Survey Of Accounting
Survey Of Accounting
5th Edition
ISBN: 9781259631122
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Chapter 2, Problem 33P

Problem 2-37A Effect of adjusting entries on the accounting equation

CHECK FIGURES

d. Adjustment amount: $4,000

Required

Each of the following independent events requires a year-end adjusting entry. Show how each event and its related adjusting entry affect the accounting equation. Assume a December 31 closing date. The first event is shown as an example.

Chapter 2, Problem 33P, Problem 2-37A Effect of adjusting entries on the accounting equation CHECK FIGURES d. Adjustment

  1. a. Paid $4,800 cash in advance on October 1 for a one-year insurance policy.
  2. b. Received a $3,600 cash advance for a contract to provide services in the future. The contract required a one-year commitment, starting April 1.
  3. c. Purchased $1,200 of supplies on account. At year’s end, $175 of supplies remained on hand.
  4. d. Paid $9,600 cash in advance on August 1 for a one-year lease on office space.
Expert Solution & Answer
Check Mark
To determine

Show the manner in which the events and its related adjusting entries would affect the accounting equation.

Answer to Problem 33P

Prepare a table exhibiting the events and the adjusting entries that would affect the accounting equation are as follows:

Company
Accounting equation
Event / Adjustment Total Assets = Liabilities + Stockholder's Equity
Cash   Other assets       Common Stock Retained Earnings
a. (Given) ($4,800) + $4,800 = NA + NA NA
Adjustment (1) NA + ($1,200) = NA + NA ($1,200)
                 
 b. $3,600 + NA = $3,600 + NA NA
Adjustment (2) NA + NA = ($2,700) + NA $2,700
                 
c. NA + $1,200 = $1,200 + NA NA
Adjustment (3) NA + ($1,025) = NA + NA ($1,025)
                 
d. ($9,600) + $9,600 = NA + NA NA
Adjustment (4) NA + ($4,000) = NA + NA ($4,000)

Table (1)

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

Assets= Liabilities+Stockholders' equity

The effects of the events and adjustments can be explained as follows:

a. Paid $4,800 cash in advance on October 1 for a one-year insurance policy.

The cash account (asset) is decreased by $4,800 and the prepaid insurance (asset) account is increased by $4,800. When the insurance expense is recognized for 3 months at the end of the year, the prepaid insurance (asset) account is decreased by $1,200 (1) and amount of insurance expense (expense account) is increased by $1,200. Increase in insurance expense account decreases the retained earnings by the same amount.

b. Received a $3,600 cash advance for a contract to provide services in the future. The contract required a one-year commitment, starting April 1.

The cash account (asset) is increased by $3,600 and the unearned revenue account (liability) is increased by $3,600. The revenue would be recognized when the services are provided to the client. After providing the service for 9 months from April 1 to December 31, revenue should be recognized for 9 months at the end of the year. While recognizing the earned unearned revenue, the unearned revenue (liability) is decreased by $2,700 (2) and the revenue account is increased by $2,700. Increase in revenue account increases the retained earnings by the same amount.

c. Purchased $1,200 of supplies on account. At year’s end, $175 of supplies remained on hand.

The supplies account (asset) is increased by $1,200 and the accounts payable (liability) account is increased by $1,200. When the supplies expenses are recognized, the supplies account (asset) is decreased by $1,025 (3) and the expense account is increased by $1,025. Increase in the expense account decreases the retained earnings by the same amount.

d. Paid $9,600 cash in advance on August 1 for a one-year lease on office space.

The cash account (asset) is decreased by $9,600 and the prepaid rent (asset) account is increased by $9,600. When the rent expense is recognized at the end of the year for 3 months, the prepaid rent (asset) account is decreased by $4,000 (4) and amount of insurance expense (expense account) is increased by $4,000. Increase in insurance expense account decreases the retained earnings by the same amount.

Working Note:

Determine the amount of prepaid insurance recognized at the end of year.

Prepaid insurance= Insurance expense×Number of months expiredMonths in a year=$4,800×312=$1,200 (1)

Determine the amount of revenue recognized at the end of year.

Unearned revenue= Revenue income×Number of months revenue earnedMonths in a year=$3,600×912=$2,700 (2)

Determine the amount of supplies used at the end of year.

Supplies used= (Supplies purchased during the year) (Supplies at the end of year)=$1,200$175=$1,075 (3)

Determine the amount of prepaid rent recognized at the end of year.

Prepaid rent= Rent expense×Months usedMonths in a year=$9,600×512=$4,000 (4)

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Assume all adjusting entries are done at year-end only

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