Chapter 27, Problem 3SEB

ADJUSTING JOURNAL ENTRIES FOR A MANUFACTURING BUSINESS Prepare the December 31 adjusting journal entries for Ortiz Company. Data for the end of the year adjustments are as follows:

To determine

Prepare the necessary adjusting entries of Company O for the year ended December 31.

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.

Factory Overhead Cost:

Factory overhead cost is the cost other than the direct material cost, and the direct labor cost which is not directly involved in the production of converting the raw materials to the finished products. If the direct material cost or direct labor cost does not constitute the major portion of the total cost of the finished product, then it may be classified as the factory overhead cost. For example: Cost of repairing, and maintaining factory equipment.

Prepare an adjusting entry to record the sales return from the customer during the year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Sales return and allowances		770
	Customer refunds payable			770
	(To record the sales return from the customer)

Table (1)

• ■ Sales return and allowances (contra-revenue) is a component of owner’s equity, and it decreases the value of owner’s equity. Hence, debit the sales return and allowances account with $770.
• ■ Customer refund payable is a liability account, and it increases the value of liabilities. Hence, credit the customer refund payable account with $770.

Prepare an adjusting entry to record the expected return of cost of goods sold during the year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Estimated returns inventory		490
	Cost of goods sold			490
	(To record the expected return of cost of goods sold)

Table (2)

• ■ Expected return in inventory is an asset account, and it increases the value of asset. Hence, debit the expected return in inventory account with $490.
• ■ Cost of goods sold is an expense account, and there is a decrease in the value of expense. Hence, credit the cost of goods sold with $490.

Prepare an adjusting entry to record the factory overhead applied to work in process ending inventory.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Work in process inventory		7,780
	Factory overheads			7,780
	(To record the transfer of factory overheads to work in process)

Table (3)

• ■ Work in process inventory is an asset account, and it increases the value of asset. Hence, debit the work in process inventory account with $7,780.
• ■ Factory overhead (expense) is a component of owner’s equity, and there is a decrease in the value of expense. Hence, credit the factory overhead account with $7,780.

Prepare an adjusting entry to record the interest revenue earned during the year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Interest receivable		435
	Interest revenue			435
	(To record the interest revenue earned at the end of the year)

Table (4)

• ■ Interest receivable is an asset account, and it increases the value of asset. Hence, debit the interest receivable account with $435.
• ■ Interest revenue is a component of owner’s equity, and it increases the value of owner’s equity. Hence, credit the interest revenue account with $435.

Prepare an adjusting entry to record the bad debt expense incurred during the year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Bad debt expense		3,876
	Allowance for doubtful account			3,876
	(To record the bad debt expense estimated at the end of the year)

Table (5)

• ■ Bad expense is component of owner’ equity and it decreases the value of owner’s equity. Hence, debit the bad expense with $3,876.
• ■ Allowance for doubtful accounts is a contra-asset account, and it decreases the value of assets. Hence, credit the allowance for doubtful account with $3,876.

Prepare an adjusting entry to record the office supplies expense incurred during the year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Office supplies expense		750
	Office supplies			750
	(To adjust the office supplies expense incurred at the end of the accounting year)

Table (6)

• ■ Offices supplies expense is component of shareholders’ equity, and it decreases the value of owner’s equity. Hence, debit the office supplies expense with $750.
• ■ Office supplies are asset account, and it decreases the value of assets. Hence, credit the office supplies account with $750.

Prepare an adjusting entry to record the factory supplies used during the year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Factory overhead (factory supplies expense)		4,160
	Factory supplies			4,160
	(To record the supplies expense incurred at the end of the year)

Table (7)

• ■ Factory overhead (expense) is a component of owner’s equity, and there is an increase in the value of expense. Hence, debit the factory overhead account with $4,160.
• ■ Factory supplies are asset account, and it decreases the value of asset. Hence, credit the factory overhead account with $4,160.

Prepare an adjusting entry to record the insurance expense on the factory building and equipment incurred during the year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Factory overhead (insurance expense-factory and equipment)		3,200
	Prepaid insurance			3,200
	(To record the insurance expense incurred at the end of the year)

Table (8)

• ■ Factory overhead (insurance expense) is a component of owner’s equity, and there is an increase in the value of expense. Hence, debit the factory overhead account with $3,200.
• ■ Prepaid insurance is an asset account, and it decreases the value of asset. Hence, credit the prepaid insurance account with $3,200.

Prepare an adjusting entry to record the depreciation expense on building incurred at the end of the accounting year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Factory overhead (depreciation expense)		6,800
	Accumulated depreciation-Factory building			6,800
	(To record the depreciation expense incurred at the end of the year)

Table (9)

• ■ Factory overhead (depreciation expense) is a component of owner’s equity, and there is an increase in the value of expenses. Hence, debit the factory overhead account with $6,800.
• ■ Accumulated depreciation-factory building is a contra-asset account, and it decreases the value of asset. Hence, credit the accumulated depreciation-Factory building account with $6,800.

Prepare an adjusting entry to record the depreciation expense on equipment incurred at the end of the accounting year.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
December 31	Factory overhead (depreciation expense)		4,200
	Accumulated depreciation-Factory equipment			4,200
	(To record the depreciation expense incurred at the end of the year)

Table (10)

• ■ Factory overhead (depreciation expense) is a component of owner’s equity, and there is an increase in the value of expenses. Hence, debit the factory overhead account with $4,200.
• ■ Accumulated depreciation-factory equipment is a contra-asset account, and it decreases the value of asset. Hence, credit the accumulated depreciation-factory equipment account with $4,200.