Chapter 4, Problem 10BP

a)

To determine

Record the necessary adjustment entries at December 31.

Explanation of Solution

Adjusting Entries

Adjusting entries are the journal entries that are adjusted at the end of the fiscal year in order to reflect the unearned revenues and accrued expenses that occurred during the current year.

Prepare the adjusting entry for the unadjusted balances on December 31 for Company O:

1. Adjustment of Prepaid Insurance

Prepaid Insurance is a prepaid expense. Prepaid expense is an expense that is paid in advance in the current year for which the benefits are available in the future years.

The prepaid insurance is adjusted with the amount equal to the cost of the prepaid insurance expired during the year. The amount of cost that has been expired is transferred from the asset account (Prepaid Insurance) to the expense account (Insurance Expense).

$\begin{array}{c}\begin{array}{l}\text{Insurance Expenses}\\ \text{Expired during }\\ \text{December}\end{array}]=\left[\left(\begin{array}{l}\text{Unadjusted Amount }\\ \text{of Prepaid Insurance}\end{array}\right)-\left(\begin{array}{l}\text{Prepaid Insurance}\\ \text{at Decemebr 31}\end{array}\right)\right]\\ \text{= \$7,200 }-\$2,400\\ =\$4,800\end{array}$ (1)

The adjusting entry for the prepaid insurance expired during December:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Insurance Expense (E–)		4,800
	Prepaid Insurance(A–)			4,800
	(To record the amount of prepaid insurance expired during the period)

Table (1)

• Insurance expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Prepaid Insurance is an asset. There is a decrease in assets, and therefore it is credited.

2. Adjusting entries for Depreciation – Furniture and Fixtures

Depreciation is the written down value that is charged against the asset at the end of every accounting period. It is treated as a deferred expenditure, that is, cost incurred in advance to get benefits of the asset in the future years.

The depreciation is adjusted every year in the two accounts, that is, Accumulated Depreciation account and Depreciation Expense Account. Accumulated Depreciation is a contra-asset account which is used to accumulate the depreciation amount on the related asset.

The adjusting entry for the depreciation expired during the year:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense (E–)		2,000
	Accumulated Depreciation – Furniture and Fixtures (A–)			2,000
	(To record the amount of depreciation for the year)

Table (2)

• Depreciation expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Accumulated Depreciation is a contra-asset account. There is a decrease in asset, and therefore it is credited.

3. Adjusting entries for Depreciation – Delivery Equipment

Depreciation is the written down value that is charged against the asset at the end of every accounting period. It is treated as a deferred expenditure, that is, cost incurred in advance to get benefits of the asset in the future years.

The depreciation is adjusted every year in the two accounts, that is, Accumulated Depreciation account and Depreciation Expense Account. Accumulated Depreciation is a contra-asset account which is used to accumulate the depreciation amount on the related asset.

The adjusting entry for the depreciation expired during the year:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense (E–)		10,000
	Accumulated Depreciation -  Delivery Equipment (A–)			10,000
	(To record the amount of depreciation for the year)

Table (3)

• Depreciation expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Accumulated Depreciation is a contra-asset account. There is a decrease in asset, and therefore it is credited.

4. Adjusting entry for accrued salaries – Sales  

Accrued salaries is treated as accrued expense or unrecorded expense. Unrecorded expense refers to the expense that is incurred during a particular period but has not been paid, and thus not recorded in the books of accounts.

Since the salaries are paid every year, the amount of $1,800 is not recorded in the books of accounts. Therefore, the salaries expenses are an expense of the current year which needs to be adjusted at the end of the year in order to show that salaries are incurred during the year and are a liability that are yet to be paid.

The adjusting entry for the accrued salaries for the year:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Salaries Expense (E–)		1,600
	Salaries Payable (L+)			1,600
	(To record the amount of accrued salaries for the year)

Table (4)

• Sales Salaries Expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Sales Salaries Payable is a liability account. There is an increase in liabilities, and therefore it is credited.

5. Adjusting Entry for Office Supplies:

Office Supplies account is treated as a deferred expense. Deferred expense refers to the cost that is incurred in the current year for which the benefits are available in the future years.

The Office Supplies is adjusted with the amount equal to the cost of the Office supplies used during the year. The amount of cost that has been consumed is transferred from the asset account (Office Supplies) to the expense account (Office Supplies Expense).

Calculate the Office Supplies used during the year:

$\begin{array}{c}\text{Office}\text{Supplies used}=\text{Balance}\text{in}\text{the}\text{trial}\text{balance}-\text{Balance}\text{in}\text{hand}\\ =\text{\$4,800}-\text{\$1,800}\\ =\text{\$3,000}\end{array}$

The adjusting entry for the office supplies used during the year:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Office Supplies Expense (E–)		3,000
	Office Supplies (A–)			3,000
	(To record the amount of office supplies used during the period)

Table (5)

• Office Supplies Expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Office Supplies is an asset. There is a decrease in assets, and therefore it is credited.

b)

To determine

Prepare the multistep income statement for the year ending December 31 for Company 0.

Answer to Problem 10BP

Prepare the multistep income statement for the year ending December 31 for Company BT.

Company O
Income Statement (Multi Step)
For the Year Ending December 31, 2013
Details	Amount ($)	Amount ($)
Sales Revenue		1,154,000
Less: Cost of Goods Sold		(821,200)
Gross Profit		332,800
Operating Expenses:
Selling, general, and administrative expenses (2)	303,000
Total Operating Expenses		(303,000)
Income From Operations		29,800
Other Income and Expenses:
Interest Expenses		Nil
Income Before Income Tax		29,800
Income Tax Expenses		(11,000)
Net Income		18,800

Table (6)

Explanation of Solution

Multi-step income statement: The income statement represented in multi-steps with several subtotals, to report the income from principal operations, and separate the other expenses and revenues which affect net income, is referred to as multi-step income statement.

Working notes:

Calculate the selling, general and administrative expenses:

Particulars	Amount ($)
Utility Expenses	8,600
Sales Salaries Expenses	108,000
Delivery Expenses	36,800
Advertising Expenses	26,200
Rent expenses	30,000
Office Salaries Expenses	72,000
Insurance Expense (Refer Adjustment 1)	4,800
Depreciation Expense (Refer Adjustment 2 and 3)
Furniture and Fixtures	2,000
Delivery Equipment	10,000
Salaries Expenses (Refer Adjustment 4)	1,600
Office Supplies Expenses (Refer Adjustment 5)	3,000
Selling, general, and administrative expenses	303,000

(2)

Table (7)