Chapter 3, Problem 48E

Expense Adjustments

Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities:

1. On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance.
2. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid.
3. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31.
4. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for 3 months' sponsorship-November 2019, December 2019, and January 2020-in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months' advertising has been and I month remains unused.

Required:

1. Prepare adjusting entries at December 31 for these four activities.
2. CONCEPTUAL CONNECTION What would be the effect on expenses if the adjusting entries were not made?

To determine

Concept Introduction:

Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.

The business activity for each type of adjusting entry is explained as follows:

• Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
• Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
• Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
• Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
• Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period.
Requirement-1:

To prepare:

The adjusting entry for the given adjustments.

Answer to Problem 48E

The adjusting entries for the given adjustments are as follows:

Faraday Electronic Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Insurance Expense	$ 1,620
		Prepaid Insurance		$ 1,620
b.	Dec. 31	Utilities Expense	$ 1,520
		Utilities payable		$ 1,520
c.	Dec. 31	Rent Expense	$ 1,440
		Rent Payable		$ 1,440
c.	Dec. 31	Advertisement Expense	$ 2,900
		Prepaid Advertisement		$ 2,900

Explanation of Solution

The adjusting entries for the given adjustments are explained as follows:

Faraday Electronic Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Insurance Expense (4860*4/12)	$ 1,620
		Prepaid Insurance		$ 1,620
		(being adjustment made for the expense accrued)
b.	Dec. 31	Utilities Expense	$ 1,520
		Utilities payable		$ 1,520
		(being adjustment made for the expense accrued)
c.	Dec. 31	Rent Expense	$ 1,440
		Rent Payable		$ 1,440
		(being adjustment made for the expense accrued)
c.	Dec. 31	Advertisement Expense (4350*2/3)	$ 2,900
		Prepaid Advertisement		$ 2,900
		(being adjustment made for the expense accrued)

To determine

Concept Introduction:

Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.

The business activity for each type of adjusting entry is explained as follows:

• Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
• Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
• Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
• Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
• Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period.
Requirement-1:

To prepare:

The adjusting entry for the given adjustments.

Answer to Problem 48E

The adjusting entries for the given adjustments are as follows:

Faraday Electronic Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Insurance Expense	$ 1,620
		Prepaid Insurance		$ 1,620
b.	Dec. 31	Utilities Expense	$ 1,520
		Utilities payable		$ 1,520
c.	Dec. 31	Rent Expense	$ 1,440
		Rent Payable		$ 1,440
c.	Dec. 31	Advertisement Expense	$ 2,900
		Prepaid Advertisement		$ 2,900

Explanation of Solution

The adjusting entries for the given adjustments are explained as follows:

Faraday Electronic Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Insurance Expense (4860*4/12)	$ 1,620
		Prepaid Insurance		$ 1,620
		(being adjustment made for the expense accrued)
b.	Dec. 31	Utilities Expense	$ 1,520
		Utilities payable		$ 1,520
		(being adjustment made for the expense accrued)
c.	Dec. 31	Rent Expense	$ 1,440
		Rent Payable		$ 1,440
		(being adjustment made for the expense accrued)
c.	Dec. 31	Advertisement Expense (4350*2/3)	$ 2,900
		Prepaid Advertisement		$ 2,900
		(being adjustment made for the expense accrued)

To determine

Concept Introduction:

Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.

The business activity for each type of adjusting entry is explained as follows:

• Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
• Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
• Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
• Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
• Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period.
Requirement-2:

To Indicate:

The effect of omission of above adjusting entries on the expenses.

Answer to Problem 48E

The of omission of above adjusting entries would result in understatement of expenses by $7,480.

Explanation of Solution

The adjusting entries for the given adjustments are explained as follows:

Faraday Electronic Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Insurance Expense (4860*4/12)	$ 1,620
		Prepaid Insurance		$ 1,620
		(being adjustment made for the expense accrued)
b.	Dec. 31	Utilities Expense	$ 1,520
		Utilities payable		$ 1,520
		(being adjustment made for the expense accrued)
c.	Dec. 31	Rent Expense	$ 1,440
		Rent Payable		$ 1,440
		(being adjustment made for the expense accrued)
c.	Dec. 31	Advertisement Expense (4350*2/3)	$ 2,900
		Prepaid Advertisement		$ 2,900
		(being adjustment made for the expense accrued)

The of omission of above adjusting entries would result in understatement of expenses by $1620+1520+1440+2900 = $7,480