Chapter 3, Problem 6GLP

To determine

Adjusting Entries:

Adjusting entries are made at the end of the year to adjust the financial position of the enterprise according to accrual basis of accounting.

Accounting rules regarding journal entries:

► Balance increase when: Assets, losses and expenses get debited and liabilities, gains, and revenue get credited.

► Balance decrease when: Assets, losses and expenses get credited and liabilities, gains, and revenue get debited.

Income Statement:

It is a financial statement which show the profit and loss made by the firm in a particular accounting period.

Statement of Retained Earnings:

It is a financial statement which shows the amount of profit retained by the company for their future unforeseen events.

Balance sheet:

It reports the position of the company in financial terms. It consists of asset and liabilities.

To prepare: Adjusting entries, financial statements and to explain the effect of adjusting entries on net income.

Explanation of Solution

Prepare adjusting entries:

a.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Computer Supplies Expense		3,065
	Computer Supplies			3,065
	(Being $3,065 worth of computer Supplies got exhausted)

• Computer supplies expense is an expense. Since, expense reduces equity, debit computer supplies expense account.

• Computer supplies are an asset. Since, some of asset used up, it reduces asset. Hence, credit computer supply account.

Working Note:

Calculation of computer supply expense:

$\begin{array}{c}\text{Computer}\text{Supply}\text{Expense}=\left(\begin{array}{l}\text{Opening}\text{Computer}\text{Supply}+\text{Purchase}\\ -\text{Closing}\text{Computer}\text{Supply}\end{array}\right)\\ =\$2,545+\$1,100-\$580\\ =\$3,065\end{array}$

b.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Insurance Expense		555
	Prepaid Insurance			555
	(Being insurance coverage worth $555has expired)

• Insurance expense is an expense. Since, expense reduces equity, debit insurance expense account.

• Prepaid Insurance is an asset. Since, some of the insurance is used up, it reduces asset. Hence, credit prepaid insurance account.

Working Note:

Calculation of Insurance expense:

$\begin{array}{c}\text{Insurance}\text{Expense}=\left(\begin{array}{l}\frac{\text{Number}\text{of}\text{Months}\text{Expired}}{\text{Total}\text{Period}\text{of}\text{Policy}}\\ \times \text{Total}\text{Prepaid}\text{Insurance}\end{array}\right)\\ \text{=}\frac{3}{12}\times \$2,220\\ =\$555\end{array}$

c.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Wages Expense		500
	Wages Payable			500
	(Being salaries worth $600 due to be paid)

• Wages expense is a expense. Since, expense reduces equity, debit wages expense account.

• Wages Payable is a liability. Since, expense has occurred but not paid yet, it increases liability. Hence, credit wages payable account.

Working Note:

Calculation of Salary expense:

$\begin{array}{c}\text{Wages}\text{expense}=\text{Number}\text{of}\text{days}\text{wages}\text{not}\text{paid}\times \text{Daily}\text{wages}\\ =4\times \$125\\ =\$500\end{array}$

d.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Depreciation Expense-Computer Equipment		1,250
	Accumulated Depreciation-Computer Equipment			1,250
	(Being depreciation is recorded)

• Depreciation Expense is an expense. Since, expense reduces equity, debit depreciation expense-computer equipment account.

• Accumulated Depreciation-Computer equipment is a Contra asset. Since, it has a normal credit balance. Hence, credit accumulated depreciation-computer equipment account.

Working Note:

Calculation of Depreciation expense:

$\begin{array}{c}\text{Depreciation}\text{Expense}=\frac{\text{Number}\text{of}\text{months}\text{asset}\text{is}\text{used}}{\text{Total}\text{life}\text{of}\text{asset}}\times \text{Value}\text{of}\text{asset}\\ =\frac{\text{3}}{48}\times \$20,000\\ =\$1,250\end{array}$

e.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Depreciation Expense-Office Equipment		400
	Accumulated Depreciation- Office Equipment			400
	(Being depreciation is recorded)

• Depreciation Expense is an expense. Since, expense reduces equity, debit depreciation expense-office equipment account.

• Accumulated Depreciation-Office equipment is a Contra asset. Since, it has a normal credit balance. Hence, credit accumulated depreciation-office equipment account.

Working Note:

Calculation of Depreciation expense:

$\begin{array}{c}\text{Depreciation}\text{Expense}=\frac{\text{Number}\text{of}\text{months}\text{asset}\text{is}\text{used}}{\text{Total}\text{life}\text{of}\text{asset}}\times \text{Value}\text{of}\text{asset}\\ =\frac{\text{3}}{60}\times \$8,000\\ =\$400\end{array}$

f.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Rent Expense		2,475
	Prepaid Rent			2,475
	(Being prepaid rent expired of $2,475)

• Rent expense is a expense. Since, expense reduces equity, debit rent expense account.

• Prepaid rent is an asset. Since, some of the rent is used up, it reduces asset. Hence, credit prepaid rent account.

Working Note:

Calculation of Rent expense:

$\begin{array}{c}\text{Rent}\text{Expense}=\left(\frac{\text{Number}\text{of}\text{Months}\text{Expired}}{\text{Total}\text{Period}\text{of}\text{advance}\text{payment}}\times \text{Total}\text{Prepaid}\text{Rent}\right)\\ \text{=}\frac{3}{4}\times \$3,300\\ =\$2,475\end{array}$

Prepare income statement:

B.S. Company
Income Statement
For the quarter ended December 31, 2017
Particulars	Amount ($)	Amount ($)
Revenue:
Service Revenue	31,284
Total Revenue		31,284
Expenses:
Depreciation Expense- Office equipment	400
Depreciation Expense- Computer equipment	1,250
Wages Expenses	3,875
Insurance Expense	555
Rent Expenses	2,475
Computer Supply Expense	3,065
Advertising Expense	2,753
Mileage expense	896
Miscellaneous Expense	250
Repairs expense	1,305	16,824
Net income		14,460

Net income of B.S. Company is $14,460.

Prepare statement of retained earnings:

B.S. Company
Retained Earnings Statement
For the quarter ended December 31, 2015
Particulars	Amount ($)
Opening balance of retained earnings	0
Net income	14,460
	14,460
Dividends	(7,100)
Ending balance of retained earnings	7,360

Therefore, retained earnings of B.S. Company are $7,360.

Prepare Balance sheet:

B.S. Company
Balance sheet
As on December 31, 2015
Particulars	Amount ($)	Amount ($)
Assets
Cash		48,372
Accounts Receivable		5,668
Computer Supplies		580
Prepaid Insurance		1,665
Prepaid Rent		825
Office equipment	8,000
Accumulated Depreciation- Office equipment	(400)	7,600
Computer equipment	20,000
Accumulated Depreciation- Computer equipment	(1,250)	18,750
Total Assets		83,460
Liabilities and Stockholder’s Equity
Liabilities
Accounts payable		1,100
Wages Payable		500
Unearned computer service revenue		1,500
Stockholder’s Equity
Common Stock	73,000
Retained earnings	7,360
Total stockholders’ equity		80,360
Total Liabilities and Stockholder’s equity		83,460

Hence, balance sheet of B.S. Company as on 31 December, 2015 stood for $83,460.

Effects of adjusting entries on net income:

a.

Computer supplies expense is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

b.

Insurance expense is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

c.

Wages expense is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

d.

Depreciation expense-Computer equipment is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

e.

Depreciation expense-office equipment is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.

f.

Rent expense is an expense. Since, it is debited. It decreased the income of the firm because it increases an expense that is deducted from income.