Chapter 11, Problem 1CP

Adjusting Entries

Two months (July and August) have passed since Ms. Valli has seen the financial statements for All About You Spa. It is time to begin their preparation. Several accounts need adjusting. These include the accounts you adjusted in Chapter 4 as well as any accounts involved with merchandising.

Adjusting Entry Information

Merchandise Inventory Adjustment (a)

A physical count of inventory was taken, and the inventory was valued at $11,310.

Supplies Adjustments (b) and (c)

A physical count has been taken of the two supplies accounts. The values of the remaining inventories of supplies are as follows:

Prepaid Insurance Adjustment (d)

A review of the insurance records determined that $233.34 in liability insurance coverage had been used during the last two months.

Depreciation Adjustments (e) and (f)

Estimated depreciation amounts for the two equipment accounts are as follows:

Wages Expense/Wages Payable Adjustment

There is no need for a Wages Expense/Wages Payable adjustment because the end of the fiscal period did not come in the middle of a pay period.

Required

1. 1. Complete a work sheet (if required by your instructor). Ignore this step if using CLGL.
2. 2. Journalize the adjusting entries in the general journal.
   • If you are preparing the adjusting entries with Working Papers, enter your transactions beginning on page 16.
3. 3. Post the adjusting entries to the general ledger accounts.
   • Ignore this step if you are using CLGL.
4. 4. Prepare an adjusted trial balance as of August 31, 20--.

To determine

Prepare worksheet for A Spa as of August.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Worksheet: A worksheet is a spreadsheet used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Prepare worksheet for A Spa.

Table (1)

To determine

Journalize the adjusting entries in the general journal

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

General journal: This is a journal used to record infrequent transactions like adjusting entries, closing entries, accounting errors, sale of assets, or bad debts expense.

Journalize the adjusting entries.

 

Table (2)

Description:

1. a) Merchandise Inventory is an asset (current) account and it is increased. Therefore, debit the merchandise inventory. Income summary is a temporary account and it is closed. Therefore, credit the income summary.
2. b) Office supplies expense is an expense account and it is increased. Therefore, debit the Office supplies expense. Office supplies are a liability account and it is increased. Therefore, credit the Office supplies.
3. c) Spa supplies expense is revenue account and it is increased. Therefore, debit the Spa supplies expense. Spa supplies (on hand) are an asset (current) account and it is decreased. Therefore, credit the Spa supplies (on hand).
4. d) Insurance expense is an expense (operating) account and it is increased. Therefore, debit the insurance expense. Prepaid insurance is an asset (current) account and it is decreased. Therefore, credit the prepaid insurance.
5. e) Depreciation expense (on office equipment) is an expense account and it is increased. Therefore, debit the depreciation expense. Accumulated depreciation (on office equipment)   is a contra asset account and it is decreased. Therefore, credit the accumulated depreciation.
6. f) Depreciation expense (on spa equipment) is an expense account and it is increased. Therefore, debit the depreciation expense. Accumulated depreciation (on spa equipment)   is a contra asset account and it is decreased. Therefore, credit the accumulated depreciation.

To determine

Post the adjusting entries in general ledger.

Explanation of Solution

Posting of transaction: The process of transferring the journalized transactions into the accounts of the ledger is known as posting of transaction.

Post the prepared journals to the general ledger:

General ledger
Account: Cash							Account No: 111
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				44,742.45
Account: Accounts receivable							Account No: 113
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				5,335.01
Account: Office supplies							Account No: 114
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				234
		Adjusting	J16		134	100
Account: Spa supplies							Account No: 115
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				730
		Adjusting	J16		305	425
Account: Merchandise inventory							Account No: 116
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Adjusting	J16	11,310		11,310
Account: Prepaid insurance							Account No: 117
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				700
		Adjusting	J16		233.34	466.66
Account: Office equipment							Account No: 124
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				1,740
Account: Accumulated depreciation, Office equipment							Account No: 125
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				13.25
		Adjusting	J11		30	43.25
Account: Spa equipment							Account No: 128
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				19,816
Account: Accumulated depreciation, Spa equipment							Account No: 129
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					150
		Adjusting	J16		660.54		810.54
Account: Accounts payable							Account No: 211
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					14,919

Account: Wages payable							Account No: 212
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31
Account: sales tax payable							Account No: 215
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					1,076.4
Account: Mr. A.V, capital							Account No: 311
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					56,271.75
Account: Mr. A.V, Drawing							Account No: 115
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				4,500
Account: Income summary							Account No: 313
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Adjusting	J16		11,310		11,310
Account: Income from services							Account No: 411
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					24,288.78
Account: Merchandise sales							Account No: 412
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					28,261.54
Account: Sales discount							Account No: 413
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				17.46
Account: Sales returns and allowances							Account No: 414
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				70
Account: Purchase							Account No: 511
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				23,344
Account: Purchase discount							Account No: 512
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					82
Account: Purchase returns and allowances							Account No: 513
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance					168

Account: Freight in							Account No: 515
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				975
Account: Wages expense							Account No: 611
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				18,260
Account: Rent expense							Account No: 612
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				3,000
Account: Office supplies expense							Account No: 613
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Adjusting	J16	134		134
Account: Spa supplies expense							Account No: 614
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Adjusting	J16	305		305
Account: Laundry expense							Account No: 615
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				110
Account: Advertising expense							Account No: 616
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				555
Account: Utilities expense							Account No: 617
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				701
Account: Insurance expense							Account No: 618
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Adjusting	J16	233.34		233.34
Account: Depreciation expense, Office equipment							Account No: 619
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Adjusting	J16	30		30
Account: Depreciation expense, Spa equipment							Account No: 620
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Adjusting	J16	660.54		660.54
Account: Promotional expense							Account No: 630
Date		Item	Post ref	Debit	Credit	Balance
20___				($)	($)	Debit ($)	Credit($)
Aug.	31	Balance				400.8

Table (3)

To determine

Prepare a trail balance for 31^st August.

Explanation of Solution

Trial balance: Trial balance is a summary of all the ledger accounts balances presented in a tabular form with two column, debit and credit. It checks the mathematical accuracy of the ledger postings and helps preparing the final accounts.

Prepare a trial balance.

A Spa
Trail balance (Adjusted)
August 31, 20__
Account name	Debit ($)	Credit($)
Cash	44,742.45
Accounts receivable	5,335
Office supplies	100
Spa supplies	425
Merchandise inventory	11,310
Prepaid insurance	466.66
Office equipment	1,740
Accumulated depreciation, office equipment		43.25
Spa equipment	19,816
Accumulated depreciation, spa equipment		810.54
Accounts payable		14,919
Sales tax payable		1,076.4
Mr. A.V, capital		56,271.75
Mr. A.V, drawings	4,500
Income summary		11,310
Income from services		24,288.78
Merchandise sales		28,261.54
Sales discounts	17.46
Sales returns and allowances	70
Purchases	23,344
Purchases discounts		82
Purchases returns and allowances		168
Freight in	975
Wages expense	18,260
Rent expense	3,000
Office supplies expense	134
Spa supplies expense	305
Laundry expense	110
Advertising expense	555
Utilities expense	701
Insurance expense	233.34
Depreciation expense, office equipment	30
Depreciation expense, spa equipment	660.54
Promotional expense	400.8
	137,231.26	137,231.26

Table (4)