Chapter 12, Problem 2PB

On June 1, 2019, Raquel Ramirez established her own advertising firm. Selected transactions for the first few days of June follow.

1. 1. Record the transactions on page 1 of the general journal. Omit descriptions. Assume that the firm initially records prepaid expenses as assets and unearned income as a liability.
2. 2. Record the adjusting journal entries that must be made on June 30, 2019, on page 2 of the general journal. Omit descriptions.

Analyze: At the end of calendar year 2019, how much of the rent paid on June 1 will have been charged to expense?

To determine

Pass the journal entries as on June 1.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit: A debit, is an accounting term that refers to the left side of an account. The term debit is be denoted by (Dr). The recording amount on the left side of the account is known as debiting.

Credit: A credit, is an accounting term that refers to the right side of an account. The term credit is denoted as (Cr). The recording amount on the right side of the account is known as crediting.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all the increase in the assets, the expenses and the dividends, all the decrease in liabilities, revenues and the stockholders’ equities.
• Credit, all the increase in the liabilities, the revenues, and the stockholders’ equities, and all decreases in the assets, and the expenses.

Pass the journal entries for the given transactions:

	General Journal			Page - 1
Date	Description	Post	Debit	Credit
2019
June 1	Prepaid Rent		$15,000
	Cash			$15,000
	(To record the rent paid in advance with check 101)
June 1	Cash		$17,550
	Prepaid Interest		$450
	Notes Payable			$18,000
	(To record the interest paid in advance)

Table (1)

	General Journal			Page - 1
Date	Description	Post Ref.	Debit	Credit
2019
June 1	Cash		$78,000
	Unearned Advertising Fee			$78,000
	(To record the fees received in advance)
June 1	Office Equipment		$17,200
	Notes Payable			$17,200
	(To record equipment purchased on account)
June 1	Prepaid Insurance		$1,680
	Cash			$1,680
	(To record insurance paid in advance using the check 102)
June 3	Office Furniture		$17,400
	Cash			$10,000
	Accounts payable			$7,400
	(To record furniture purchased on account after making a part payment using the check 103)
June 5	Office Supplies		$1,910
	Cash			$1,910
	(To record the purchase of supplies using the check 104)

Table (2)

To determine

Pass the adjusting entries as on June 30, and compute the amount of rent expensed by the year end.

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 entries for the given transactions:

	General Journal			Page - 2
Date	Description	Post Ref.	Debit	Credit
2019
June 30	Rent expense		$1,250
	Prepaid Rent			$1,250
	(To record the prepaid rent)
June 30	Interest expense		$150
	Prepaid Interest			$150
	(To record the prepaid interest)
June 30	Unearned Advertising Fees		$6,500
	Advertising Fees			$6,500
	(To record the Advertising fees earned)
June 30	Interest expense		$86
	Interest Payable			$86
	(To record the interest payable)
June 30	Depreciation Expense - Office Equipment		$270
	Accumulated Depreciation - Office Equipment			$270
	(To record the depreciation on equipment)
June 30	Insurance expense		$140
	Prepaid Insurance			$140
	(To record the prepaid insurance)

Table (3)

	General Journal			Page - 2
Date	Description	Post Ref.	Debit	Credit
2019
June 30	Depreciation Expense - Office Furniture		$270
	Accumulated Depreciation - Office Furniture			$270
	(To record the depreciation on furniture)
June 30	Office Supplies Expense		$1,060
	Office Supplies			$1,060
	(To record the supplies)

Table (4)

The amount of rent expensed or charged to the Rent Expense Account will be $8,750 by the end of the year.

Working note:

Calculate the amount of rent expensed:

$\begin{array}{c}\text{Rent expense = Prepaid rent }\times \left(\begin{array}{l}\text{Months of }\\ \text{rent expired}\end{array}\right)\\ =\frac{\$15,000}{12}\times 7\\ =\$1,250\times 7\\ \text{= \$8,750}\end{array}$