Chapter 3, Problem 3.3BPR

Adjusting entries

Crazy Mountain Outfitters Co., an outfitter store for fishing treks, prepared the following unadjusted trial balance at the end of its first year of operations:

Crazy Mountain Outfitters Co. Unadjusted Trial Balance April 30, 2016
	Debit Balances	Credit Balances
cash............................................................................	11,400
Accounts Receivable.......................................	72,600
Supplies..................................................	7,200
Equipment................................................	112,000
Accounts Payable.........................................		12,200
Unearned Fees............................................		19,200
Common Stock...........................................		20,000
Retained Earnings........................................		117,800
Dividends................................................	10,000
Fees Earned...............................................		305,800
Wages Expense...........................................	157,800
Rent Expense.............................................	55,000
Utilities Expense..........................................	42,000
Miscellaneous Expense....................................	7,000
	475,000	475,000

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

• a. Supplies on hand on April 30 were $1,380.
• b. Fees earned but unbilled on April 30 were $3,900.
• c. Depreciation of equipment was estimated to be $3,000 for the year.
• d. Unpaid wages accrued on April 30 were $2,475.
• e. The balance in unearned fees represented the April 1 receipt in advance for services to be provided. Only $14,140 of the services was provided between April 1 and April 30.

Instructions

1. 1. Journalize the adjusting entries necessary on April 30, 2016.
2. 2. Determine the revenues, expenses, and net income of Crazy Mountain Outfitters Co. before the adjusting entries.
3. 3. Determine the revenues, expense, and net income of Crazy Mountain Outfitters Co. 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, 2016 of CMO Company.

Explanation of Solution

a. The following entry shows the adjusting entry for supplies on April 30, 2016.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30, 2016	Supplies Expense (1)	5,820
	Supplies		5,820
	(To record the supplies expense at the end of the accounting period)

Table (1)

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

$\left\{\begin{array}{l}\text{Assets}\\ \text{–\$5,820}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'Equity}\\ -\text{\$}\text{5,820}\end{array}\right\}$

Explanation:

• Supplies expense is a component of stockholders’ equity, and it decreased the stockholders’ equity by $5,820. So debit supplies expense by $5,820.
• Supplies are an asset for the business, and it is decreased by $5,820. So credit supplies by $5,820.

Working Note:

Calculation of fees earned for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Supplies}\text{expense}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$7,200}-\text{\$1,380}\\ \text{=}\text{\$5,820}\end{array}$ (1)

b. The following entry shows the adjusting entry for accrued fees unearned on April 30, 2016.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30, 2016	Accounts Receivable	3,900
	Fees earned		3,900
	(To record the accounts receivable at the end of the year.)

Table (2)

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

$\left\{\begin{array}{l}\text{Assets}\\ \text{+\$}3,900\end{array}\right\}\text{ = Liabilibilities + }\left\{\begin{array}{l}\text{Stockholders' Equities}\\ \text{+\$}3,900\end{array}\right\}$

Explanation:

• Accounts Receivable is an asset, and it is increased by $3,900. So debit Accounts receivable by $3,900.
• Fees earned are component of stockholders’ equity and increased it by $3,900. So credit fees earned by $3,900.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30, 2016	Depreciation expense	3,000
	Accumulated Depreciation		3,000
	(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:

$\left\{\begin{array}{l}\text{Asset}\\ \text{–\$3,000}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ \text{–\$3,000}\end{array}\right\}$

Explanation:

• Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $3,000.
• Accumulated depreciation is a contra asset account, and it decreases the asset value by $3,000. So credit accumulated depreciation by $3,000.

d. The following entry shows the adjusting entry for wages expense on April 30, 2016.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30, 2016	Wages expenses	2,475
	Wages Payable		2,475
	(To record the wages accrued but not paid at the end of the accounting period.)

Table (4)

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

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ +\$2,475\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -\$2,475\end{array}\right\}$

Explanation:

• Wages expense is a component of Stockholders ‘equity, and it decreased it by $2,475. So debit wage expense by $2,475.
• Wages Payable is a liability, and it is increased by $2,475. So credit wages payable by $2,475.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30, 2016	Unearned Fees	14,140
	Fees earned		14,140
	(To record the fees earned from services at the end of the accounting period.)

Table (5)

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

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ -\text{\$14,140}\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ \text{+\$14,140}\end{array}\right\}$

Explanation:

• Unearned fees are a liability, and it is decreased by $14,140. So debit unearned rent by $14,140.
• Fees earned are a component of Stockholders’ equity, and it is increased by $14,140. So credit rent revenue by $14,140.

To determine

The revenues, expenses and net income of CMO Company before adjusting entries

Explanation of Solution

The revenues, expenses and net income before adjusting entries of CMO Company are stated below:

• Revenue = $305,800 (given)
• Expenses = $261,800 (2)
• Net income = $44,000 (3)

Working Notes:

Calculate the value of expenses before adjusting entries:

$\begin{array}{c}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Wages}\text{expense}\text{+}\text{Rent}\text{expense}\text{+}\\ \text{Utilities}\text{Expense}\text{+}\text{Miscellaneous}\text{expense}\end{array}\right)\\ \text{=}\left(\text{\$157,800+}\text{\$55,000}\text{+\$42,000+}\text{\$7,000}\right)\\ \text{=}\text{\$261,800}\end{array}$ (2)

Calculate the value of net income before adjusting entries

$\begin{array}{c}\text{Net}\text{income}\text{=}\left(\text{Revenue}-\text{Expenses}\right)\\ \text{=}\text{\$305,800}-\text{\$261,800}\\ \text{=\$44,000}\end{array}$ (3)

Conclusion

Hence, the revenues, expenses and net income of CMO Company are $305,800, $261,800 and $44,000 respectively.

To determine

The revenues, expenses and net income of CMO Company after adjusting entries

Explanation of Solution

The revenues, expenses and net income after adjusting entries of CMO Company are stated below:

• Revenue = $323,840 (5)
• Expenses = $273,095 (4)
• Net income = $50,745 (6)

Working Notes:

Calculate the value of expenses after adjusting entries:

$\begin{array}{c}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Expenses}\text{before}\text{adjusting}\text{+}\text{Supplies}\text{expense}\\ \text{+}\text{Depreciation}\text{expense}\text{+}\text{}\text{Wages}\end{array}\right)\\ \text{=}\left(\text{\$261,800+}\text{\$5,820}\text{+\$3,000+}\text{\$2475}\right)\\ \text{=}\text{\$273,095}\end{array}$ (4)

Calculate the value of revenue after adjusting entries

$\begin{array}{c}\text{Revenue}\text{=}\left(\begin{array}{l}\text{Revenue}\text{before}\text{adjusting}\text{entries}\\ \text{+}\text{Fees}\text{earned}\text{+}\text{Fees}\text{earned}\text{from}\text{services}\end{array}\right)\\ \text{=}\text{\$305,800}\text{+}\text{\$3,900}\text{+}\text{\$14,140}\\ \text{=}\text{\$323,840}\end{array}$ (5)

Calculate the value of net income after adjusting entries

$\begin{array}{c}\text{Net}\text{income}\text{=}\left(\text{Revenue}-\text{Expenses}\right)\\ \text{=}\text{\$323,840}-\text{\$273,095}\\ \text{=\$50,745}\end{array}$ (6)

Conclusion

Hence, the revenues, expenses and net income of CMO Company are $323,840, $273,095 and $50,745 respectively.

To determine

The effect of the adjusting entries on the capital of CMO Company.

Explanation of Solution

The capital of CMO Company will be increased by $10,745 after the adjusting entry.

Due to the adjusting entry there is an increase in the net income of $6,745 $\left(\text{\$50,745}-\text{\$44,000}\right)$. As a result the capital of CMO Company will also be increased.