Chapter 3, Problem 5E

a.

To determine

Prepare adjusting entry to record the accrued revenue and the amount of service revenue earned that was collected in advance.

Explanation of Solution

Adjusting entry to record the accrued revenue for the year ended December 31:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Accounts receivable	2,100
	Service revenue $\left(\$7,000\times 30\%\right)$		2,100
	(To record the earned service revenue)

Table (1)

Accrued revenues:

Accrued revenues are the revenues that have been earned, but the cash has not yet been collected for the earned revenue. These accrued revenues create assets. For the portion of collection of cash, created assets would be reduced by way of passing an adjusting entry.

Performed services must be billed while making an adjusting entry to record the accrued service revenue. Accrued service revenue increases both accounts receivable and service revenue.

• Debit to increase the accounts receivable (asset account).
• Credit to increase the service revenue account (Stockholders’ equity account).

Adjusting entry to record the amount of service revenue earned that was collected in advance:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Unearned fees	4,900
	Fees earned		4,900
	(To record the amount of earned service revenue that was collected in advance)

Table (2)

Fees received in advance represent unearned revenue. At the end of Year December 31, earned unearned revenue of $4,900 $\left(\$7,000\times 70\%\right)$ must be recognized by decreasing the unearned revenue (liability account) and by increasing the service revenue (revenue account).  

• Debit to decrease the unearned fees account (liability account).
• Credit to increase the fee earned account (stockholders’ equity account).

b.

To determine

Prepare adjusting entry to record the depreciation expense for the year ended December 31.

Explanation of Solution

Adjusting entries to record the depreciation expense of computers:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Depreciation expense – Computers	1,600
	Accumulated depreciation - Computers		1,600
	(To record the amount of depreciation on computers)

Table (3)

Depreciation expense is the written down value of the tangible asset at the end of each accounting year. Accumulated depreciation is the cumulative depreciation expense till the date from the date of purchase of an asset.

• Debit to increase the Depreciation expense account (Increase in Depreciation expense decreases stockholders’ equity account).
• Credit to increase the Accumulated depreciation account (contra asset account).

c.

To determine

Prepare adjusting entry to record the depreciation expense for the year ended December 31.

Explanation of Solution

Adjusting entries to record the depreciation expense of office furniture:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Depreciation expense – Office furniture	1,850
	Accumulated depreciation - Office furniture		1,850
	(To record the amount of depreciation on office furniture)

Table (4)

Depreciation expense is the written down value of the tangible asset at the end of each accounting year. Accumulated depreciation is the cumulative depreciation expense till the date from the date of purchase of an asset.

• Debit to increase the Depreciation expense account (Increase in Depreciation expense decreases stockholders’ equity account).
• Credit to increase the Accumulated depreciation account (contra asset account).

d.

To determine

Prepare the adjusting entry for Salaries expense for the year ended December 31.

Explanation of Solution

Adjusting entry to record the salaries wages for the year ended December 31:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Salaries expense (SE–)	2,250
	Salaries payable (L+)		2,250
	(To record the salaries accrued but not yet paid)

Table (5)

• Debit to increase the salaries expense account (Increase in salaries expense decreases stockholders’ equity account).
• Credit to increase the salaries payable account (liability account).

Working note:

Calculate the amount of salaries expenses for the year ended December 31

$\begin{array}{c}\text{Salaries expenses}=\left(\begin{array}{l}\text{Adjusted balance of salaries expenses}\\ -\text{Unadjusted balance of salaries expenses}\end{array}\right)\\ =\$15,750-\$13,500\\ \text{=}\text{\$2,250}\end{array}$

e.

To determine

Prepare adjusting entry to record the insurance expense for the year ended December 31.

Explanation of Solution

Adjusting entries to record the insurance expense for the year ended December 31:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Insurance expense	1,400
	Prepaid insurance		1,400
	(To record the prepaid insurance has expired)

Table (6)

Prepaid insurance is a prepaid expense, which should be adjusted through an adjusting entry with the amount equal to the cost of the prepaid insurance expired at the end of the accounting year.

• Debit to increase the insurance expense account (Increase in insurance expense decreases stockholders’ equity account).
• Credit to decrease the prepaid insurance account (asset account).

f.

To determine

Prepare adjusting entry to record the amount of office supplies used for the year ended December 31.

Explanation of Solution

Adjusting entry to record the amount of office supplies used for the year ended December 31:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Supplies expense	580
	Office supplies		580
	(To record the amount of office supplies used during the period)

Table (7)

For the portion of used office supplies, office supplies balance (asset) would be reduced by way of passing an adjusting entry. Office supplies expense of $580 for the used supplies must be recognized.

• Debit to increase the Office supplies expense account (Increase in office supplies expense decreases stockholders’ equity account).
• Credit to decrease the office supplies account (asset account).

g.

To determine

Prepare adjusting entry to record the accrued utilities expenses for the year ended December 31.

Explanation of Solution

Adjusting entry to record the accrued utilities expenses for the year ended December 31:

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Utilities expense	90
	Utilities payable		90
	(To record the utilities expenses incurred but not yet paid)

Table (8)

• Utilities expense is an expense account (increase in Utilities expense decreases stockholders’ equity account), hence debit to increase Utilities expense account with $90.
• Utilities payable is a liability, which is increased by $600. Hence, credit to increase the Utilities payable account by $90.

Working note:

Calculate the amount of accrued utilities expense for the year ended December 31

$\begin{array}{c}\text{Accrued utilities expense}=\left(\begin{array}{l}\text{Adjusted balance of salaries expenses}\\ -\text{Unadjusted balance of salaries expenses}\end{array}\right)\\ =\$1,335-\$1,245\\ \text{=}\text{\$90}\end{array}$