Chapter 3, Problem 3AP

a.

To determine

Prepare unadjusted trial balance to prove that the total debit balance equals total credit balance.

Explanation of Solution

Unadjusted trial balance:

Unadjusted trial balance is a statement which contains complete list of accounts with their unadjusted balances, after journal entries are made but before all relevant adjustments have been made. This statement is prepared at the end of every financial period.

Prepare an unadjusted trial balance as of December 31 for Incorporation P.

Incorporation P Unadjusted Trial Balance As of December 31
	Debit ($)	Credit ($)
Cash	2,150
Accounts receivable	3,800
Prepaid rent	12,600
Prepaid insurance	2,970
Supplies	4,250
Equipment	22,800
Accounts payable		1,910
Unearned photography fees		2,600
Common stock		24,000
Photography fees earned		34,480
Wages expense	11,000
Utilities expense	3,420
Total	62,990	62,990

Table (1)

Hence, it is proved that the sum of the debits equals the sum of the credits in the unadjusted trial balance of Incorporation P.

b.

To determine

Record the adjusting entries in the general journal.

Explanation of Solution

1.

Adjusting entry for accrued service revenues:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Fees Receivable		925
	Photography Fee earned			925
	(To record the amount of revenue earned but not recorded)

Table (2)

• Fees Receivable is an asset account. There is an increase in assets, and therefore, it is debited.
• Photography fee earned is a revenue account. There is an increase in Stockholders’ Equity, and therefore, it is credited.

2.

Adjusting entry for depreciation expense on equipment:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense- Equipment		2,280
	Accumulated Depreciation -  Equipment			2,280
	(To record the amount of depreciation for the year)

Table (3)

• Depreciation expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Accumulated Depreciation is a contra-asset account. There is decrease in assets, and therefore it is credited.

Working note:

Calculate depreciation for the year.

$\begin{array}{c}\text{Depreciation = }\frac{\text{Cost of equipment – Salvage value}}{\text{Estimated Life of equipment}}\\ =\frac{\$22,800-\$0}{10}\\ =\$2,280\end{array}$

3.

Adjusting entry for accrued utilities expenses:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Utility Expense		400
	Utility Payable			400
	(To record the amount of accrued utility expenses)

Table (4)

• Utility Expense is an expense. There is an increase in the expenses, and therefore, it is debited.
• Utility Payable is a liability account. There is an increase in liabilities, and therefore, it is credited.

4.

Adjusting entry for recognizing the rent expense on prepaid rent:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Rent Expense		6,300
	Prepaid Rent			6,300
	(To record the amount of prepaid rent expired during the period)

Table (5)

• Rent expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Prepaid Rent is an asset. There is a decrease in assets, and therefore it is credited.

Working note:

Calculate rent expense.

$\begin{array}{c}\text{Rent expense = }\frac{\text{Prepaid rent for 2 years}}{2\text{ years}}\times 1\text{ year expired}\\ \text{=}\frac{\$12,600}{2}\times 1\\ =\$6,300\end{array}$

5.

Adjusting entry for earned unearned Photography fees:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Unearned Photography fees		2,600
	Photography fees earned			2,600
	(To record the amount of unearned photography fees earned during the year)

Table (6)

• Unearned photography fees are liability. There is a decrease in liabilities, and therefore it is debited.
• Photography fees earned is a component of Equity account. There is an increase in Equity, and therefore it is credited.

6.

Adjustment of Prepaid Insurance:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Insurance Expense		990
	Prepaid Insurance			990
	(To record the amount of prepaid insurance expired during the period)

Table (7)

• Insurance expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Prepaid Insurance is an asset. There is a decrease in assets, and therefore it is credited.

Working note:

Calculate insurance expense.

$\begin{array}{c}\text{Insurance expense = }\frac{\text{Prepaid insurance for 3 years}}{3\text{ years}}\times 1\text{ year expired}\\ \text{=}\frac{\$2,970}{3}\times 1\\ =\$990\end{array}$

7.

Adjustment of Office Supplies:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Supplies Expense		2,730
	Office Supplies			2,730
	(To record the amount of office supplies used during the period)

Table (8)

• Supplies expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Office Supplies is an asset. There is a decrease in assets, and therefore it is credited.

Working note:

Calculate the Supplies used during the year.

$\begin{array}{c}\text{Supplies used}=\text{Unadjusted Balance of Office Supplies }-\text{Closing balance}\\ =\$4,250-\$1,520\\ =\$2,730\end{array}$

8.

Adjusting entry for accrued wages expenses:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Wages Expense		375
	Wages Payable			375
	(To record the amount of accrued wages expenses)

Table (9)

• Wages Expense is an expense. There is an increase in the expenses, and therefore, it is debited.
• Wages Payable is a liability account. There is an increase in liabilities, and therefore, it is credited.