Chapter 3, Problem 50E

Exercise 3-50 Prepayment of Expenses

JDM Inc. made the following prepayments for expense items during 2019:

1. Prepaid building rent for I year on April I by paying $6,600. Prepaid rent was debited for the amount paid.
2. Prepaid 12 months' insurance on I by paying Prepaid insurance was debited.
3. 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.
4. 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.

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 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)

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 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)

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-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)