Chapter 13, Problem 37P

To determine

Enter the adjusting journal entries of Company H for the year-end December 31, 20X6.

Explanation of Solution

Adjusted entry:

At the end of the financial year, the management of the company is required to make journal entries to reflect that the financial statement of the company is prepared as per the accrual concept. Adjusting entries are prepared to update the accounts so that they would reflect the correct figure as per the accrual concept.

Enter the adjusting journal entries of Company H for the year-end December 31, 20X6:

Date	Accounts title & explanation	Post ref.	Debit	Credit
1	Prepaid rent		$1,250
	Accumulated depreciation on machine and equipment		$2,020
	Contract payables		$35,400
	Rent expense		$3,750
	Machinery and equipment			$40,400
	Depreciation expenses			$2,020
	(the cancellable lease with no renewable option recorded and the correcting entry passed)
2	Profit on the construction of the building		$1,500
	Depreciation expenses		$317
	Accumulated depreciation			$317
	Building			$1,500
	(being the addition to building and correction to depreciation is recorded)
3	Land improvements		$5,000
	Depreciation expenses		$250
	Accumulated depreciation			$250
	Land			$5,000
	(being rectification of the paving and fencing expenses is recorded)
4	Accumulated depreciation		$20,300
	Loss on sale of machine		$2,800
	Machine & equipment			$22,000
	Depreciation expenses			$1,100
	(being the rectification of the disposal of the asset and depreciation is recorded)
5	Land		$100,000
	Building		$400,000
	Depreciation		$8,000
	Paid-in-capital (donated assets)			$500,000
	Accumulated depreciation			$8,000
	(being the increased value of the land and depreciation is recorded

Table: (1)

Working note 1:

Calculation of the profit on the construction of the building for case 1:

$\begin{array}{c}\text{Profit on construction of the building = Bid price }-\text{ Additional cost}\\ \text{= \$17,500 }-\text{ \$16,000}\\ \text{= \$1,500}\end{array}$

Working note 2:

Calculate the depreciation expenses for case 1:

Particulars	Amount
Actual depreciation	$667
Recorded depreciation	$350
Difference	$317

Table: (2)

Working note 3:

Calculate the actual depreciation and recorded depreciation for case 1:

$\begin{array}{c}\text{Actual depreciation = Additional cost }\times \frac{1}{\text{Actual life }}\times \frac{1}{2}\\ =\text{ \$16,000 }\times \frac{1}{12}\times \frac{1}{2}\\ =\text{ \$667}\end{array}$

Working note 4:

Calculate the recorded depreciation for case 1:

$\begin{array}{c}\text{Recorded depreciation = Bidding price }\times \frac{1}{\text{Recorded life }}\times \frac{1}{2}\\ =\text{ \$17,500 }\times \frac{1}{25}\times \frac{1}{2}\\ =\text{ \$350}\end{array}$

Working note 5:

Calculate the depreciation on land for case 2:

$\begin{array}{c}\text{Depreciation on land = Paving and fencing expenses }\times \frac{1}{\text{Life of asset}}\times \frac{1}{2}\\ =\text{ \$5,000 }\times \frac{1}{10}\times \frac{1}{2}\\ =\text{ \$250}\end{array}$

Working note 6:

Calculate the loss on sale for case 3:

Particulars	Amount
Machinery cost	$48,000
Less: Accumulated depreciation:
20X5	$16,800
20X6	$2,400
Unrecorded depreciation cost	$28,800
Less: Proceeds from sales	$26,000
Loss of sales	$2,800

Table: (3)

Working note 7:

Calculate the depreciation for case 4:

$\begin{array}{c}\text{Depreciation on building = Value of donated land }\times \frac{1}{\text{Life of asset}}\times \frac{1}{2}\\ =\text{ \$4,00,000 }\times \frac{1}{25}\times \frac{1}{2}\\ =\text{ \$8,000}\end{array}$