Chapter 3, Problem 2PSA

1.

To determine

To prepare: Adjusting entries.

Answer to Problem 2PSA

Solution:

a.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Office Supplies Expenses		14,846
	Office Supplies			14,846
	(Being office supplies used during the year)

Explanation of Solution

• Office supplies expense is an expense. Since, office supply expense reduce equity, office supply expense account is debited.
• Office supplies are an asset. Since office supply has decreased due to usage, it reduces asset. Hence, it is credited.

Working Notes:

Calculation of office supplies used,

$\begin{array}{c}\text{Office}\text{Supplies}\text{Used}=\left(\begin{array}{l}\text{Opening}\text{Office}\text{Supplies}+\text{Purchases}\\ -\text{Closing}\text{Office}\text{Supplies}\end{array}\right)\\ =\text{\$4,000}+\text{\$13,400}-\$2,554\\ =\$14,846\end{array}$

b.

Date	Account Title and Explanation	Post ref.	Debit ($)	Credit ($)
Dec 31	Insurance Expenses		7,120
	Prepaid insurance			7,120
	(Being Insurance paid in advance)

• Insurance expense is an expense. Since, it reduce equity, it is debited.
• Prepaid insurance is an asset. Since, we have used up prepaid insurance worth $7,120, it reduce our asset. Hence, it is debited.

Working note:

Calculation of amount of insurance of policy A,
$\begin{array}{c}\text{Policy}\text{A}=\frac{\text{Number}\text{of}\text{months}\text{policy}\text{used}}{\text{Total}\text{duration}\text{of}\text{policy}}\times \text{Cost}\\ =\frac{3}{24}\times \$14,400\\ =\$1,800\end{array}$

Calculation of amount of insurance of policy B,

$\begin{array}{c}\text{Policy}\text{B}=\frac{\text{Number}\text{of}\text{months}\text{policy}\text{used}}{\text{Total}\text{duration}\text{of}\text{policy}}\times \text{Cost}\\ =\frac{12}{36}\times \$12,960\\ =\$4,320\end{array}$

Calculation of amount of insurance of policy C,

$\begin{array}{c}\text{Policy}\text{C}=\frac{\text{Number}\text{of}\text{months}\text{policy}\text{used}}{\text{Total}\text{duration}\text{of}\text{policy}}\times \text{Cost}\\ =\frac{5}{12}\times \$2,400\\ =\$1,000\end{array}$

Calculation of total amount of policy,

$\begin{array}{c}\text{Total}\text{Amount}\text{of}\text{Policy}=\text{Policy}\text{A}+\text{Policy}\text{B}+\text{Policy}\text{C}\\ =\$1,800+\$4,320+\$1,000\\ =\$7,120\end{array}$

c.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Salaries Expenses		3,920
	Salaries payable			3,920
	(Being salary accrued but not paid)

• Salaries expense is an expense. Since it reduces equity, it is debited.
• Salaries payable is a liability. Since, salaries expense has occurred but not paid yet, liability is increased. So, credit interest payable account.

Working Notes:

Calculation of accrued salary,

$\begin{array}{c}\text{Accrued}\text{Salary}=\text{Daily}\text{Salary}\times \text{Number}\text{of}\text{days}\text{salary}\text{not}\text{paid}\text{for}\\ =\text{\$1,960}\times 2\\ =\$3,920\end{array}$

d.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Depreciation Expense		30,500
	Accumulated Depreciation-Building			30,500
	(Being to record the depreciation expense.)

• Depreciation expense is an expense. Since, it reduce equity, it is debited.
• Accumulated depreciation-building is a contra asset account. Since, it has normal credit balance; credit accumulated depreciation-building account.

e.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Rent receivable		3,000
	Rent Earned			3,000
	(Being rent earned but not received yet))

• Rent receivable is an asset. Since, revenue is earned but not recorded, the asset is increased. Hence debit Accounts Receivable account.
• Rent is revenue. Since, revenue increase equity. Hence credit Rent Earned account.

f.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Unearned rent		5,600
	Rent Earned			5,600
	(Being rent earned adjusted

• Unearned rent is a liability. Since, two months period has expired, liability is reduced. Hence, debit unearned rent account.
• Rent is an income. Since, rent is earned. Since, income is increased, debit rent earned account.

2.

To determine

To prepare: Journal entries for January, 2018.

Answer to Problem 2PSA

Solution:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
January 6	Salaries payable		3,920
	Salaries Expense		5,880
	Cash			9,700
	(Being salary paid)

Explanation of Solution

• Salaries payable is a liability. The liability has been paid. Since, liability is decreased, debit salaries payable account.
• Salaries expense is an expense. Since, expense reduces equity, salaries expense account is debited.
• Cash is an asset. Since, cash is used in paying salaries, it is decreased. Hence, credit cash account.

Working Notes:

$\begin{array}{c}\text{Accrued}\text{salary}=\text{Daily}\text{salary}\times \text{Number}\text{of}\text{days}\text{salary}\text{not}\text{paid}\text{for}\\ \text{=}\text{\$1,960}\times 2\\ =\$3,920\end{array}$

$\begin{array}{c}\text{Salary}\text{Expense}=\text{Daily}\text{Salary}\times \text{Number}\text{of}\text{days}\text{employees}\text{worked}\text{in}\text{january}\\ =\$1,960\times 3\\ =\$5,880\end{array}$

e.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
January 15	Cash		6,000
	Rent receivable			3,000
	Rent Earned			3,000
	(Being rent received))

• Cash is an asset. Since, rent is earned and received, it increases value of asset. Hence, cash is debited.
• Rent receivable is an asset. Since, Rent is received, it reduces asset. Hence, credit rent receivable account.
• Rent earned is an income. Since, income is earned, it increases income. Hence it is credited.