Chapter 3, Problem 3.3APR

(1)

To determine

Adjusting Entries

Adjusting entries indicates those entries, which are passed in the books of accounts at the end of one accounting period. These entries are passed in the books of accounts as per the revenue recognition principle and the expenses recognition principle to adjust the revenue, and the expenses of a business in the period of their occurrence.

Adjusted Trial Balance

Adjusted trial balance is a trial balance prepared at the end of a financial period, after all the adjusting entries are journalized and posted. It is prepared to prove the equality of the total debit and credit balances.

Rule of Debit and Credit:

Debit - Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.

Credit - Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.

To record: The adjusting entries on April 30, 2016 of R Repairs and Services.

Explanation of Solution

a. The following entry shows the adjusting entry for accrued fees unearned on April 30.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April, 30	Accounts Receivable	9,850
2016	Fees earned		9,850
	(To record the accounts receivable at the end of the year.)

Table (1)

The impact on the accounting equation for the above referred adjusting entry is as follows:

$\left\{\begin{array}{l}\text{Assets}\\ \text{+\$9,850 }\end{array}\right\}\text{ = Liabilibilities + }\left\{\begin{array}{l}\text{Stockholders' Equities}\\ \text{+\$9,850}\end{array}\right\}$

• Accounts Receivable is an asset, and it is increased by $9,850. So debit Accounts receivable by $9,850.
• Fees earned are component of stockholders’ equity and increased it by $9,850. So credit fees earned by $9,850.

The following entry shows the adjusting entry for supplies on April 30.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April, 30	Supplies Expense (1)	11,540
2016	Supplies		11,540
	(To record the supplies expense at the end of the accounting period)

Table (2)

The impact on the accounting equation for the above referred adjusting entry is as follows:

$\left\{\begin{array}{l}\text{Assets}\\ \text{-\$13,425}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'Equity}\\ \text{-\$}\text{13,425}\end{array}\right\}$

• Supplies expense is a component of stockholders’ equity, and it decreased the stockholders’ equity by $11,540. So debit supplies expense by $11,540.
• Supplies are an asset for the business, and it is decreased by $11,540. So credit supplies by $11,540.

Working Note:

Calculate the value of fees earned for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Supplies}\text{expense}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{before}\text{adjustment}\end{array}\right)\text{-}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$16,200}\text{-}\text{\$2,775}\\ \text{=}\text{\$13,425}\end{array}$ (1)

c. The adjusting entry for recording depreciation is as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April, 30	Depreciation expense	6,470
2016	Accumulated Depreciation		6,470
	(To record the depreciation on office equipment for the current year.)

Table (3)

The impact on the accounting equation for the above referred adjusting entry is as follows:

$\left\{\begin{array}{l}\text{Asset}\\ \text{-\$6,470}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ \text{-\$6,470}\end{array}\right\}$

• Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $6,470.
• Accumulated depreciation is a contra asset account, and it decreases the asset value by $6,470. So credit accumulated depreciation by $6,470.

d. The following entry shows the adjusting entry for unearned fees on April 30.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April, 30	Unearned Fees	15,000
2016	Fees earned		15,000
	(To record the fees earned from services at the end of the accounting period.)

Table (4)

The impact on the accounting equation for the above referred adjusting entry is as follows:

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ -\text{\$15,000}\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ \text{+\$15,000}\end{array}\right\}$

• Unearned fees are a liability, and it is decreased by $15,000. So debit unearned rent by $15,000.
• Fees earned are a component of Stockholders’ equity, and it is increased by $15,000. So credit rent revenue by $15,000.

e. The following entry shows the adjusting entry for wages expense on April 30.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April, 30	Wages expenses	5,200
2016	Wages Payable		5,200
	(To record the wages accrued but not paid at the end of the accounting period.)

Table (5)

The impact on the accounting equation for the above referred adjusting entry is as follows:

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ +3,880\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -3,880\end{array}\right\}$

• Wages expense is a component of Stockholders ‘equity, and it decreased it by $5,200. So debit wage expense by $5,200.
• Wages Payable is a liability, and it is increased by $5,200. So credit wages payable by $5,200.

(2)

To determine

The revenues, expenses and net income of R Repairs and Services before adjusting entries

Explanation of Solution

The revenues, expenses and net income before adjusting entries of R Repairs and Services are stated below:

• Revenue = $294,750 (given)
• Expenses = $226,350 (2)
• Net income = $68,400 (3)

Working Notes:

1. Calculate the expenses before adjusting entries:

$\begin{array}{c}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Wages}\text{expense}\text{+}\text{Rent}\text{expense}\text{+}\\ \text{Utilities}\text{Expense}\text{+}\text{Miscellaneous}\text{expense}\end{array}\right)\\ \text{=}\left(\text{\$94,500+}\text{\$72,000}\text{+\$51,750+}\text{\$8,100}\right)\\ \text{=}\text{\$226,350}\end{array}$ (2)

2. Calculate the net income before adjusting entries

$\begin{array}{c}\text{Net}\text{income}\text{=}\left(\text{Revenue}-\text{Expenses (2)}\right)\\ \text{=}\text{\$294,750}-\text{\$226,350}\\ \text{=\$68,400}\end{array}$ (3)

Conclusion

Hence, the revenues, expenses and net income of R Repairs and Services are $294,750, $226,350 and $68,400 respectively.

(3)

To determine

The revenues, expenses and net income of R Repairs and Services after adjusting entries

Explanation of Solution

The revenues, expenses and net income after adjusting entries of R Repairs and Services are stated below:

• Revenue = $319,600 (5)
• Expenses = $249,350 (4)
• Net income = $70,040 (6)

Working Notes:

1. Calculate expenses after adjusting entries:

$\begin{array}{c}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Expenses}\text{before}\text{adjusting}\text{+}\text{Supplies}\text{expense}\\ \text{+}\text{Depreciation}\text{expense}\text{+}\text{}\text{Wages}\end{array}\right)\\ \text{=}\left(\text{\$226,350+}\text{\$11,540}\text{+\$6,470+}\text{\$5,200}\right)\\ \text{=}\text{\$249,560}\end{array}$ (4)

2. Calculate the revenue after adjusting entries

$\begin{array}{c}\text{Revenue}\text{=}\left(\begin{array}{l}\text{Revenue}\text{before}\text{adjusting}\text{entries}\\ \text{+}\text{Fees}\text{earned}\text{+}\text{Fees}\text{earned}\text{from}\text{services}\end{array}\right)\\ \text{=}\text{\$294,750}\text{+}\text{\$9,850}\text{+}\text{\$15,000}\\ \text{=}\text{\$319,600}\end{array}$ (5)

3. Calculate the net income after adjusting entries

$\begin{array}{c}\text{Net}\text{income}\text{=}\left(\text{Revenue (5)}-\text{Expenses (4)}\right)\\ \text{=}\text{\$319,600}-\text{\$249,560}\\ \text{=\$70,040}\end{array}$ (6)

Conclusion

Hence, the revenues, expenses and net income of R Repairs and Services are $319,600, $249,560 and $70,040 respectively.

(4)

To determine

The effect of the adjusting entries on the capital of K

Explanation of Solution

The capital of K will be reduced by $1,640 after the adjusting entry.

Due to the adjusting entry, there is a decrease in the net income of $1,640$\left(\$70,040-\text{\$68,400}\right)$. As a result the capital of K will be reduced.