}\\ \text{at}\text{the}\text{end}\text{of}\text{the month}\end{array}\right)\\ =\left(\$2,600–\$1,050\right)\\ =\$1,550\end{array}$ (1)

Hence, the value of supplies expenses at the end of the May month is $1,550.

Description:

• Supplies expense decreases the value of stockholders’ equity by $1,550; hence debit the supplies expenses for $1,550.
• Supplies are an asset, and it decreases the value of asset by $1,550, hence credit the supplies for $1,550.  

3. An adjusting entry for depreciation expense:

In this case, Hotel M recognized the depreciation expense at end of the May month.  So, the necessary adjusting entry that the Hotel M should make to record the depreciation expense at end of the month is as follows:

On the building:

Date	Account Titles and Description	Debit ($)	Credit ($)
May 31, 2017	Depreciation expense (2)	300
	Accumulated depreciation-Building		300
	(To record the depreciation expenses allocated at end of the month)

Table (3)

Working note:

Calculate the value of depreciation expense at the end of the May month

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\left(\begin{array}{l}\text{Annual depreciation expense ×}\\ \frac{\text{No}\text{. of month occured (May month)}}{\text{No}\text{. of months in a year}}\end{array}\right)\\ \text{=\$3,600×}\frac{1}{12}\\ \text{=\$300}\end{array}$ (2)

Description:

• Depreciation expense decreases the value of stockholders’ equity by $300; hence debit the depreciation expense for $300.
• Accumulated depreciation is a contra asset account, and it decreases the value of asset by $300 hence, credit the accumulated depreciation for $300.

On the equipment:

Date	Account Titles and Description	Debit ($)	Credit ($)
May 31, 2017	Depreciation expense (3)	250
	Accumulated depreciation-Equipment		250
	(To record the depreciation expenses allocated at end of the month)

Table (4)

Working note:

Calculate the value of depreciation expense at the end of the May month

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\left(\begin{array}{l}\text{Annual depreciation expense ×}\\ \frac{\text{No}\text{. of month occured (May month)}}{\text{No}\text{. of months in a year}}\end{array}\right)\\ \text{=\$3,000×}\frac{1}{12}\\ \text{=\$250}\end{array}$ (3)

Description:

• Depreciation expense decreases the value of stockholders’ equity by $250; hence debit the depreciation expense for $250.
• Accumulated depreciation is a contra asset account, and it decreases the value of asset by $250 hence, credit the accumulated depreciation for $250.

4. An adjusting entry for interest payable:

In this case, Hotel M incurred the interest expenses but cash is not yet paid.  So, the necessary adjusting entry that the Hotel M should record to recognize the accrued expense is as follows:

Date	Account Title and Description	Debit ($)	Credit ($)
May 31, 2017	Interest expense (4)	180
	Interest payable		180
	(To record the interest expense incurred at the end of the month)

Table (5)

Working note:

Calculate the value of interest expense at the end of the May month

$\begin{array}{c}\text{Interest expense}\text{=}\left[\begin{array}{l}\left(\text{Mortgage value}\times \text{Annual interest rate}\right)\times \\ \frac{\text{No}\text{. of month occured (May month)}}{\text{No}\text{. of months in a year}}\end{array}\right]\\ \text{=}\left(\$36,000\times \frac{6}{100}\right)\times \frac{1}{12}\\ \text{=\$180}\end{array}$ (4)

Description:

• Interest expense decreases the value of stockholders’ equity by $180; hence debit the interest expense for $180.
• Interest payable is a liability, and it increases the value of liability by $180, hence credit the interest payable for $180.

5.  An adjusting entry for unearned rent revenue:

In this case, Hotel M has been earned unearned rent revenue of $2,500 at end of the May month. Hence, Hotel M should record $2,500 as rent revenue to be adjusted from unearned rent revenue is as follows:

Date	Account Title and Description	Debit ($)	Credit ($)
May 31, 2017	Unearned rent revenue	2,500
	Rent revenue		2,500
	(To record the unearned rent revenue at end of the month)

Table (6)

Description:

• Unearned rent revenue is a liability, and it decreases the value of liability by $2,500, hence debit the unearned rent revenue for $2,500.
• Rent revenue increases the value of stockholders’ equity by $2,500; hence credit the rent revenue for $2,500.

6.  An adjusting entry for salaries and wages payable:

In this case, Hotel M incurred the salaries and wages expense but cash is not yet paid.  So, the necessary adjusting entry that the Hotel M should record to recognize the accrued expense is as follows:

Date	Account Title and Description	Debit ($)	Credit ($)
May 31, 2017	Salaries and wages expense	900
	Salaries and wages payable		900
	(To record the salaries and wages expense incurred at the end of the May month)

Table (7)

Description:

• Salaries and wages expense decreases the value of stockholders’ equity by $900; hence debit the salaries and wages expense for $900.
• Salaries and wages payable is a liability, and it increases the value of liability by $900, hence credit the salaries and wages payable for $900.

(b)

To determine

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:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

To post:  the transaction to T-accounts of Hotel M on May 31, 2017.

Explanation of Solution

Post the transactions to T-accounts of Hotel M on May 31, 2017 as follows:

Cash account
May, 31 Bal.	$2,500
Bal.	$2,500

Supplies account
May, 31 Bal.	$2,600	May, 31	$1,550
Total	$2,600	Total	$1,550
Bal.	$1,050

Prepaid insurance
May, 31 Bal.	$1,800	May, 31	$450
Total	$1,800	Total	$450
Bal.	$1,350

Land
May, 31 Bal.	$15,000
Bal.	$15,000

Building
May, 31 Bal.	$70,000
Bal.	$70,000
Accumulated depreciation-Building
		May, 31	$300
		Bal.	$300

Equipment
May, 31 Bal.	$16,800
Bal.	$16,800

Accumulated depreciation - Equipment
		May, 31	$250
		Bal.	$250

Accounts payable
		May, 31 Bal.	$4,700
		Bal.	$4,700

Unearned rent revenue
May, 31.	$2,500	May, 31 Bal.	$3,300
Total	$2,500	Total	$3,300
		Bal.	$   800

Salaries and wages payable
		May, 31 Bal.	$900
		Bal.	$900

Interest payable
		May, 31 Bal.	$180
		Bal.	$180

Mortgage payable
		May, 31 Bal.	$36,000
		Bal.	$36,000

Closing stock
		May, 31 Bal.	$60,000
		Bal.	$60,000

Rent revenue
		May, 31 Bal. May, 31	$9,000   $2,500
		Bal.	$11,500

Salaries and wages expense
May, 31 Bal. May, 31	$3,000    $900
Bal.	$3,900

Utilities expense
May, 31 Bal.	$800
Bal.	$800

Advertising expense
May, 31 Bal.	$500
Bal.	$500

Interest expense
May, 31 Bal.	$180
Bal.	$180

Insurance expense
May, 31 Bal.	$450
Bal.	$450
Supplies expense
May, 31	$1,550
Bal.	$1,550

Depreciation expense
May, 31.	$300
May, 31	$250
Bal.	$550

(c)

To determine

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

To prepare:  The adjusted trial balance of Hotel M on May 31, 2017.

Explanation of Solution

Adjusted trial balance of Hotel M on May 31, 2017 is as follows:

Hotel M
Adjusted Trial balance
May 31, 2017
Particulars	Debit $	Credit $
Cash	2,500
Supplies	1,050
Prepaid insurance	1,350
Land	15,000
Building	70,000
Accumulated depreciation - Building		300
Equipment	16,800
Accumulated depreciation-Equipment		250
Accounts payable		4,700
Unearned rent revenue		800
Salaries and wages payable		900
Interest payable		180
Mortgage payable		36,000
Common stock		60,000
Rent revenue		11,500
Salaries and wages expense	3,900
Utilities expense	800
Advertising expense	500
Interest expense	180
Insurance expense	450
Supplies expense	1,550
Depreciation expense	550
	114,630	114,630

Table (8)

Conclusion

Thus, the total of debit, and credit columns of a trial balance is $114,630 and agreed.

(d)

To determine

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Statement of retained earnings:

This is an equity statement which shows the changes in the stockholders’ equity over a period of time.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

To prepare: The income statement, statement of retained earnings, and classified balance sheet of Hotel M.

Explanation of Solution

The income statement of Hotel M for the month ended May 31, 2017 is as follows:

Hotel M
Income Statement
For the month ended May 31, 2017
Particulars	$	$
Revenue:
Service revenue	11,500
Total revenue (A)		11,500
Less:  Expenses
Salaries and wages expenses	3,900
Supplies expense	1,550
Utilities expense	800
Depreciation expense	550
Advertising expense	500
Interest expense	180
Insurance expenses	450
Total Expenses (B)		7,930
Net income $\left(\text{A–B}\right)$		3,570

Table (9)

Hence, the net income of Hotel M for the month ended May 31, 2017 is $3,570.

The retained earnings statement of Hotel M for the month ended May 31, 2017 is as follows:

Hotel M
Retained earnings statement
For the month ended May 31, 2017
Particulars	$
Retained earnings at May, 1	-
Add:  Net income	3,570
	3,570
Less:  Dividends paid	-
Retained earnings at May, 31	3,570

Table (10)

Hence, retained earnings of Hotel M for the month ended May 31, 2017 are $3,570.

The classified balance sheet at May 31, 2017 is as follows:

Hotel M
Classified Balance sheet Statement
As  at May 31, 2017
Assets	$	$	$
Current assets:
Cash		2,500
Supplies		1,050
Prepaid insurance		1,350
Total of current assets (X)			4,900
Other assets:
Land		15,000
Building	70,000
Less: Accumulated depreciation-Building	300	69,700
Equipment	16,800
Less: Accumulated depreciation-Equipment	250	16,550
Total of other assets (Y)			101,250
Total assets $\left(\text{X+Y}\right)$			106,150
Liabilities and Stockholders' equity	$	$	$
Current liabilities:
Accounts payable		4,700
Salaries and wages payable		900
Unearned rent revenue		800
Interest payable		180
Total current liabilities			6,580
Long-term liabilities:
Mortgage payable			36,000
Total liabilities (A)			42,580
Stockholders' equity:
Common stock		60,000
Retained earnings		3,570
Total stockholders' equity (B)			63,570
Total liabilities and stockholders' equity $\left(\text{A+B}\right)$			106,150

Table (11)

Hence, the total assets of Hotel M are $106,150, and the total liabilities and stockholders’ equity are $106,150.

(e)

To determine

To identify: The accounts would be closed at the end of the May month.

Answer to Problem 4.3AP

All revenue and expense accounts must be closed at end of the May, 2017.

Explanation of Solution

Rent revenue, salaries and wages expense, utilities expense, advertising expense, interest expense, insurance expense, supplies expense, and depreciation expense (temporary accounts) are closed by transferring the amount of all revenue and expenses to the income summary account in order to bring the all revenue and expense accounts balance to zero.