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Explanation of Solution
Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and
Rules of Debit and Credit:
Following rules are to be 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.
Accrued expense: Accrued expense is the expense incurred but not yet paid. It is treated as liability until the expense is paid. Hence, accrued expenses require adjustment at the end of the accounting period.
Accrued revenue: Accrued revenue is the revenue earned but not yet received. It is treated as asset until the cash is received. Hence, accrued revenues require adjustment at the end of the accounting period.
Prepaid expenses:
Advance payment for future expenses is called as prepaid expenses. These prepaid expenses are considered as assets until they are expensed or used. Hence, prepaid expenses require adjustment at the end of the accounting period.
Unearned revenues:
Collection of cash in advance to render service or to deliver goods in future is known as unearned revenues. These unearned revenues are considered as liabilities until they are earned. Hence, unearned revenue requires adjustment at the end of the accounting period.
1.
Prepare adjusting entry for accrued salaries expense.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Salaries Expense | 720 | ||
Salaries Payable | 720 | ||||
(To record accrued salaries for two days of December) |
Table (1)
- Salaries expense is an expense account. The amount has increased because salaries are accrued and the increased expenses decrease equity value. Therefore, debit Salaries Expense account with $720.
- Salaries Payable is a liability account. The amount has increased because salaries that are to be paid have increased. Therefore, credit Salaries Payable account with $720.
Working Notes:
Compute the salaries for two days (Monday and Tuesday).
Salaries for 5 days is $1,800
Number of days is 2 days
2.
Prepare adjusting entry for accrued interest expense.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Interest Expense | 200 | ||
Interest Payable | 200 | ||||
(To record accrued interest) |
Table (2)
- Interest expense is an expense account. The amount has increased because interest is outstanding on the note is accrued and the increased expenses decrease equity value. Therefore, debit Interest Expense account with $200.
- Interest Payable is a liability account. The amount has increased because salaries that are to be paid have increased. Therefore, credit Interest Payable account with $200.
3.
Prepare adjusting entry for accrued service revenue.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Fee Receivable | 900 | ||
Service Revenue | 900 | ||||
(To record accrued earned fee revenue) |
Table (3)
- Fee Receivable is an asset account. The amount has increased because services are performed but the amount is to be received. Therefore, debit Fee Receivable account with $900.
- Service Revenue is a revenue account. The amount has increased because service revenue is to be received and revenues increase Equity value. Therefore, credit Service Revenue account with $900.
4.
Prepare adjusting entry for prepaid maintenance.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Maintenance Expense | 90 | ||
Prepaid Maintenance | 90 | ||||
(To record maintenance expense) |
Table (4)
- Maintenance expense is an expense. There is an increase in the expenses, and therefore debit Maintenance Expense with $90.
- Prepaid Maintenance is an asset. There is a decrease in assets, and therefore credit Prepaid Maintenance with $90.
5.
Prepare adjusting entry for prepaid maintenance.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Advertising Expense | 300 | ||
Prepaid Advertising | 300 | ||||
(To record accrued advertising expense) |
Table (5)
- Advertising expense is an expense. There is an increase in the expenses, and therefore debit Advertising Expense with $300.
- Prepaid Advertising is an asset. There is a decrease in assets, and therefore credit Prepaid Advertising with $300.
Working Note:
Compute maintenance expense for December.
Prepaid advertising expense is $900
Total aired as on December 31 is One-third of $900
6.
Prepare adjusting entry for prepaid maintenance.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Rent Expense | 160 | ||
Prepaid Rent | 160 | ||||
(To record rent expense) |
Table (6)
- Rent expense is an expense. There is an increase in the expenses, and therefore debit Rent Expense with $160.
- Prepaid Rent is an asset. There is a decrease in assets, and therefore credit Prepaid Rent with $160.
Working Note:
Compute rent expense for 15 days.
Total square feet = 400 square feet
Monthly rate per square foot = $0.80
Number of days = 15 days
7.
Prepare adjusting entry for deferred interest income.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Interest Receivable | 38 | ||
Interest Income | 38 | ||||
(To record accrued interest earned on securities) |
Table (7)
- Interest Receivable is an asset account. The amount has increased because interest is earned on securities will be received in future. Therefore, debit Interest Receivable account with $38.
- Interest Income is a revenue account. The amount has increased because interest income is to be received and revenues increase Equity value. Therefore, credit Interest Income account with $38.
8.
Prepare adjusting entry for
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
December | 31 | Depreciation Expense | 2,175 | ||
Equipment | 2,175 | ||||
(To record depreciation expense) |
Table (8)
- Depreciation Expense is an expense account. Expenses decrease Equity value. Therefore, debit Depreciation Expense account with $2,175.
- Accumulated Depreciation – Equipment is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation – Equipment account with $2,175.
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Chapter 3 Solutions
Financial Accounting for Undergraduates
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