Chapter 3, Problem 3.5APR

Adjusting entries and adjusted trial balances

Rowland Company is a small editorial services company owned and operated by Marlene Rowland. On August 31, 2016, the end of the current year, Rowland Company's account­ing clerk prepared the following unadjusted trial balance:

Rowland Company Unadjusted Trial Balance August 31,2016
	Debit Balances	Credit Balances
Cash……………………………………………………..	7,500
Accounts Receivable............................................	38,400
Prepaid Insurance..............................................	7,200
Supplies.......................................................	1,980
Land..........................................................	112,500
Building.......................................................	150,250
Accumulated Depreciation—Building............................		87,550
Equipment.....................................................	135,300
Accumulated Depreciation—Equipment.........................		97,950
Accounts Payable..............................................		12,150
Unearned Rent.................................................		6,750
Common Stock………………………………………….		75,000
Retained Earnings.............................................		146,000
Dividends.....................................................	15,000
Fees Earned....................................................		324,600
Salaries and Wages Expense.....................................	193,370
Utilities Expense...............................................	42,375
Advertising Expense............................................	22,800
Repairs Expense................................................	17,250
Miscellaneous Expense.........................................	6,075
	750,000	750,000

The data needed to determine year-end adjustments are as follows:

• a. Unexpired insurance at August 31, $6,000.
• b. Supplies on hand at August 31, $480.
• c. Depreciation of building for the year, $7,500.
• d. Depreciation of equipment for the year, $4,150.
• e. Rent unearned at August 31, $1,550.
• f. Accrued salaries and wages at August 31, $3,200.
• g. Fees earned but unbilled on August 31, $11,330.

Instructions

1. 1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Rent Revenue; Insurance Expense; Depreciation Expense—Building; Depreciation Expense—Equipment; and Supplies Expense.
2. 2. Determine the balances of the accounts affected by the adjusting entries, and prepare an adjusted trial balance.

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 August 31, 2016 of Company R.

Explanation of Solution

a. The following entry shows the adjusting entry for insurance expense on August 31.

Date	Description	Post. Ref	Debit ($)	Credit ($)
August 31, 2016	Insurance expense (1)		1,200
	Prepaid insurance			1,200
	(To record the insurance  expense incurred at the end of the year)

Table (1)

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

$\left\{\begin{array}{l}\text{Assets}\\ -\text{\$1,200}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Owners'}\text{Equity}\\ -\text{\$1,200}\end{array}\right\}$

Working note:

Calculate the value of insurance expense at the end of the year

$\begin{array}{c}\text{Insurance}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Value}\text{of}\text{prepaid}\\ \text{insurance}\text{before}\text{adjustment}\end{array}\right)-\left(\text{Unexpired}\text{insurance}\right)\\ \text{=}\left(\text{\$7,200}\right)-\left(\text{\$6,000}\right)\\ \text{=}\text{\$1,200}\end{array}$ (1)

Explanation:

• Insurance expense is a component of owners’ equity, and decreased it by $1,200 hence debit the insurance expense for $1,200.
• Prepaid insurance is an asset, and it decreases the value of asset by $1,200, hence credit the prepaid insurance for $1,200.

b. The following entry shows the adjusting entry for supplies on August 31.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31, 2016	Supplies Expense (2)	1,500
	Supplies		1,500
	(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:

$\left\{\begin{array}{l}\text{Assets}\\ -\text{\$1,500}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'Equity}\\ -\text{\$}\text{1,500}\end{array}\right\}$

Explanation:

• Supplies expense is a component of stockholders’ equity, and it decreased the stockholders’ equity by $1,500. So debit supplies expense by $1,500.
• Supplies are an asset for the business, and it is decreased by $1,500. So credit supplies by $1,500.

Working Note:

Calculate the supplies expense for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Supplies}\text{expense}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$1,980}-\text{\$480}\\ \text{=}\text{\$1,500}\end{array}$ (2)

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31, 2016	Depreciation expense - Building	7,500
	Accumulated Depreciation- Building		7,500
	(To record the depreciation on building for the current year.)

Table (3)

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

$\left\{\begin{array}{l}\text{Asset}\\ -\text{\$7,500}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -\text{\$7,500}\end{array}\right\}$

Explanation:

• Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $7,500.
• Accumulated depreciation is a contra asset account, and it decreases the asset value by $7,500. So credit accumulated depreciation by $7,500.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31, 2016	Depreciation expense-Equipment	4,150
	Accumulated Depreciation- Equipment		4,150
	(To record the depreciation on equipment for the current year.)

Table (4)

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

$\left\{\begin{array}{l}\text{Asset}\\ -\text{\$4,150}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -\text{\$4,150}\end{array}\right\}$

Explanation:

• Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $4,150.
• Accumulated depreciation is a contra asset account, and it decreases the asset value by $4,150. So credit accumulated depreciation by $4,1500.

e. The following entry shows the adjusting entry for Unearned Rent on August 31.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31, 2016	Unearned Rent	5,200
	Rent revenue (3)		5,200
	(To record the Rent revenue 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:

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ -\text{\$4,500}\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ \text{+\$4,500}\end{array}\right\}$

Explanation:

• Unearned Rent is a liability, and it is decreased by $5,200. So debit unearned rent by $5,200.
• Rent revenue is a component of Stockholders’ equity, and it is increased by $5,200. So credit rent revenue by $5,200.

Working Notes:

Calculate the rent revenue for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Rent}\text{revenue}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Unearned}\text{rent}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Unearned}\text{rent}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$6,750}-\text{\$1,550}\\ \text{=}\text{\$5,200}\end{array}$ (3)

f. The following entry shows the adjusting entry for Salary and wages expense on August 31.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31, 2016	Salary and wages expense	3,200
	Salary and Wages Payable		3,200
	(To record the salary and wages accrued but not paid at the end of the accounting period.)

Table (6)

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

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ +3,200\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -3,200\end{array}\right\}$

Explanation:

• Salary and wages expense is a component of Stockholders ‘equity, and it decreased it by $3,200. So debit wage expense by $3,200.
• Salary and wages payable is a liability, and it is increased by $3,200. So credit Salary and wages payable by $3,200.

g. The following entry shows the adjusting entry for accrued fees unearned on August 31.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31, 2016	Accounts Receivable	11,330
	Fees earned		11,330
	(To record the accounts receivable at the end of the year.)

Table (7)

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

$\left\{\begin{array}{l}\text{Assets}\\ \text{+\$11,330 }\end{array}\right\}\text{ = Liabilibilities + }\left\{\begin{array}{l}\text{Stockholders' Equities}\\ \text{+\$11,330}\end{array}\right\}$

Explanation:

• Accounts Receivable is an asset, and it is increased by $11,330. So debit Accounts receivable by $11,330.
• Fees earned are component of stockholders’ equity, and it increased it by $11,330. So credit fees earned by $11,330.

Conclusion

Hence, the adjusting entries for Company R are recorded.

To determine

To prepare: The adjusted trial balance of the Company R

Explanation of Solution

Explanations:

The adjusted trial balance of the Company R is shown below:

Company R
Trial Balance after Adjustments
August 31, 2016
Particulars	Debit $	Credit $
Cash	7,500
Accounts Receivable (8)	49,730
Prepaid Insurance  (4)	6,000
Supplies (5)	480
Land	112,500
Building	150,250
Accumulated Depreciation - Building (6)		95,050
Equipment	135,300
Accumulated Depreciation – Equipment (7)		102,1000
Accounts Payable		12,150
Unearned Rent		1,550
Salaries and Wages Payable		3,200
Capital		221,000
Drawing	15,000
Fees earned		335,930
Rent Revenue		5,200
Salaries and Wages Expense	196,170
Utilities Expense	42,375
Advertising Expense	22,800
Repairs Expense	17,250
Depreciation Expense - building	7,500
Depreciation Expense - equipment	4,150
Insurance Expense (1)	1,200
Supplies Expense (2)	1,500
Miscellaneous Expense	6,075
Total	776,180	776,180

Table (8)

Working Notes:

1. Calculate the value of prepaid insurance at the end of the year

$\begin{array}{c}\text{Prepaid insurance}\text{=}\left(\begin{array}{l}\text{Value}\text{of}\text{prepaid}\\ \text{insurance}\text{before}\text{adjustment}\end{array}\right)-\left(\text{Unexpired}\text{insurance}\right)\\ \text{=}\left(\text{\$7,200}\right)-\left(\text{\$1,200}\right)\\ \text{=}\text{\$6,000}\end{array}$ (4)

2. Calculate the supplies for the accounting period

$\begin{array}{c}\left(\text{Supplies}\text{for}\text{the}\text{year}\right)\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$1,980}-\text{\$1,500}\\ \text{=}\text{\$480}\end{array}$ (5)

3. Calculate the value of building

$\begin{array}{c}\text{Buildings}\text{=}\left(\begin{array}{l}\text{Unadjusted}\text{Accumulated}\\ \text{depreciation-}\text{building}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Depreciation}\\ \text{expense}\end{array}\right)\\ \text{=}\text{\$87,550}\text{+}\text{\$4,150}\\ \text{=\$95,050}\end{array}$ (6)

4. Calculate the value of equipment

$\begin{array}{c}\text{Equipment}\text{=}\left(\begin{array}{l}\text{Unadjusted}\text{Accumulated}\\ \text{depreciation-}\text{equipment}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Depreciation}\\ \text{expense}\end{array}\right)\\ \text{=}\text{\$97,950}\text{+}\text{\$4,150}\\ \text{=\$102,100}\end{array}$ (7)

5. Calculation of accounts receivable

$\begin{array}{c}\text{AccountsReceivable}\text{=}\left(\text{Unadjusted}\text{Accounts receivable}\right)\text{+}\left(\text{Fees}\text{earned}\right)\\ \text{=}\text{\$38,400}\text{+}\text{\$11,330}\\ \text{=\$49,730}\end{array}$ (8)

Conclusion

Hence, the total of debit and credit column of the adjusted trial balance matches and they have a total balance of $776,180