Chapter 3, Problem 53E

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 entries as on Dec. 31 for the given transactions.

Answer to Problem 53E

The adjusting entries as on Dec. 31 for the given transactions are as follows:

Reynold Computer Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Depreciation Expense- Equipment	$ 132,500
		Accumulated Depreciation- Equipment		$ 132,500
b.	Dec. 31	Insurance Expense	$ 2,040
		Prepaid Insurance		$ 2,040
c.	Dec. 31	Accounts Receivables	$ 5,450
		Service Revenue		$ 5,450
c.	Dec. 31	Rent Expense	$390
		Rent Payable		$390
d.	Dec. 31	Unearned Rent Revenue	$ 1,810
		Rent Revenue		$ 1,810

Explanation of Solution

The adjusting entries as on Dec. 31 for the given transactions are explained as follows:

Reynold Computer Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit
a.	Dec. 31	Depreciation Expense- Equipment	$ 132,500
		Accumulated Depreciation- Equipment		$ 132,500
		(being adjustment made for the expense accrued)
b.	Dec. 31	Insurance Expense (12240*4/24)	$ 2,040
		Prepaid Insurance		$ 2,040
		(being adjustment made for the expense accrued)
c.	Dec. 31	Accounts Receivables	$ 5,450
		Service Revenue		$ 5,450
		(being adjustment made for the revenue accrued)
c.	Dec. 31	Rent Expense (12*65/2)	$390
		Rent Payable		$390
		(being adjustment made for the expense accrued)
d.	Dec. 31	Unearned Rent Revenue	$ 1,810
		Rent Revenue		$ 1,810
		(being adjustment made for the revenue 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 the above adjusting entry on balance sheet and income statement.

Answer to Problem 53E

The effect of omission of the above adjusting entry on balance sheet and income statement is as follows:

#	Effect of Omission
a.	Understatement of Expense
	Overstatement of Assets
b.	Understatement of Expense
	Overstatement of Assets
c.	Understatement of Assets
	Understatement of Revenue
c.	Understatement of Expenses
	Understatement of Liabilities
d.	Overstatement of Liabilities
	Understatement of Revenue

Explanation of Solution

The effect of omission of the above adjusting entry on balance sheet and income statement is explained as follows:

Reynold Computer Service
Adjusting entries
As on Dec. 31, 2019
#	Date	Account titles	Debit	Credit	Effect of Omission
a.	Dec. 31	Depreciation Expense- Equipment	$ 132,500		Understatement of Expense
		Accumulated Depreciation- Equipment		$ 132,500	Overstatement of Assets
		(being adjustment made for the expense accrued)
b.	Dec. 31	Insurance Expense (12240*4/24)	$ 2,040		Understatement of Expense
		Prepaid Insurance		$ 2,040	Overstatement of Assets
		(being adjustment made for the expense accrued)
c.	Dec. 31	Accounts Receivables	$ 5,450		Understatement of Assets
		Service Revenue		$ 5,450	Understatement of Revenue
		(being adjustment made for the revenue accrued)
c.	Dec. 31	Rent Expense (12*65/2)	$390		Understatement of Expenses
		Rent Payable		$390	Understatement of Liabilities
		(being adjustment made for the expense accrued)
d.	Dec. 31	Unearned Rent Revenue	$ 1,810		Overstatement of Liabilities
		Rent Revenue		$ 1,810	Understatement of Revenue
		(being adjustment made for the revenue accrued)