Chapter 3, Problem 4PA

Good Note Company specializes in the repair of music equipment and is owned and operated by Robin Stahl. On November 30, 2019, the end of the current year, the accountant for Good Note prepared the following trial balances:

Instructions

Journalize the seven entries that adjusted the accounts at November 30. None of the accounts were affected by more than one adjusting entry.

To determine

Prepare adjusting entries in the books of Company GN at the end of the year.

Answer to Problem 4PA

Adjusting entries: Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

An adjusting entry for Supplies expenses: In this case, Company GN recognized the supplies expenses at the end of the year. So, the necessary adjusting entry that the Company GN should record to recognize the supplies expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Supplies expenses  (1)		8,850
November	30	Supplies			8,850
		(To record the supplies expenses incurred at the end of the year)

Table (1)

Explanation of Solution

Working note 1: Calculate the value of supplies expense

  $\begin{array}{c}\text{Supplies}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of}\text{supplies}\right)-\\ \left(\text{The}\text{adjusted balance of supplies}\right)\end{array}\right]\\ =\left(\$11,250–\$2,400\right)\\ =\$8,850\end{array}$

Justification for journal entry

• Supplies expense decreases the value of owner’s equity by $8,850; hence debit the supplies expenses for $8,850.
• Supplies are an asset, and it decreases the value of asset by $8,850, hence credit the supplies for $8,850.  

An adjusting entry for insurance expenses: In this case, Company GN recognized the insurance expenses at the end of the year. So, the necessary adjusting entry that the Company GN should record to recognize the prepaid expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Insurance expenses (2)		10,400
November	30	Prepaid insurance			10,400
		(To record the insurance expenses incurred at the end of the year)

Table (2)

Working note 1: Calculate the value of insurance expense

  $\begin{array}{c}\text{Insurance}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of}\text{prepaid insurance}\right)-\\ \left(\text{The}\text{adjusted balance of prepaid insurance}\right)\end{array}\right]\\ =\left(\$14,250–\$3,850\right)\\ =\$10,400\end{array}$

Justification for journal entry

• Insurance expense decreases the value of owner’s equity by $10,400; hence debit the insurance expenses for $10,400.
• Prepaid insurance is an asset, and it decreases the value of asset by $10,400, hence credit the prepaid insurance for $10,400.  

An adjusting entry for depreciation expenses-Equipment: In this case, Company GN recognized the depreciation expenses on equipment at the end of the year. So, the necessary adjusting entry that the Company GN should record to recognize the accrued expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Depreciation expenses –Equipment (3)		11,600
November	30	Accumulated depreciation-Equipment			11,600
		(To record the depreciation expenses incurred at the end of the year)

Table (3)

Working note 3: Calculate the value of depreciation expense-Equipment

  $\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of accumulated depreciation}\right)-\\ \left(\text{The}\text{adjusted balance of accumulated depreciation}\right)\end{array}\right]\\ =\left(\$94,500–\$106,100\right)\\ =\$11,600\end{array}$

Justification for journal entry

• Depreciation expense decreases the value of owner’s equity by $11,600; hence debit the depreciation expenses for $11,600.
• Accumulated depreciation is a contra-asset account, and it decreases the value of asset by $11,600, hence credit the accumulated depreciation for $11,600.  

An adjusting entry for depreciation expenses-Automobiles: In this case, Company GN recognized the depreciation expenses on automobiles at the end of the year. So, the necessary adjusting entry that the Company GN should record to recognize the accrued expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Depreciation expenses –Automobiles (4)		7,300
November	30	Accumulated depreciation-Automobiles			7,300
		(To record the depreciation expenses incurred at the end of the year)

Table (4)

Working note 4: Calculate the value of depreciation expense-Automobiles

  $\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of accumulated depreciation}\right)-\\ \left(\text{The}\text{adjusted balance of accumulated depreciation}\right)\end{array}\right]\\ =\left(\$54,750–\$62,050\right)\\ =\$7,300\end{array}$

Justification for journal entry

• Depreciation expense decreases the value of owner’s equity by $7,300; hence debit the depreciation expenses for $7,300.
• Accumulated depreciation is a contra-asset account, and it decreases the value of asset by $7,300, hence credit the accumulated depreciation for $7,300.  

An adjusting entry for utilities expenses: In this case, Company GN recognized the utilities expenses at the end of the year. So, the necessary adjusting entry that the Company GN should record to recognize the accrued expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Utilities expenses  (5)		1,200
November	30	Accounts payable			1,200
		(To record the utilities expenses incurred at the end of the year)

Table (5)

Working note 5: Calculate the value of utilities expense

  $\begin{array}{c}\text{Utilities}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of utilities expense}\right)-\\ \left(\text{The}\text{adjusted balance of utilities expense}\right)\end{array}\right]\\ =\left(\$12,900–\$14,100\right)\\ =\$1,200\end{array}$

Justification for journal entry

• Utilities expense decreases the value of owner’s equity by $1,200; hence debit the utilities expenses for $1,200.
• Accounts payable is a liability, and it increases the value of liability by $1,200, hence credit the accounts payable for $1,200.  

An adjusting entry for salaries expenses: In this case, Company GN recognized the salaries expenses at the end of the year. So, the necessary adjusting entry that the Company GN should record to recognize the accrued expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Salaries expenses  (6)		8,100
November	30	Salaries payable			8,100
		(To record the salaries expenses incurred at the end of the year)

Table (6)

Working note 6: Calculate the value of salaries expense.

  $\begin{array}{c}\text{Salaries}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of salaries expense}\right)-\\ \left(\text{The}\text{adjusted balance of salaries expense}\right)\end{array}\right]\\ =\left(\$516,900–\$525,000\right)\\ =\$8,100\end{array}$

Justification for journal entry

• Salaries expense decreases the value of owner’s equity by $8,100; hence debit the salaries expenses for $8,100.
• Salaries payable is a liability, and it increases the value of liability by $8,100, hence credit the salaries payable for $8,100.  

An adjusting entry for unearned service fees: In this case, Company GN received cash in advance before the service provided to customer. So, the necessary adjusting entry that the Company GN should record for the unearned fees revenue at the end of the year is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Unearned service fees		9,000
November	30	Service fees earned (7)			9,000
		(To record the unearned service fees at the end of the year)

Table (7)

Working note 7: Calculate the value of service fees earned

$\begin{array}{c}\text{Service fees earned}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of service fees earned}\right)-\\ \left(\text{The}\text{adjusted balance of service fees earned}\right)\end{array}\right]\\ =\left(\$733,800–\$742,800\right)\\ =\$9,000\end{array}$

Justification for journal entry

• Unearned service fees are a liability, and it decreases the value of liability by $9,000, hence debit the unearned service fees for $9,000.
• Service fees earned increases owner’s equity by $9,000; hence credit the service fees earned for $9,000.