Chapter 3, Problem 2BP

1.

To determine

Prepare the adjusting entries as of 31^st October 2015.

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.

Explanation of Solution

Prepare the adjusting entries as of 31^st October 2015.

a. Prepare the adjusting entries to record the cost of supplies used.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Office supplies expense		4,370
	Office supplies			4,370
	(To record the adjusting entry for cost of supplies used)

Table (1)

• Office supplies expense is an expense account and it is increased. Therefore, debit office supplies expense with $4,370.
• Office supplies are an asset account and it is decreased. Therefore, credit office supplies with $4,370.

Working note:

Calculate the amount of supplies used.

$\begin{array}{c}\text{Supplies used}=\text{Opening balance}+\text{Purchases}-\text{Supplies in hand}\\ =\$600+\$4,570-\$800\\ =\$4,370\end{array}$

b. Prepare the adjusting entry to record the annual insurance coverage cost.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Insurance expense		4,730
	Prepaid insurance			4,730
	(To record the adjusting entry for annual insurance coverage cost)

 Table (2)

• Insurance expense is an expense account and it is increased. Therefore, debit Insurance expense with $4,730.
• Prepaid insurance is an asset account and it is decreased. Therefore, credit prepaid insurance with $4,730.

Working note:

Calculate the amount of prepaid insurance.

Policy	Cost	Calculate the cost per month	Cost per month	Months Active in 2015	Cost for 2015
A	$6,000	$\left(\frac{\$6,000}{24\text{Months}}\right)$	$250	12	$3,000
B	$7,200	$\left(\frac{\$7,200}{36\text{Months}}\right)$	$200	7	$1,400
C	$1,320	$\left(\frac{\$1,320}{12\text{Months}}\right)$	$110	3	$330
Total					$4,730

Table (3)

Note: Cost for 2015 is calculated by multiplying Cost per month and number of months active in 2015.

c. Prepare the adjusting entry to record the unpaid wages.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Salaries expense		1,000
	Salaries payable			1,000
	(To record the adjusting entry unpaid wages)

 Table (4)

• Salaries expense is an expense account and it is increased. Therefore, debit Salaries expense with $1,000.
• Salaries payable is a liability account and it is increased. Therefore, credit salaries payable with $1,000.

Working note:

Calculate the amount of salaries payable.

$\begin{array}{c}\text{Salaries payable}=\text{Number of days}\times \text{Total amount}\\ =1\text{Day}\times \text{\$1,000}\\ =\$1,000\end{array}$

4. Prepare the adjusting entry to record the annual depreciation expense.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Depreciation expense, Building		5,400
	Accumulated depreciation, Building			5,400
	(To record the adjusting entry annual depreciation expense)

 Table (5)

• Depreciation is an expense account and it is increased. Therefore, debit depreciation expense with $5,400.
• Accumulated depreciation is a contra-asset and it decreases the value of asset. Therefore, credit accumulated depreciation account with $5,400.

Working note:

Calculate the amount of annual depreciation expense:

$\begin{array}{c}\text{Annual depreciation expense}=\left(\frac{\text{Cost of the asset}-\text{Salvage value}}{\text{Estimated life of the asset}}\right)\\ =\frac{\$175,000-\$40,000}{\text{25Years}}\\ =\$5,400\end{array}$

e. Prepare the adjusting entry to record the unpaid October rent.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Rent receivable		1,000
	Rent revenue			1,000
	(To record the adjusting entry for rent earned but unpaid for October rent)

Table (6)

• Rent receivable is an asset and it is increased. Therefore, debit rent receivable with $1,000.
• Rent revenue is a revenue account and it is increased. Therefore, credit rent earned with $1,000.

f. Prepare the adjusting entry to record the unearned rent for November and October.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Unearned rent revenue		1,450
	Rent revenue			1,450
	(To record the adjusting entry for unearned rent for November and October)

Table (7)

• Unearned rent revenue is a liability and it is decreased. Therefore, debit unearned rent revenue with $1,450
• Rent revenue is a revenue account and it is increased. Therefore, credit rent earned with $1,450.

Working note:

Calculate the amount of revenue earned for November and October.

$\begin{array}{c}\text{Rent earned}=\text{Number of months}\times \text{Rent per month}\\ =2\text{Months}\times \text{\$725}\\ =\$1,450\end{array}$

2.

To determine

Prepare the journal entries to record the first subsequent cash transaction for c and e.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Prepare the journal entry to record the cash payment made for (c):

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
November 7	Salaries payable		1,000
	Salaries expense(6)		4,000
	Cash			5,000
	(To record the payment of accrued and current salaries)

Table (8)

• Salaries payable is a liability and it is decreased. Therefore, debit salaries payable with $1,000.
• Salaries expense is an expense account and it is increased. Therefore, debit Salaries expense with $4,000.
• Cash is an asset account and it is decreased. Therefore, credit cash with $5,000.

Working note:

$\begin{array}{c}\text{Salaries expense}=\text{Number of days}\times \text{Total salaries}\\ =4\text{Days}\times \text{\$1,000}\\ =4,000\end{array}$

Prepare the journal entry to record the amount of rent due for past two months.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
November15	Cash		2,000
	Rent receivable			1,000
	Rent revenue			1,000
	(To record the payment of amount of rent due for two months)

Table (9)

• Cash is an asset account and it is increased. Therefore, debit cash with $2,000.
• Rent revenue is a revenue account and it is increased. Therefore, credit rent earned with $1,000.
• Rent receivable is an asset and it is decreased. Therefore, credit rent receivable with $1,000.