Chapter 3, Problem 3.3APR

Adjusting entries

Reliable Repairs & Service, an electronics repair store, prepared the following unadjusted trial balance at the end of its first year of operations:

Reliable Repairs & Service Unadjusted Trial Balance April 30,2018
	Debit Balances	Credit Balances
Cash	10,350
Accounts Receivable	67,500
Supplies	16,200
Equipment	116,100
Accounts Payable		15,750
Unearned Fees		18,000
Common Stock		10,000
Retained Earnings		111,500
Dividends	13,500
Fees Earned		294,750
Wages Expense	94,500
Rent Expense	72,000
Utilities Expense	51,750
Miscellaneous Expense	8,100
	450,000	450,000

For preparing the adjusting entries, the following data were assembled:

• Fees earned but unbilled on April 30 were $9,850.
• Supplies on hand on April 30 were $4,660.
• Depreciation of equipment was estimated to be $6,470 for the year.
• The balance in unearned fees represented the April 1 receipt in advance for services to be provided. During April, $15,000 of the services were provided.
• Unpaid wages accrued on April 30 were $5,200.

Instructions

1. 1. Journalize the adjusting entries necessary on April 30, 2018.
2. 2. Determine the revenues, expenses, and net income of Reliable Repairs & Service before the adjusting entries.
3. 3. Determine the revenues, expense, and net income of Reliable Repairs & Service after the adjusting entries.
4. 4. Determine the effect of the adjusting entries on Retained Earnings.

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, 2019 of R Repairs and Services.

Explanation of Solution

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
	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
	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:

$\left\{\begin{array}{l}\text{Assets}\\ \text{–\$}11,540\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'Equity}\\ \text{-\$}11,540\end{array}\right\}$

• 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:

Calculation of fees earned for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Supplies}\text{expense}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{before}\text{adjustment}\end{array}\right)\text{-}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$16,200}\text{-}\text{\$4,660}\\ \text{=}\text{\$11,540}\end{array}$ (1)

The adjusting entry for recording depreciation is as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30	Depreciation expense	6,470
	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.

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
	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.

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
	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:

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ +\$5,200\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -\$5,200\end{array}\right\}$

• 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.

To determine

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

Answer to Problem 3.3APR

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

• Revenue = $294,750 (given)
• Expenses = $226,350 (W.N-1)
• Net income = $68,400 (W.N-2)

Explanation of Solution

Working Notes:

W.N-1

Calculation of expenses before adjusting entries:

$\begin{array}{c}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Wages}\text{expense}\text{+}\text{Rent}\text{expense}\text{+}\\ \text{Utilities}\text{Expense}\text{+}\text{Miscellaneous}\text{expense}\end{array}\right)\\ \text{=}\left(\text{\$94,500+}\text{\$72,000}\text{+\$5,1750+}\text{\$8,100}\right)\\ \text{=}\text{\$226,350}\end{array}$

W.N-2

Calculation of net income before adjusting entries

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

Conclusion

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

To determine

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

Answer to Problem 3.3APR

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

• Revenue = $318,630 (W.N-4)
• Expenses = $254,655 (W.N-3)
• Net income = $63,975 (W.N-5)

Explanation of Solution

Working Notes:

W.N-3

Calculation of expenses after adjusting entries:

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

W.N-4

Calculation of revenue after adjusting entries

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

W.N-5

Calculation of net income after adjusting entries

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

Conclusion

Hence, the revenues, expenses and net income of R Repairs and Services are $318,630, $254,655 and $63,975 respectively.

To determine

The effect of the adjusting entries on the retained earnings of R Repairs and Services.

Answer to Problem 3.3APR

The retained earnings will be increased by $1,640 after the adjusting entry.

Explanation of Solution

Due to the adjusting entry there is an increase in the net income of $1,640 $\left(\text{\$70,040}\text{-}\text{\$68,400}\right)$. As a result the retained earnings will also be increased.