Introduction: 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 & analyze: The necessary adjustments for each of the given transactions from (a) through (g) on January 31, 2017.
Explanation of Solution
a. Adjustment for prepaid insurance
Activity: Operating
Accounts: Prepaid insurance − Decreases
Insurance expense − Increase
Statements:
Balance sheet | Income Statement | ||||
Assets = | Liability + | Revenues - | Expenses = | Net income | |
Prepaid insurance ($750) |
($750) |
Insurance expense $750 |
($750) |
Computation of insurance expenses:
Prepaid insurance is $18,000
Monthly insurance expense is calculated as follows:
b. Adjustments for
Activity: Operating
Accounts: Depreciation expense − warehouse: Increases.
Accumulated depreciation − warehouse: Increase
Warehouse: Decrease
Statements: Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Warehouse ($150) |
($150) | Depreciation expense −warehouse $150 |
($150) |
Monthly depreciation is calculated as follows:
c. Adjustments for depreciation on truck fleet
Activity: Operating
Accounts: Depreciation expense − truck fleet: Increases.
Accumulated depreciation − truck fleet: Increase
Truck fleet: Decrease
Statements: Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Truck fleet ($3,125) |
($3,125) | Depreciation expense −truck fleet $3,125 |
($3,125) |
Monthly depreciation is calculated as follows:
d. Adjustment for interest payable
Activity: Operating
Accounts: Interest payable: Increase
Interest expense: Increase
Statements: Balance sheet and Income statement
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Interest payable $375 |
($375) | Interest expenses $375 |
($375) |
Calculation of interest expense:
Monthly interest expense is calculated as follows:
e. Adjustment for revenue recognized
Activity: Operating
Accounts: Revenue: Increase
Customer deposits: Decrease
Statements: Balance sheet and Income statement
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Customer deposits ($4,500) |
$4,500 | Revenue $4,500 |
$4,500 |
f. Adjustment for accrued wages and salary
Activity: Operating
Accounts: Wages and salaries payable. Increase
Wages and salaries expense. Increase
Statements: Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Wages and salary payable $8,200 |
($8,200) | Wages and salary expense $8,200 |
($8,200) |
g. Adjustments for income tax.
Activity: Operating
Accounts: Income tax payable − Increase
Income tax expenses − Increase
Statements: Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets= | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Income tax payable $9,237 |
($9,237) | Income tax expenses $9,237 |
($9,237) |
Computation of income tax for month:
Particular | Amount ($) |
Revenue: | |
Freight revenue | 165,670 |
Revenue recognized (customer deposit) | 4,500 |
Total revenue (a) | 170,170 |
Less: expenses: | |
Gas and oil expense | 57,330 |
Maintenance expense | 26,400 |
Depreciation expense −warehouse | 150 |
Depreciation expense − truck fleet | 3,125 |
Wages and salaries ($43,050 + $8,200) | 51,250 |
Interest expenses | 375 |
Insurance expense | 750 |
Total expenses (b) | 139,380 |
Net income (a − b) | 30,790 |
Income tax ($30,790 × 30%) | 9,237 |
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