Identifying adjusting entries with explanations
C3 P1
For each of the following entries, enter the letter of the explanation that most closely describes it in the space beside each entry. (You can use letters more than once.)
A. To record an accrued revenue.
B. To record this period’s use of a prepaid expense.
C. To record payment of a prepaid expense.
D. To record this period’s depreciation expense.
E. To record receipt of unearned revenue.
F. To record this period’s earning of prior unearned revenue.
G. To record payment of an accrued expense.
H. To record receipt of an accrued revenue.
I. To record an accrued expense.
______ 1. Interest Expense . . . 1,000
Interest Payable . . . 1,000 ______ 2. Depreciation Expense . . . 4,000
Accumulated Depreciation . . . 4,000 ______ 3. Unearned Professional Fees . . . 3,000
Professional Fees Earned . . . 3,000 ______ 4. Insurance Expense . . . 4,200 Prepaid Insurance . . . 4,200 ______ 5. Salaries Payable . . . 1,400 Cash . . . 1,400 ______ 6. Prepaid Rent . . . 4,500 Cash . . . 4,500 ______ 7. Salaries Expense . . . 6,000 Salaries Payable . . . 6,000 ______ 8. Interest Receivable . . . 5,000 Interest Revenue . . . 5,000 ______ 9. Cash . . . 9,000
Accounts Receivable (from consulting) . . . 9,000 ______ 10. Cash . . . 7,500
Unearned Professional Fees . . . 7,500 ______ 11. Cash . . . 2,000
Interest Receivable . . . 2,000 ______ 12. Rent Expense . . . 2,000
Prepaid Rent . . . 2,000 a. Prepare journal entries (including any adjusting entries as of the end of the month) to record these
events using the procedure of initially crediting the Unearned Fees account when payment is received from a customer in advance of performing services.
b. Prepare journal entries (including any adjusting entries as of the end of the month) to record these events using the procedure of initially crediting the Fees Earned account when payment is received from a customer in advance of performing services.
c. Under each method, determine the amount of earned fees reported on the income statement for July and the amount of unearned fees reported on the balance sheet as of July 31.
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Chapter 3 Adjusting Accounts and Preparing Financial Statements 121
Check (1b) Dr. Insurance Expense, $12,280 (1d ) Dr. Depreciation Expense, $18,875
Months of
Policy Date of Purchase Coverage Cost
A April 1, 2008 24 $11,640
B April 1, 2009 36 10,440
C August 1, 2009 12 9,240
The total premium for each policy was paid in full (for all months) at the purchase date, and the Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries for Prepaid Insurance were properly recorded in all prior years.)
c. The company has 15 employees, who earn a total of $1,830 in salaries each working day. They are paid each Monday for their work in the five-day workweek ending on the previous Friday. Assume that December 31, 2009, is a Tuesday, and all 15 employees worked the first two days of that week. Because New Year’s Day is a paid holiday, they will be paid salaries for five full days on Monday, January 6, 2010.
d. The company purchased a building on January 1, 2009. It cost $800,000 and is expected to have a $45,000 salvage value at the end of its predicted 40-year life. Annual depreciation is $18,875.
e. Since the company is not large enough to occupy the entire building it owns, it rented space to a ten- ant at $3,000 per month, starting on November 1, 2009. The rent was paid on time on November 1, and the amount received was credited to the Rent Earned account. However, the tenant has not paid the December rent. The company has worked out an agreement with the tenant, who has promised to pay both December and January rent in full on January 15. The tenant has agreed not to fall behind again.
f. On November 1, the company rented space to another tenant for $2,718 per month. The tenant paid five months’ rent in advance on that date. The payment was recorded with a credit to the Unearned Rent account.
Required
1. Use the information to prepare adjusting entries as of December 31, 2009.
2. Prepare journal entries to record the first subsequent cash transaction in 2010 for parts c and e.
b. An analysis of the company’s insurance policies provided the following facts.
Wells Teaching Institute (WTI), a school owned by Tracey Wells, provides training to individuals who pay tuition directly to the school. WTI also offers training to groups in off-site locations. Its unadjusted trial balance as of December 31, 2009, follows. WTI initially records prepaid expenses and unearned revenues in balance sheet accounts. Descriptions of items a through h that require adjusting entries on December 31, 2009, follow.
Additional Information Items
a. An analysis of the school’s insurance policies shows that $3,000 of coverage has expired.
b. An inventory count shows that teaching supplies costing $2,000 are available at year-end 2009.
c. Annual depreciation on the equipment is $10,000.
d. Annual depreciation on the professional library is $5,000.
e. On November 1, the school agreed to do a special six-month course (starting immediately) for a client. The contract calls for a monthly fee of $2,500, and the client paid the first five months’ fees in advance. When the cash was received, the Unearned Training Fees account was credited. The fee for the sixth month will be recorded when it is collected in 2010.
f. On October 15, the school agreed to teach a four-month class (beginning immediately) for an individual for $1,600 tuition per month payable at the end of the class. The services are being pro- vided as agreed, and no payment has yet been received.
g. The school’s two employees are paid weekly. As of the end of the year, two days’ salaries have ac- crued at the rate of $120 per day for each employee.
h. The balance in the Prepaid Rent account represents rent for December.
Problem 3-3A
Preparing adjusting entries, adjusted trial balance, and financial statements
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122 Chapter 3 Adjusting Accounts and Preparing Financial Statements
A six-column table for KLJ Company follows. The first two columns contain the unadjusted trial balance for the company as of July 31, 2009. The last two columns contain the adjusted trial balance as of the same date.
Required
Analysis Component
1. Analyze the differences between the unadjusted and adjusted trial balances to determine the eight ad- justments that likely were made. Show the results of your analysis by inserting these adjustment amounts in the table’s two middle columns. Label each adjustment with a letter a through h and pro- vide a short description of it at the bottom of the table.
Preparation Component
2. Use the information in the adjusted trial balance to prepare the company’s (a) income statement and its statement of owner’s equity for the year ended July 31, 2009 (note: K. Jenkins, Capital at July 31, 2008, was $46,000, and the current-year withdrawals were $10,000), and (b) the balance sheet as of July 31, 2009.
Problem 3-4A
Interpreting unadjusted and adjusted trial balances, and preparing financial statements
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Required
1. Prepare T-accounts (representing the ledger) with balances from the unadjusted trial balance.
2. Prepare the necessary adjusting journal entries for items a through h and post them to the T-accounts. Assume that adjusting entries are made only at year-end.
3. Update balances in the T-accounts for the adjusting entries and prepare an adjusted trial balance.
4. Prepare Wells Teaching Institute’s income statement and statement of owner’s equity for the year 2009 and prepare its balance sheet as of December 31, 2009.
Check (2e) Cr. Training Fees Earned, $5,000; (2f ) Cr. Tuition Fees Earned, $4,000; (3) Adj. Trial balance totals, $319,480; (4) Net income, $41,384; Ending T. Wells, Capital $68,384
Check (2) Net income, $34,460; K. Jenkins, Capital (7/31/2009), $70,460; Total assets, $178,960
WELLS TEACHING INSTITUTE Unadjusted Trial Balance
December 31, 2009 Cash Accounts receivable Teaching supplies Prepaid insurance Prepaid rent Professional library
Accumulated depreciation—Professional library Equipment
Accumulated depreciation—Equipment Accounts payable
Salaries payable Unearned training fees
Tuition fees earned Training fees earned
Depreciation expense—Professional library Depreciation expense—Equipment Salaries expense
Insurance expense Rent expense
Teaching supplies expense Advertising expense Utilities expense Totals T. Wells, Capital T. Wells, Withdrawals Debit $ 28,064 0 11,000 16,000 2,178 33,000 75,800 44,000 0 0 52,000 0 23,958 0 8,000 6,000 $ 300,000 Credit $ 300,000 $ 10,000 15,000 39,500 0 12,500 71,000 111,000 41,000
Chapter 3 Adjusting Accounts and Preparing Financial Statements 123
The adjusted trial balance for Clarita Company as of December 31, 2009, follows. Problem 3-5A
Preparing financial statements from the adjusted trial balance and calculating profit margin
P3 A1 A2
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance Cash . . . $ 86,000 ____________________ $ 86,000 Accounts receivable . . . 15,000 ____________________ 19,000 Office supplies . . . 17,800 ____________________ 9,000 Prepaid insurance . . . 6,040 ____________________ 3,960 Office equipment . . . 87,000 ____________________ 87,000 Accum. depreciation— Office equip. . . . $ 24,000 ____________________ $ 26,000 Accounts payable . . . 9,100 ____________________ 24,000 Interest payable . . . 0 ____________________ 2,500 Salaries payable . . . 0 ____________________ 15,000 Unearned consulting fees . . . 20,000 ____________________ 13,000 Long-term notes payable . . . 54,000 ____________________ 54,000 K. Jenkins, Capital . . . 46,000 ____________________ 46,000 K. Jenkins, Withdrawals . . . 10,000 ____________________ 10,000
Consulting fees earned . . . 165,000 ____________________ 176,000 Depreciation expense— Office equip. . . . 0 ____________________ 2,000 Salaries expense . . . 67,990 ____________________ 82,990 Interest expense . . . 1,270 ____________________ 3,770 Insurance expense . . . 0 ____________________ 2,080 Rent expense . . . 14,540 ____________________ 14,540 Office supplies expense . . . 0 ____________________ 8,800 Advertising expense . . . 12,460 ____________________ 27,360 Totals . . . $318,100 $318,100 ____________________ $356,500 $356,500 Debit Credit Cash . . . $149,000 Accounts receivable . . . 50,000 Interest receivable . . . 22,600 Notes receivable (due in 90 days) . . . 171,500 Office supplies . . . 16,000 Automobiles . . . 171,000 Accumulated depreciation—Automobiles . . . $ 75,000 Equipment . . . 146,000 Accumulated depreciation—Equipment . . . 23,000 Land . . . 79,000 Accounts payable . . . 101,000 Interest payable . . . 20,000 Salaries payable . . . 42,000 Unearned fees . . . 36,000 Long-term notes payable . . . 140,000 S. Clarita, Capital . . . 295,800 S. Clarita, Withdrawals . . . 47,000
Fees earned . . . 534,000 Interest earned . . . 20,000
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124 Chapter 3 Adjusting Accounts and Preparing Financial Statements
Riso Co. had the following transactions in the last two months of its year ended December 31. Nov. 1 Paid $2,000 cash for future newspaper advertising.
1 Paid $2,466 cash for 12 months of insurance through October 31 of the next year. 30 Received $4,200 cash for future services to be provided to a customer.
Dec. 1 Paid $2,400 cash for a consultant’s services to be received over the next three months. 15 Received $7,250 cash for future services to be provided to a customer.
31 Of the advertising paid for on November 1, $1,300 worth is not yet used.
31 A portion of the insurance paid for on November 1 has expired. No adjustment was made in November to Prepaid Insurance.
31 Services worth $1,600 are not yet provided to the customer who paid on November 30. 31 One-third of the consulting services paid for on December 1 have been received.
31 The company has performed $4,350 of services that the customer paid for on December 15.
Required
1. Prepare entries for these transactions under the method that records prepaid expenses as assets and records unearned revenues as liabilities. Also prepare adjusting entries at the end of the year.
2. Prepare entries for these transactions under the method that records prepaid expenses as ex- penses and records unearned revenues as revenues. Also prepare adjusting entries at the end of the year.
Analysis Component
3. Explain why the alternative sets of entries in requirements 1 and 2 do not result in different financial statement amounts.
Problem 3-6AA
Recording prepaid expenses and unearned revenues
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