Chapter 12, Problem 1PA

To determine

Pass the adjusting entries for the transactions of Company SC as on June 30, 2019.

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.

Pass the adjusting entry for the given transaction:

	General Journal			Page -18
Date	Description	Post Ref.	Debit	Credit
2019
June 30	Income Summary		$8,300
	Merchandise Inventory			$8,300
	(To record the beginning inventory)
June 30	Merchandise Inventory		$8,800
	Income Summary			$8,800
	(To record the closing inventory)
June 30	Unearned Seminar Fees (1)		$2,720
	Seminar Fees Income			$2,720
	(To record the unearned revenue)
June 30	Insurance expense (2)		$5,600
	Prepaid Insurance			$5,600
	(To record the prepaid insurance)
June 30	Depreciation Expense - Store Equipment (3)		$675
	Accumulated Depreciation - Store Equipment			$675
	(To record the depreciation on equipment)

Table (1)

	General Journal			Page - 18
Date	Description	Post Ref.	Debit	Credit
2019
June 30	Wage Expense		$330
	Wages Payable			$330
	(To record the wages payable)
June 30	Payroll Taxes Expense		$37.13
	Federal Unemployment Tax Payable			$9.90
	State Unemployment Tax Payable			$1.98
	Social Security Tax Payable			$4.79
	Medicare Tax Payable			$20.46
	(To record the taxes on accrued wages)
June 30	Uncollectible Accounts Expense (4)		$28,000
	Allowance for Doubtful accounts			$28,000
	(To record the uncollectible account)
June 30	Rent expense (5)		$5,200
	Prepaid Rent			$5,200
	(To record the prepaid rent)
June 30	Supplies Expense (6)		$290
	Supplies			$290
	(To record the supplies)
June 30	Interest expense (7)		$41
	Interest Payable			$41
	(To record the interest payable)

Table (2)

Working note (1):

Calculate the Unearned Seminar Fees:

$\begin{array}{c}\begin{array}{l}\text{Unearned }\\ \text{Seminar Fees}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Cash received }\\ \text{per seminar}\end{array}\right)\times \text{ 2 seminars}\\ =\frac{\$6,800}{\text{5 seminars}}\times \text{2 seminars}\\ =\text{ \$1,360 }\times \text{2 seminars}\\ \text{= \$2,720}\end{array}$

Working note (2):

Calculate the Insurance expense:

$\begin{array}{c}\text{Insurance expense = Prepaid insurance }\times \left(\begin{array}{l}\text{Months of }\\ \text{Insurance expired}\end{array}\right)\\ =\frac{\$16,800}{6}\times 2\\ =\$2,800\times 2\\ \text{= \$5,600}\end{array}$

Working note (3):

Calculate the Depreciation Expense - Store Equipment:

$\begin{array}{c}\begin{array}{l}\text{Depreciation Expense }\\ \text{for Store Equipment}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Cost of equipment }\\ -\text{ salvage value}\end{array}\right)\text{per month}\times \text{ Months of use}\\ =\left(\frac{\$11,380-\$580}{48\text{ months}}\right)\times \text{3 months}\\ =\text{ \$225 }\times \text{3 months}\\ \text{= \$675}\end{array}$

Working note (4):

Calculate the Uncollectible Accounts Expense:

$\begin{array}{c}\begin{array}{l}\text{Uncollectible }\\ \text{Accounts Expense}\end{array}\}\text{ = Sales}\times \text{ Uncollectible Accounts Percentage}\\ =\$2,800,000\times \text{1\%}\\ =\text{ \$28,000}\end{array}$

Working note (5):

Calculate the Rent expense:

$\begin{array}{c}\text{Rent expense = Prepaid rent }\times \left(\begin{array}{l}\text{Months of }\\ \text{rent expired}\end{array}\right)\\ =\frac{\$7,800}{6}\times 4\\ =\$1,300\times 4\\ \text{= \$5,200}\end{array}$

Working note (6):

Calculate the Supplies Expense:

$\begin{array}{c}\text{Supplies Expense = Supplies at beginning }-\text{ Closing Supplies}\\ =\text{ \$480}-\$190\\ \text{= \$290}\end{array}$

Working note (7):

Calculate the Interest expense:

$\begin{array}{c}\text{Interest expense = Principal }\times \text{ Rate }\times \text{ Time factor}\\ =\text{\$8,200 }\times \text{ 6\% }\times \frac{1}{12}\\ \text{= \$41}\end{array}$

Calculate the balance amount in the prepaid rent.

$\begin{array}{c}\text{Prepaid rent balance}=\left(\text{Beginning balance}-\text{Prepaid rent expired}\right)\\ =\$7,800-\$5,200\\ =\$2,600\end{array}$

Conclusion

The balance of the prepaid rent would be $2,600.