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1.
Prepare adjusting entry for the items (a) to (g) for the Incorporation J at December 31, 2014.
1.
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Answer to Problem 17E
Prepare adjusting entry for the items (a) to (g) for the Incorporation J at December 31, 2014:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a. | Salaries and wages expense (+E, -SE) | 730 | ||
Salaries and wages payable (+L) | 730 | |||
(To record salaries and wages expense) | ||||
b. | Utilities expense (+E, -SE) | 440 | ||
Utilities payable (+L) | 440 | |||
(To record utilities expenses) | ||||
c. | 24,000 | |||
24,000 | ||||
(To record the accumulated depreciation) | ||||
d. | Interest expense (+E, -SE) (1) | 300 | ||
Interest payable (+L) | 300 | |||
(To record interest payable) | ||||
e. | Maintenance expense (+E, -SE) | 1,100 | ||
Maintenance supplies (-A) | 1,100 | |||
(To record maintenance expense) | ||||
f. | No adjustment is needed because the revenue will not be earned until January of next year. | |||
g. | Income tax expense (+E, -SE) | 5,800 | ||
Income tax payable (+L) | 5,800 | |||
(To record income tax expense) |
Table (1)
Explanation of Solution
Adjusting entries are those entries which are made at the end of the accounting period, to record the revenues in the period of which they have been earned and to record the expenses in the period of which have been incurred, as well as to update all the balances of assets and liabilities accounts on the
(a)
- Salaries and wages expense is the expense account which is a component of
stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit salaries and wages expense with $730. - Salaries and wages payable is a liability. There is an increase in liability. Hence, credit salaries and wages payable with $730.
(b)
- Utilities expense is the expense account which is a component of stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit utilities expense with $440.
- Utilities payable is a liability. There is an increase in liability. Hence, credit utilities payable with $440.
(c)
- Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit depreciation expense with $24,000.
- Accumulated depreciation is a contra-asset. There is a decrease in the asset. Hence, credit accumulated depreciation with $24,000.
(d)
- Interest expense is the expense account which is a component of stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit interest expense with $300.
- Interest payable is a liability. There is an increase in liability. Hence, credit interest payable with $300.
Working notes:
Calculation of interest expense:
(e)
- Maintenance expense is the expense account which is a component of stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit interest expense with $1,100.
- Maintenance supplies are asset. There is a decrease in asset. Hence, credit maintenance supplies with $1,100.
(f)
No adjustment is needed because the revenue will not be earned until January of next year.
(g)
- Income tax expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit income tax expense with $5,800.
- Income tax payable is a liability. There is a increase in the liability. Hence, credit income tax payable with $5,800.
2.
Prepare a corrected income statement for the current year including earnings per share.
2.
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Explanation of Solution
Prepare a corrected income statement for the current year including earnings per share:
Incorporation J | |
Income Statement | |
For the Current Year Ended December 31, 2014 | |
Particulars | Amount ($) |
Operating Revenue: | |
Rental revenue | $109,000 |
Operating Expenses: | |
Salaries and wages (1) | $27,230 |
Maintenance expense (2) | 13,100 |
Rent expense | 8,800 |
Utilities expense (3) | 4,740 |
Gas and oil expense | 3,000 |
Depreciation expense | 24,000 |
Miscellaneous expenses | 1,000 |
Total expenses | 81,870 |
Operating Income | 27,130 |
Other Item: | |
Interest expense (4) | 300 |
Pretax income | 26,830 |
Income tax expense | 5,800 |
Net income | $ 21,030 |
Earnings per share | $3.00 |
Table (2)
The income statement of the Incorporation J shows the net income with $21,030.
Working notes:
Calculation of salaries and wages expenses:
Calculation of maintenance expenses:
Calculation of utilities expenses:
Calculation of interest expense:
3.
Compute the total asset turnover ratio based on the corrected information and to say what does this ratio suggests and to infer about the Incorporation J.
3.
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Explanation of Solution
Total asset turnover ratio:
Total asset turnover ratio is used to determine the asset’s efficiency towards sales.
Calculation of total asset turnover ratio:
The total asset turnover ratio represents that, for every $1 of assets, Incorporation J The total asset turnover ratio represents that, for every $1 of assets, and Incorporation J earns $1.77 in rental revenue. This ratio is lower than the industry average total asset turnover of 2.31, which implies the Incorporation J is less effective at utilizing assets to generate revenue than the average company in the industry.
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Financial Accounting, 8th Edition
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