Chapter 3, Problem 3PB

1.

To determine

Record the adjusting entries on April 30, 20Y5 of Company CMO.

Explanation of Solution

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.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30	Supplies Expense $\left(\$7,200-\$1,380\right)$	5,820
	Supplies		5,820
	(To record the supplies expense at the end of the accounting period)

Table (1)

• 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

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

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

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

Table (2)

• 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.

The adjusting entry for recording depreciation is as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30	Depreciation expense	3,000
	Accumulated Depreciation-Equipment		3,000
	(To record the depreciation on office equipment for the current year.)

Table (3)

• 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.

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

Date	Account Titles and Explanation	Debit ($)	Credit ($)
April 30	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)

• 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.

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

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

                                                     Table (5)

• 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.

2.

To determine

Determine the revenues, expenses and net income of Company CMO before adjusting entries.

Explanation of Solution

Revenues: Revenues are earnings from operations of a business. The operating activities are sale of goods and services, and rent revenue.

Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and utilities expense.

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

Revenues: The amount of revenue before adjusting entries is $305,800.

Calculation of expenses before adjusting entries:

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

Thus, the amount of expense before adjusting entries is $261,800.

Calculation of net income before adjusting entries

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

Thus the amount of net income before adjusting entries is $44,000.

3.

To determine

Determine the amount of revenues, expenses and net income of Company CMO after adjusting entries.

Explanation of Solution

Revenues: Revenues are earnings from operations of a business. The operating activities are sale of goods and services, and rent revenue.

Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and utilities expense.

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

Calculation of revenue after adjusting entries:

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

Thus, the amount of revenue after adjusting entries is $323,840.

Calculation of expenses after adjusting entries:

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

Thus, the amount of expense after adjusting entries is $273,095.

Calculation of net income after adjusting entries:

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

Thus, the amount of net income after adjusting entries is $50,745.

4.

To determine

Determine the effect of the adjusting entries on the retained earnings of Company CMO.

Explanation of Solution

Due to the adjusting entry there is an increase in the net income of $6,745$\left(\text{\$50,745}\text{-}\text{\$44,000}\right)$.

As a result there will be an increase in the retained earnings of Company CMO.