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Concept explainers
Exercise 3-50 Prepayment of Expenses
JDM Inc. made the following prepayments for expense items during 2019:
- Prepaid building rent for I year on April I by paying $6,600. Prepaid rent was debited for the amount paid.
- Prepaid 12 months' insurance on I by paying Prepaid insurance was debited.
- Purchased $5,250 of office supplies on 15, debiting supplies for the full amount. There were no office supplies on hand as of October 15. Office supplies costing $1,085 remain unused at December 3 1, 2019.
- Paid $600 for a 12-month service contract for repairs and maintenance on a computer. The contract begins November 1. The full amount of the payment was debited to prepaid repairs and maintenance.
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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 journal entries for the cash payments.
Answer to Problem 50E
The journal entries for the cash payments are as follows:
JDM Inc. | ||||
Journal Entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Apr. 1 | Prepaid Rent | $ 6,600 | |
Cash | $ 6,600 | |||
b | Oct. 1 | Prepaid Insurance | $ 4,200 | |
Cash | $ 4,200 | |||
c | Oct. 15 | Supplies | $ 5,250 | |
Cash | $ 5,250 | |||
d | Nov. 1 | Prepaid Repair and maintenance | $600 | |
Cash | $600 |
Explanation of Solution
The journal entries for the cash payments are explained as follows:
JDM Inc. | ||||
Journal Entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Apr. 1 | Prepaid Rent | $ 6,600 | |
Cash | $ 6,600 | |||
(Being amount paid for rent in advance) | ||||
b | Oct. 1 | Prepaid Insurance | $ 4,200 | |
Cash | $ 4,200 | |||
(Being amount paid for insurance in advance) | ||||
c | Oct. 15 | Supplies | $ 5,250 | |
Cash | $ 5,250 | |||
(Being supplies purchased for cash) | ||||
d | Nov. 1 | Prepaid Repair and maintenance | $600 | |
Cash | $600 | |||
(Being amount paid in advance) |
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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 prepare:
The adjusting entries at the end of the year.
Answer to Problem 50E
The adjusting entries at the end of the year are as follows:
JDM Inc. | ||||
Adjusting entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Dec. 31 | Rent Expense | $ 4,950 | |
Prepaid Rent | $ 4,950 | |||
b | Dec. 31 | Insurance Expense | $ 1,050 | |
Prepaid Insurance | $ 1,050 | |||
c | Dec. 31 | Supplies Expense | $ 4,165 | |
Supplies | $ 4,165 | |||
d | Dec. 31 | Repair and maintenance Expense | $100 | |
Prepaid Repair and maintenance | $100 |
Explanation of Solution
The adjusting entries at the end of the year are explained as follows:
JDM Inc. | ||||
Adjusting entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Dec. 31 | Rent Expense (6600*9/12) | $ 4,950 | |
Prepaid Rent | $ 4,950 | |||
(Being adjustment made for accrued expense) | ||||
b | Dec. 31 | Insurance Expense (4200*3/12) | $ 1,050 | |
Prepaid Insurance | $ 1,050 | |||
(Being adjustment made for accrued expense) | ||||
c | Dec. 31 | Supplies Expense (5250-1085) | $ 4,165 | |
Supplies | $ 4,165 | |||
(Being adjustment made for accrued expense) | ||||
d | Dec. 31 | Repair and maintenance Expense (600*2/12) | $100 | |
Prepaid Repair and maintenance | $100 | |||
(Being adjustment made for accrued expense) |
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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-3:
To Indicate:
The effect of omission of adjusting entries on the Income statement and balance sheet for the year/
Answer to Problem 50E
The effect of omission of adjusting entries on the Income statement and balance sheet for the year is as follows:
# | Effect of Omission |
a | Understatement of Expenses by $4950 |
Overstatement of assets by $4950 | |
b | Understatement of Expenses by $1050 |
Overstatement of assets by $1050 | |
c | Understatement of Expenses by $4165 |
Overstatement of assets by $4165 | |
d | Understatement of Expenses by $100 |
Overstatement of assets by $100 | |
Explanation of Solution
The effect of omission of adjusting entries on the Income statement and balance sheet for the year is explained as follows:
JDM Inc. | |||||
Adjusting entries | |||||
For the year 2019 | |||||
# | Date | Account Title | Debit | Credit | Effect of Omission |
a | Dec. 31 | Rent Expense (6600*9/12) | $ 4,950 | Understatement of Expenses by $4950 | |
Prepaid Rent | $ 4,950 | Overstatement of assets by $4950 | |||
(Being adjustment made for accrued expense) | |||||
b | Dec. 31 | Insurance Expense (4200*3/12) | $ 1,050 | Understatement of Expenses by $1050 | |
Prepaid Insurance | $ 1,050 | Overstatement of assets by $1050 | |||
(Being adjustment made for accrued expense) | |||||
c | Dec. 31 | Supplies Expense (5250-1085) | $ 4,165 | Understatement of Expenses by $4165 | |
Supplies | $ 4,165 | Overstatement of assets by $4165 | |||
(Being adjustment made for accrued expense) | |||||
d | Dec. 31 | Repair and maintenance Expense (600*2/12) | $100 | Understatement of Expenses by $100 | |
Prepaid Repair and maintenance | $100 | Overstatement of assets by $100 | |||
(Being adjustment made for accrued expense) |
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Chapter 3 Solutions
Cornerstones of Financial Accounting
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