Chapter 3, Problem 2APSA

To determine

Concept Introduction:

Adjusted Journal Entries: Adjustment entries are just like the journal entries and are basic for accounting. They are made in the closing period to adjust the expenses and incomes in the period in which they occurred. To show the true and fair financial position, it is essential to pass the adjustment entries. This includes the adjustments for the accrued interest, unearned revenues and the prepaid expenses. They can be termed as the closing entries as well from the accounting perspective.

To Prepare:

1. Adjusted journal Entries as of 31^st December, 2017

Explanation of Solution

1. Given: Opening balance of office supplies is $4,000

Purchased during the year is $13,400

Closing balance of office supplies is $2,554

$\begin{array}{l}Office Supplies Expense=Opening balance of office supplies+Office suppliespurchasedduringtheyear\\ -Closingbalanceofofficesupplies\\ =\$4,000+\$13,400-\$2,554\\ =\$14,846\end{array}$

Journal Entry should be:

Particulars	Debits	Credits
Office supplies Expense	$14,846
To Office Supplies		$14,846

It reflects that the office supplies, an asset of the company, used during the year amounts to $14,846. Due to this, asset (office supplies) is decreased by 14,846 and it simultaneously hits the profit and loss account as expense by the same amount in the form of office supplies expense.

2. Calculation of insurance expense out of prepaid insurance as of 31^st December,, 2017

$\begin{array}{l}\text{Insurance expensed out during the year = Pepaid insurance/Months of coverage}\\ \text{ × Months coverage in the current year}\\ Policy A\\ =\$14,400/24\times 3\\ =\$1,800\\ \\ Policy B\\ =\$12,960/36\times 12\\ =\$4,320\\ \\ Policy C\\ =\$2,400/12\times 5\\ =\$1,000\end{array}$

Journal Entry should be:

Particulars	Debits	Credits
Insurance Expense	$7,120
To Prepaid Insurance		$7,120

It reflects that out of the prepaid insurance, Arnez Company expensed out $7,120 as insurance expense. Due to this transaction, the Company’s asset (prepaid Insurance) was decreased by $7,120 and simultaneously it hits the profit and loss account on the expense side by the same amount as insurance expense.

3. Calculation of employee’s salaries to be paid on Monday, 6^th January, 2018.

$\begin{array}{l}Employee\text{'}s salaries to be paid=Salariesperday\times No of working daysinaweek\\ =\$1,960\times 5\\ =\$9,800\end{array}$

Journal Entry should be:

Particulars	Debits	Credits
Salaries Expense	$9,800
To Salaries Payable		$9,800

Due to this transaction, Company’s liabilities in the form of salaries payable has increased by $9,800 as it will be payable on 6^th January, 2018 i.e., after the end of the financial year and simultaneously it hits the profit and loss account of the financial year ending 31^st December, 2017 as salaries expense by $9,800.

4. Calculation of annual depreciation on building.

$\begin{array}{l}Annual depreciation on building=(Cost price of building-SalvageValue)\\ /ExpectedUsefullife\\ =(\$960,000-\$45,000)/30\\ =\$30,500\end{array}$

Journal entry should be:

Particulars	Debits	Credits
Depreciation Expense-Building	$9,800
To Accumulated Depreciation-Building		$9,800

The effect of this transaction reflects that the value of building is depreciated by $30,500 and charged to profit and loss account as depreciation expense on building.

5. Journal Entry of tenant falling to pay rent of December month on time

Particulars	Debits	Credits
Rent receivable	$3,000
To Rent Earned		$3,000

The effect of this transaction is that the asset (Rent Receivable) is created by the $3,000 and it appears in the Balance Sheet on the asset side and shows recovery to be made from tenant and simultaneously, income side of profit and loss account is increased by the same amount.

6. Journal Entry of five month's rent received in advance.
   
   

Particulars	Debits	Credits
Cash	$14,000
To Unearned Rent		$14,000

The effect of above transaction is that the unearned rent should be shown on the liabilities side of the Balance Sheet which reflects the services to be provided to the tenant against the rent received and simultaneously, company’s assets are increased by the same amount.

2. Pass journal entries to record the first subsequent cash transactions in 2018 for parts c and e.

S. No.	Date	Particulars	Debits	Credits
c	06th January, 2018	Salaries Payable	$9,800
		To Cash		$9,800
e	15th January, 2018	Cash	$3,000
		To rent Receivable		$3,000

Hence, the journal entries of cash transactions in 2018 are prepared.