Chapter 3, Problem 3.5BPR

Adjusting entries and adjusted trial balances

Reece Financial Services Co., which specializes in appliance repair services, is owned and operated by Joni Reece. Reece Financial Services Co.’s accounting clerk prepared the following unadjusted trial balance at July 31, 2016:

Reece Financial Services Co. Unadjusted Trial Balance July 31,2016
	Debit	Credit
	Balances	Balances
Cash..........................................................	10,200
Accounts Receivable............................................	34,750
Prepaid Insurance..............................................	6,000
Supplies......................................................	1,725
Land………………………………………..	50,000
Building.......................................................	155,750
Accumulated Depreciation—Building............................		62,850
Equipment.....................................................	45,000
Accumulated Depreciation—Equipment.........................		17,650
Accounts Payable..............................................		3,750
Unearned Rent................................................		3,600
Common Stock................................................		60,000
Retained Earnings.............................................		93,550
Dividends...................................................	8,000
Fees Earned....................................................		158,600
Salaries and Wages Expense.....................................	56,850
Utilities Expense...............................................	14,100
Advertising Expense...........................................	7,500
Repairs Expense................................................	6,100
Miscellaneous Expense.........................................	4,025
	400,000	400,000

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

• a. Depreciation of building for the year, $6,400.
• b. Depreciation of equipment for the year, $2,800.
• c. Accrued salaries and wages at July 31, $900.
• d. Unexpired insurance at July 31, $1,500.
• e. Fees earned but unbilled on July 31, $ 10,200.
• f. Supplies on hand at July 31, $615.
• g. Rent unearned at July 31, $300.

Instructions

1. 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 July 31, 2016 of Company RFS.

Explanation of Solution

The adjusting entries of Company RFS are as follows:

Depreciation expense-Building

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2016	Depreciation expense	6,400
July, 31	Accumulated Depreciation- building		6,400
	(To record the depreciation on building for the current year.)

Table (1)

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

$\left\{\begin{array}{l}\text{Asset}\\ -\text{\$6,400}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -\text{\$6,400}\end{array}\right\}$

Explanation:

• Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $6,400.
• Accumulated depreciation is a contra asset account, and it decreases the asset value by $6,400. So credit accumulated depreciation by $6,400.

Depreciation expense-Equipment

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2016	Depreciation expense	2,800
July, 31	Accumulated Depreciation- equipment		2,800
	(To record the depreciation on equipment for the current year.)

Table (2)

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

$\left\{\begin{array}{l}\text{Asset}\\ -\text{\$2,800}\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -\text{\$2,800}\end{array}\right\}$

Explanation:

• Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $2,800.
• Accumulated depreciation is a contra asset account, and it decreases the asset value by $2,800. So credit accumulated depreciation by $2,800.

Salary and wages expense:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2016	Salary and wages expense	900
July, 31	Wages Payable		900
	(To record the salary and wages accrued but not paid at the end of the accounting period.)

Table (3)

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

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ +900\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ -900\end{array}\right\}$

Explanation:

• Salary and wages expense is a component of Stockholders ‘equity, and it decreased it by $900. So debit wage expense by $900.
• Salary and wages payable is a liability, and it is increased by $900. So credit Salary and wages payable by $900.

Unexpired insurance:

Date	Description	Post. Ref	Debit ($)	Credit ($)
2016	Insurance expense (1)		4,500
July 31	Prepaid insurance			4,500
	(To record the insurance  expense incurred at the end of the year)

Table (4)

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

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

Working note:

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

$\begin{array}{c}\text{Insurance}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Value}\text{of}\text{prepaid}\\ \text{insurance}\text{before}\text{adjustment}\end{array}\right)-\left(\text{Unexpired}\text{insurance}\right)\\ \text{=}\left(\text{\$6,500}\right)-\left(\text{\$1,500}\right)\\ \text{=}\text{\$4,500}\end{array}$ (1)

Explanation:

• Insurance expense is a component of owners’ equity, and decreased it by $4,500 hence debit the insurance expense for $4,500.
• Prepaid insurance is an asset, and it decreases the value of asset by $4,500, hence credit the prepaid insurance for $4,500.

Accrued fees unearned on July 31

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2016	Accounts Receivable	10,200
July 31	Fees earned		10,200
	(To record the accounts receivable at the end of the year.)

Table (5)

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

$\left\{\begin{array}{l}\text{Assets}\\ \text{+\$10,200 }\end{array}\right\}\text{ = Liabilibilities + }\left\{\begin{array}{l}\text{Stockholders' Equities}\\ \text{+\$10,200}\end{array}\right\}$

Explanation:

• Accounts Receivable is an asset, and it is increased by $10,200. So debit Accounts receivable by $10,200.
• Fees earned are component of stockholders’ equity, and it increased it by $10,200. So credit fees earned by $10,200.

Supplies expenses on July 31

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2016	Supplies Expense (2)	1,110
July 31	Supplies		1,110
	(To record the supplies expense at the end of the accounting period)

Table (6)

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

$\left\{\begin{array}{l}\text{Assets}\\ -\text{\$}1,110\end{array}\right\}\text{=}\text{Liabilities}\text{+}\left\{\begin{array}{l}\text{Stockholders'Equity}\\ -\text{\$}1,110\end{array}\right\}$

Explanation:

• Supplies expense is a component of stockholders’ equity, and it decreased the stockholders’ equity by $1,110. So debit supplies expense by $1,110.
• Supplies are an asset for the business, and it is decreased by $1,110. So credit supplies by $1,110.

Working Note:

Calculate supplies expense for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Supplies}\text{expense}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$1,725}-\text{\$615}\\ \text{=}\text{\$1,110}\end{array}$ (2)

Unearned Rent on July 31:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2016	Unearned Rent	3,300
July 31	Rent revenue (3)		3,300
	(To record the Rent revenue from services at the end of the accounting period.)

Table (7)

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

$\text{Assets}\text{=}\left\{\begin{array}{l}\text{Liabilities}\\ -\text{\$3,300}\end{array}\right\}\text{+}\left\{\begin{array}{l}\text{Stockholders'equity}\\ \text{+\$3,300}\end{array}\right\}$

Explanation:

• Unearned Rent is a liability, and it is decreased by $3,300. So debit unearned rent by $3,300.
• Rent revenue is a component of Stockholders’ equity, and it is increased by $3,300. So credit rent revenue by $3,300.

Working Notes:

Calculate the rent revenue for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Rent}\text{revenue}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Unearned}\text{rent}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Unearned}\text{rent}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$3,600}-\text{\$300}\\ \text{=}\text{\$3,300}\end{array}$ (3)

Conclusion

Thus, the adjusting entries of Company RFS are recorded.

To determine

To prepare: The adjusted trial balance of the Company RFS on July 31, 2016

Explanation of Solution

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

Company RFS
Trial Balance after Adjustments
July 31, 2016
Particulars	Debit $	Credit $
Cash	10,200
Accounts receivable(8)	44,950
Prepaid insurance	1,500
Supplies	615
Land	50,000
Building	155,750
Accumulated depreciation - Building(4)		69,250
Equipment	45,000
Accumulated depreciation - Equipment(5)		20,450
Accounts payable		3,750
Unearned rent		300
Salaries and wages payable		900
Common stock		60,000
Retained earnings		93,550
Drawing	8,000
Fees earned		168,800
Rent revenue (10)		3,300
Salaries and wages expense (6)	57,750
Utilities expense	14,100
Advertising expense	7,500
Repairs expense	6,100
Depreciation expense - Building	6,400
Depreciation expense - Equipment	2,800
Insurance expense (7)	4,500
Supplies expense (9)	1,110
Miscellaneous expense	4,025
	420,300	420,300

Table (8)

Working Notes:

1. Calculate accumulated depreciation- building

$\begin{array}{c}\text{Accumulated}\text{depreciation-}\text{building})\text{=}\left(\begin{array}{l}\text{Unadjusted}\text{Accumulated}\\ \text{depreciation-}\text{building}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Depreciation}\\ \text{expense}\end{array}\right)\\ \text{=}\text{\$62,850}\text{+}\text{\$6,400}\\ \text{=\$69,250}\end{array}$ (4)

2. Calculate accumulated depreciation- equipment

$\begin{array}{c}\begin{array}{l}\text{Accumulated}\\ \text{depreciation-}\text{equipment}\end{array}\}\text{=}\left(\begin{array}{l}\text{Unadjusted}\text{Accumulated}\\ \text{depreciation-}\text{equipment}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Depreciation}\\ \text{expense}\end{array}\right)\\ \text{=}\text{\$17,650}\text{+}\text{\$2,800}\\ \text{=\$20,450}\end{array}$ (5)

3. Calculate salaries and wages expenses

$\begin{array}{c}\begin{array}{l}\text{Salaries}\text{and}\\ \text{wages}\text{expense}\end{array}\}\text{=}\left(\begin{array}{l}\text{UnadjustedSalaries}\\ \text{and}\text{wages expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Accrued}\text{Salaries}\\ \text{and}\text{wages}\text{expense}\end{array}\right)\\ \text{=}\text{\$56,850}\text{+}\text{\$900}\\ \text{=\$57,750}\end{array}$ (6)

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

$\begin{array}{c}\text{Insurance}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Value}\text{of}\text{prepaid}\\ \text{insurance}\text{before}\text{adjustment}\end{array}\right)-\left(\text{Unexpired}\text{insurance}\right)\\ \text{=}\left(\text{\$6,000}\right)-\left(\$1,500\right)\\ \text{=}\text{\$4,500}\end{array}$ (7)

5. Calculate the accounts receivable

$\begin{array}{c}\left(\begin{array}{l}\text{Accounts}\\ \text{Receivable}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Unadjusted}\\ \text{Accounts receivable}\end{array}\right)\text{+}\left(\text{Fees}\text{earned}\right)\\ \text{=}\text{\$34,750}\text{+}\text{\$10,200}\\ \text{=\$44,950}\end{array}$ (8)

6. Calculate the supplies expense for the accounting period

$\begin{array}{c}\left(\begin{array}{l}\text{Supplies}\text{expense}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Amount}\text{of}\text{supplies}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$1,725}-\text{\$615}\\ \text{=}\text{\$1,110}\end{array}$ (9)

7. Calculate the rent revenue

$\begin{array}{c}\left(\begin{array}{l}\text{Rent}\text{revenue}\\ \text{for}\text{the}\text{year}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Unearned}\text{rent}\\ \text{before}\text{adjustment}\end{array}\right)-\left(\begin{array}{l}\text{Unearned}\text{rent}\\ \text{on}\text{hand}\end{array}\right)\\ \text{=}\text{\$3,600}-\text{\$300}\\ \text{=}\text{\$3,300}\end{array}$ (10)

Conclusion

Hence, the total of debit and credit column of the adjusted trial balance matches and they have a total balance of $420,300