Chapter 3, Problem 12E

1.

To determine

Record the adjusting entry for deferred service revenue.

Answer to Problem 12E

Adjusting entry for unearned service revenue is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Deferred Revenue		2,000
	Service Revenue			2,000
	(To record the adjustment of revenue account.)

Table (1)

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Working Note:

Calculate the service revenue.

$\begin{array}{c}\left(\begin{array}{l}\text{Service revenue for }\\ \text{one month }\left(\text{December}\right)\end{array}\right)\text{=}\left(\frac{\text{Deferred revenue received in advance}}{\text{Number of months for which revenue is received}}\right)\\ =\frac{\$4,000}{2}\\ =\$2,000\end{array}$

Following is the rules of debit and credit of above transaction:

• Deferred Revenue is a liability account. The liability is decreased and therefore, debit deferred revenue account with $2,000.
• Service Revenue is a stockholders’ equity account. The service revenue increases the stockholder’s equity. Therefore, credit Service Revenue account with $2,000.

2.

To determine

Record the adjusting entry for prepaid insurance.

Answer to Problem 12E

Adjusting entry for prepaid Insurance is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Insurance expense $\left(\$13,200\times \frac{6}{12}\text{months}\right)$		6,600
	Prepaid Insurance			6,600
	(To record the insurance expense incurred at the end of the accounting year)

Table (2)

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Following is the rules of debit and credit of above transaction:

• Insurance expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Prepaid insurance is an asset account. There is a decrease in assets, therefore it is credited.

3.

To determine

Record the adjusting entry for salaries expense incurred at the end of the accounting year.

Answer to Problem 12E

Adjusting entry for salaries expense is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Salaries expense		3,000
	Salaries payable			3,000
	(To record the adjustment made for salaries payable.)

Table (3)

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Following is the rules of debit and credit of above transaction:

• Salaries expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Salaries payable is a liability account. There is a decrease in liability, therefore it is credited.

4.

To determine

Record the adjusting entry for interest expense incurred at the end of the accounting year.

Answer to Problem 12E

Adjusting entry for interest expense is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Interest Expense		250
	Interest Payable			250
	(To record the adjustment made for interest payable.)

Table (4)

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Working Note:

Calculate the interest expense.

$\begin{array}{c}\text{Interest expense=}\left(\begin{array}{l}\text{Principal amount}\times \text{Interest rate}\times \\ \frac{\text{Time period}\left(\text{September to December}\right)}{\text{Total months in a year}}\end{array}\right)\\ =\$15,000\times 0.10\times \frac{2}{12}\\ =\$250\end{array}$

Following is the rules of debit and credit of above transaction:

• Interest expense decreases the value of stockholders’ equity. Hence, it is debited.
• Interest payable increases the liability account. Therefore, credit interest payable account.

5.

To determine

Record the adjusting entry for supplies expense.

Answer to Problem 12E

Adjusting entry for supplies expense is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Supplies expense		3,900
	Supplies			3,900
	(To record the supplies expense incurred at the end of the accounting year)

Table (5)

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Working Note:

Calculate the supplies expense.

$\begin{array}{c}\text{Supplies expense = }\left\{\begin{array}{l}\text{Supplies at beginning of the year+Supplies purchased – }\\ \text{Supplies on hand at the end of first year}\end{array}\right\}\\ \text{=\$1,000+\$3,400–\$500}\\ \text{=\$3,900}\end{array}$

Following is the rules of debit and credit of above transaction:

• Supplies expense is an expense, and it decreases the value of stockholder’s equity. Therefore, it is debited.
• Supplies are the asset account. There is a decrease in assets, therefore it is credited.