Chapter 11, Problem 11CP

To determine

Adjusting Entries:

The journal entries to recognize the revenue earned and expenses incurred during a specified accounting period is called adjusting entries. The adjusting entries are basically classified into two categories; deferral and accrual. The trial balance without adjusting the revenue and expenses recognized during the period is called an unadjusted trial balance and the trial after posting the adjusting entries is referred as adjusted trial balance.

To determine:

1.

a) The reconciled ending balance of cash and the amount of omitted check.

b) The adjustment needed to obtain the correct ending balance of the Allowance for Doubtful Accounts.

c) Compute the depreciation expense for the truck used during the year 2017.

d) Compute the total deprecation for the two items of equipment.

e) The adjusted 2017 ending balance of the Extermination Services Revenue and the Unearned Service Revenue accounts.

f) The adjusted 2017 ending balance of the Warranty Expense and the Estimated Warranty Liability accounts.

2.

Preparation of six column table by entering the appropriate adjustments for items a through g and then completing the adjusted trial balance.

3.

Journalize the adjusting entries for the adjustments entered on the six column table.

4.

Preparing a single-step income statement; a statement of owner’s equity and a classified balance sheet

Answer to Problem 11CP

Solution:

1.

a) The reconciled ending balance of cash is $15,750 and the amount of omitted check is $1,287.

b) The adjustment needed to obtain the correct ending balance of the Allowance for Doubtful Accounts is $551.

c) Deprecation expense for the truck used during the year 2017 is $6,000.

d) The total deprecation for the two items of equipment is $6,100(Sprayer; 3,000 and Injector; 3,100).

e) The adjusted 2017 ending balance of the Extermination Services Revenue account is $57,760 and the Unearned Service Revenue account is $2,240.

f) The adjusted 2017 ending balance of the Warranty Expense account is $1,444 and the Estimated Warranty Liability account is $2,844.

g) The adjusted 2017 ending balance of the Interest Expense account and Interest Payable account remains the same because the interest expense is not yet due in the current year.

2.

BUGS-OFF EXTERMINATORS Trial Balance December 31, 2017
	Unadjusted		Adjusting entries		Adjusted
	Debit	Credit	Debit	Credit	Debit	Credit
Cash	$17,000		$52	$1,302	$15,750
Accounts Receivable	$4,000			$679	$3,321
Allowance for doubtful accounts		$828	$679	$551		$700
Merchandise Inventory	$11,700				$11,700
Trucks	$32,000				$32,000
Accumulated depreciation – Trucks		0		$6,000		$6,000
Equipment	$45,000				$45,000
Accumulated depreciation – Equipment		$12,200		$6,100		$18,300
Accounts Payable		$5,000	$1,287			$3,713
Estimated Warranty Liability		$1,400		$1,444		$2,844
Unearned Service Revenue		0		$2,240		$2,240
Interest Payable		0				-
Long-Term Notes payable		$15,000				$15,000
D. Buggs, Capital		$59,700				$59,700
D. Buggs, Withdrawals	$10,000				$10,000
Extermination Service Revenue		$60,000	$2,240			$57,760
Interest Revenue		$872		$52		$924
Sales (of Merchandise)		$71,026				$71,026
Cost of Goods Sold	$46,300				$46,300
Depreciation Expense – Truck	0		$6,000		$6,000
Depreciation Expense – Equipment	0		$6,100		$6,100
Wages Expense	$35,000				$35,000
Interest Expense	0				-
Rent Expense	$9,000				$9,000
Bad Debts Expense	0		$551		$551
Miscellaneous Expense	$1,226		$15		$1,241
Repairs Expense	$8,000				$8,000
Utilities Expense	$6,800				$6,800
Warranty Expense	0		$1,444		$1,444
Total	$226,026	$226,026	$18,368	$18,368	$238,207	$238,207

3.

Adjusting Entries for the transactions

	General journal
a.	Cash	$52
	Interest Revenue		$52
	Accounts Payable	$1,287
	Miscellaneous Expense	$15
	Cash		$1,302
b.	Allowance for Doubtful Accounts	$679
	Accounts Receivable		$679
	Bad Debt Expense	$551
	Allowance for Doubtful Accounts		$551
c.	Depreciation Expense – Truck	$6,000
	Accumulated Depreciation – Truck		$6,000
d	Depreciation Expense – Equipment	$6,100
	Accumulated Depreciation – Equipment		$6,100
e.	Extermination Service Revenue	$2,240
	Unearned Service Revenue		$2,240
f.	Warranty Expense	$1,444
	Estimated Warranty Liability		1,444

4.

BUGS-OFF EXTERMINATORS Single-Step Income Statement December 31, 2017
Revenues:
Service Revenue	$57,760
Interest Revenue	$924
Sales (Merchandise)	$71,026
		$129,710
Expenses:
Cost of Goods Sold	$46,300
Depreciation Expense – Truck	$6,000
Depreciation Expense – Equipment	$6,100
Wages Expense	$35,000
Rent Expense	$9,000
Bad Debts Expense	$551
Miscellaneous Expense	$1,241
Repairs Expense	$8,000
Utilities Expense	$6,800
Warranty Expense	$1,444	$120,436
Net Income		$9,274

BUGS-OFF EXTERMINATORS Balance Sheet December 31, 2017
Assets:
Current Assets
Cash	$15,750
Accounts Receivable	$3,321
Merchandise Inventory	$11,700
Total Current Assets	$30,771
Fixed Assets
Trucks $32,000
Accumulated depreciation – Trucks $6,000	$26,000
Equipment $45,000
Accumulated depreciation – Equipment $18,300	$26,700
Total Fixed Assets	$52,700
Total Assets	$83,471
Liabilities
Current Liabilities
Allowance for doubtful accounts	$700
Accounts Payable	$3,713
Estimated Warranty Liability	$2,844
Unearned Service Revenue	$2,240
Total Current Liabilities	$9,497
Long-Term Liabilities
Notes Payable	$15,000
Total long term liabilities	$15,000
Total Liabilities	$24,497
Owner’s Equity
D. Buggs, Capital	$58,974
Total Liabilities $ Owner’s Equity	$83,471

BUGS-OFF EXTERMINATORS Statement of Owner’s Equity December 31, 2017
Unadjusted owner’s Equity as on December 31, 2017	$59,700
Add: Net Income during the year $	$9,274
Subtotal	$68,974
Less: D. Buggs, Drawing	$10,000
Adjusted Owner’s Equity	$58,974

Explanation of Solution

Explanation:

1. a)

Computation of ending balance of cash and omitted check
Cash balance as per bank	$15,100
Less: Outstanding checks	$1,800
Add: Deposit in transit	$2,450
Reconcile cash balance		$15,750
Cash balance as per books	$17,000
Less: Bank service charge	$15
Add: Interest earned	$52
Cash balance before omitted check		$17,037
Less: Reconciled cash balance		$15,750
Amount of Omitted Check		$1,287

Adjusted Cash Balance
Unadjusted Cash Balance	$17,000
Less: Omitted Check	$1,287
Less: Bank Service Charge	$15
Add: Interest revenue	$52
Adjusted Cash Balance	$15,750

b)

Adjustment of allowance for doubtful accounts
Unadjusted balance	$828
Less: Bad debt written-off	$679
Revised unadjusted balance	$149
Desired ending balance	$700
Adjustment of allowance for doubtful accounts	$551

c) Computation of depreciation expense on truck (Straight-line method)

$\begin{array}{l}Depreciationexpense=\frac{OriginalCostoftruck–SalvageValue}{Usefullifeofthetruck}\hfill \\ =\frac{\$32,000-\$8,000}{4years}\hfill \\ =\$6,000\hfill \end{array}$

d) Depreciation expense of Sprayer and Injector

$\begin{array}{l}Sprayer=\frac{\$27,000-\$3,000}{8years}\hfill \\ =\$3,000\hfill \\ \hfill \\ Injector=\frac{\$18,000-\$2,500}{5years}\hfill \\ =\$3,100\hfill \end{array}$

e) Computation of Service Revenue earned from August 1, to December 31.

Adjusted Unearned Service Revenue
Service Revenue received in advance	$3,840
Less: Service Revenue earned	$1,600*
Unearned Service revenue	$2,240

Adjustment of Extermination Services Revenue Account
Unadjusted balance	$60,000
Less: Unearned Service Revenue	$2,240
Adjusted balance	$57,760

$\begin{array}{l}ServiceRevenueperMonth=\frac{TotalRevenueinAdvance}{PeriodofAdvance}\hfill \\ =\frac{\$3,840}{12months}\hfill \\ =\$320permonth\hfill \\ \hfill \\ Servicerevenuefor5months=ServicerevenuepermonthXMonthsofserviceprovided\hfill \\ =\$320X5months\hfill \\ =\$1,600\left(earned\right)\hfill \\ \hfill \end{array}$

f)

Computation of Warranty Expense

$\begin{array}{l}WarrantyExpense=ServiceRevenueXWarrantyPercent\hfill \\ =\$57,760X2.5\%\hfill \\ =\$1,444\hfill \end{array}$

Adjustment of Estimated warranty liability
Unadjusted balance	$1,400
Add: Warranty Expense	$1,444
Adjusted balance	$2,844

g)

The Bug-Off Exterminator signed the long-term note payable with First National Bank on December 31, 2017 (current year), so the interest expense liable on December 31, 2018. Hence, no adjustment is required of interest expense and interest payable in the current year.

h) The ending inventory of merchandise determined in the additional information is same as the inventory provided in the unadjusted trial balance which means that the merchandise inventory balance is already adjusted.

Conclusion

Conclusion:

Thus, from the above we can get a clear idea of how to make the adjusted trial balance, adjusting entries and income statement.