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, 2018, the end of the current year, Rowland Company’s accounting clerk prepared the following unadjusted trial balance:

Rowland Company Unadjusted Trial Balance August 31,2018
	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:

• Unexpired insurance at August 31, $6,000.
• Supplies on hand at August 31, $480.
• Depreciation of building for the year, $7,500.
• Depreciation of equipment for the year, $4,150.
• Rent unearned at August 31, $1,550.
• Accrued salaries and wages at August 31, $3,200.
• 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; Kent 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, 2018 of Company RFS.

Explanation of Solution

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

Date	Description	Post. Ref	Debit ($)	Credit ($)
August 31	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

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

• 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.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31	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:

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

• 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:

Calculation of Supplies expense for the accounting period

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

The adjusting entry for recording depreciation is as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31	Depreciation expense	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:

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

• 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.

The adjusting entry for recording depreciation is as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31	Depreciation expense	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:

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

• 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 $4,150.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31	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:

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

• 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:

Calculation of Rent Revenue for the accounting period

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

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31	Salary and wages expense	3,200
	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:

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

• 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.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
August 31	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:

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

• 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.

To determine

To prepare: The adjusted trial balance of the Company R on August 31, 2018

Answer to Problem 3.5APR

The adjusted trial balance of the Company R is as follows:

Company KWW
Trial Balance after Adjustments
August 31, 2018
Particulars	Debit $	Credit $
Cash	7,500
Accounts Receivable (7)	49,730
Prepaid Insurance	6,000
Supplies	480
Land	112,500
Building	150,250
Accumulated Depreciation - Building (3)		95,050
Equipment	135,300
Accumulated Depreciation - Equipment(4)		102,100
Accounts Payable		12,150
Unearned Rent		1,550
Salaries and Wages Payable		3,200
Common Stock		75,000
Retained Earnings		146,000
Dividend	15,000
Fees earned		335,930
Rent Revenue(5)		5,200
Salaries and Wages Expense (6)	196,570
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

Explanation of Solution

Working Notes:

1. Calculation of insurance expense at the end of the year

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

2. Calculation of Supplies expense for the accounting period

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

3. Calculation of accumulated depreciation- building

$\begin{array}{c}\begin{array}{l}\text{Accumulated}\\ \text{depreciation-}\text{building}\end{array}\}\text{=}\left(\begin{array}{l}\text{Unadjusted}\text{Accumulated}\\ \text{depreciation-}\text{building}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Depreciation}\\ \text{expense}\end{array}\right)\\ \text{=}\text{\$87,550}\text{+}\text{\$7,500}\\ \text{=\$95,050}\end{array}$ (3)

4. Calculation of accumulated depreciation- equipment

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

5. Calculation of Rent Revenue for the accounting period

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

6. Calculation of Salaries and Wages expenses

$\begin{array}{c}\begin{array}{l}\text{Salaries}\text{and}\\ \text{wages}\text{expense}\end{array}\}\text{=}\left(\begin{array}{l}\text{UnadjustedSalaries}\\ \text{and}\text{wagesexpense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Accrued}\text{Salaries}\\ \text{and}\text{wages}\text{expense}\end{array}\right)\\ \text{=}\text{\$193,370}\text{+}\text{\$3,200}\\ \text{=\$196,570}\end{array}$ (6)

7. Calculation of accounts receivable

$\begin{array}{c}\left(\begin{array}{l}\text{Accounts}\\ \text{Receivable}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Unadjusted}\\ \text{Accounts receivable}\end{array}\right)\text{+}\left(\text{Fees}\text{earned}\right)\\ \text{=}\text{\$38,400}\text{+}\text{\$11,330}\\ \text{=\$49,730}\end{array}$ (7)

Conclusion

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