Chapter 3, Problem 4PB

The Signage Company specializes in the maintenance and repair of signs, such as billboards. On March 31, 2016, the accountant for The Signage Company prepared the following trial balances:

Instructions

Journalize the seven entries that adjusted the accounts at March 31. None of the accounts were affected by more than one adjusting entry.

To determine

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

Explanation of Solution

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 owner’s equities.
• Credit, all increase in liabilities, revenues, and owners’ equities, all decrease in assets, expenses.

An adjusting entry for Supplies expenses:

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

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Supplies expenses  (1)		4,025
March	31	Supplies			4,025
		(To record the supplies expenses incurred at the end of the year)

Table (1)

• Supplies expense decreased the value of owner’s equity by $4,025; hence debit the supplies expenses for $4,025.
• Supplies are an asset, and it decreased the value of asset by $4,025, hence credit the supplies for $4,025.  

Working note (1):

Calculate the value of supplies expense.

$\begin{array}{c}\text{Supplies}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of}\text{supplies}\right)-\\ \left(\text{The}\text{adjusted balance of supplies}\right)\end{array}\right]\\ =\left(\$6,200–\$2,175\right)\\ =\$4,025\end{array}$

An adjusting entry for insurance expenses:

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

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Insurance expenses (2)		7,850
March	31	Prepaid insurance			7,850
		(To record the insurance expenses incurred at the end of the year)

Table (2)

• Insurance expense decreased the value of owner’s equity by $7,850; hence debit the insurance expenses for $7,850.
• Prepaid insurance is an asset, and it decreased the value of asset by $7,850, hence credit the prepaid insurance for $7,850.  

Working note (2):

Calculate the value of insurance expense.

$\begin{array}{c}\text{Insurance}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of}\text{prepaid insurance}\right)-\\ \left(\text{The}\text{adjusted balance of prepaid insurance}\right)\end{array}\right]\\ =\left(\$9,000–\$1,150\right)\\ =\$7,850\end{array}$

An adjusting entry for depreciation expenses-Buildings:

In this case, Company S recognized the depreciation expenses on buildings at the end of the year. So, the necessary adjusting entry that the Company S should record to recognize the accrued expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Depreciation expenses –Buildings (3)		9,500
March	31	Accumulated depreciation-Buildings			9,500
		(To record the depreciation expenses incurred at the end of the year)

Table (3)

• Depreciation expense decreased the value of owner’s equity by $9,500; hence debit the depreciation expenses for $9,500.
• Accumulated depreciation is a contra-asset account, and it decreased the value of asset by $9,500, hence credit the accumulated depreciation for $9,500.  

Working note (3):

Calculate the value of depreciation expense-Equipment.

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of accumulated depreciation}\right)-\\ \left(\text{The}\text{adjusted balance of accumulated depreciation}\right)\end{array}\right]\\ =\left(\$51,500–\$61,000\right)\\ =\$9,500\end{array}$

An adjusting entry for depreciation expenses-Trucks:

In this case, Company S recognized the depreciation expenses on trucks at the end of the year. So, the necessary adjusting entry that the Company S should record to recognize the accrued expense is as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Depreciation expenses –Trucks(4)		5,000
March	31	Accumulated depreciation-Trucks			5,000
		(To record the depreciation expenses incurred at the end of the year)

Table (4)

• Depreciation expense decreased the value of owner’s equity by $5,000; hence debit the depreciation expenses for $5,000.
• Accumulated depreciation is a contra-asset account, and it decreased the value of asset by $5,000, hence credit the accumulated depreciation for $5,000.  

Working note (4):

Calculate the value of depreciation expense-Trucks.

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of accumulated depreciation}\right)-\\ \left(\text{The}\text{adjusted balance of accumulated depreciation}\right)\end{array}\right]\\ =\left(\$12,000–\$17,000\right)\\ =\$5,000\end{array}$

An adjusting entry for utilities expenses:

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

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Utilities expenses  (5)		1,830
March	31	Accounts payable			1,830
		(To record the utilities expenses incurred at the end of the year)

Table (5)

• Utilities expense decreased the value of owner’s equity by $1,830; hence debit the utilities expenses for $1,830.
• Accounts payable is a liability, and it increased the value of liability by $1,830, hence credit the accounts payable for $1,830.  

Working note (5):

Calculate the value of utilities expense.

$\begin{array}{c}\text{Utilities}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of utilities expense}\right)-\\ \left(\text{The}\text{adjusted balance of utilities expense}\right)\end{array}\right]\\ =\left(\$6,200–\$8,030\right)\\ =\$1,830\end{array}$

An adjusting entry for salaries expenses:

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

Date		Description	Post Ref.	Debit ($)	Credit ($)
2019		Salaries expenses  (6)		1,400
March	31	Salaries payable			1,400
		(To record the salaries expenses incurred at the end of the year)

Table (6)

• Salaries expense decreased the value of owner’s equity by $1,400; hence debit the salaries expenses for $1,400.
• Salaries payable is a liability, and it increased the value of liability by $1,400, hence credit the salaries payable for $1,400.  

Working note (6):

Calculate the value of salaries expense.

$\begin{array}{c}\text{Salaries}\text{expense}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of salaries expense}\right)-\\ \left(\text{The}\text{adjusted balance of salaries expense}\right)\end{array}\right]\\ =\left(\$80,000–\$81,400\right)\\ =\$1,400\end{array}$

An adjusting entry for unearned service fees:

In this case, Company S received cash in advance before the service provided to customer. So, the necessary adjusting entry that the Company S 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		6,650
March	31	Service fees earned (7)			6,650
		(To record the unearned service fees at the end of the year)

Table (7)

• Unearned service fees are a liability, and it decreased the value of liability by $6,650, hence debit the unearned service fees for $6,650.
• Service fees earned increased owner’s equity by $6,650; hence credit the service fees earned for $6,650

Working note (7):

Calculate the value of service fees earned.

$\begin{array}{c}\text{Service fees earned}\text{=}\left[\begin{array}{l}\left(\text{The}\text{unadjusted balance}\text{of service fees earned}\right)-\\ \left(\text{The}\text{adjusted balance of service fees earned}\right)\end{array}\right]\\ =\left(\$162,680–\$169,330\right)\\ =\$6,650\end{array}$