Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Chapter 4, Problem 20E

Preparing Adjusting Entries, an Adjusted Trial Balance, and Financial Statements

Bill’s Boards (BB) is an outdoor advertising company founded by William Longfall. William knows very little accounting so he hired a friend to “keep the books.” Unfortunately, William did not review his friend’s work and now it seems his friend has made a mess of the accounting records. William has provided you the following list of unadjusted account balances at BB’s September 30 fiscal year-end. You have reviewed the balances with William and made notes shown in the right column.

Chapter 4, Problem 20E, Preparing Adjusting Entries, an Adjusted Trial Balance, and Financial Statements Bills Boards (BB)

Required:

  1. 1. Use the notes to determine and record the adjusting journal entries needed on September 30 to (a) fix the premature recording of advertising revenue, (b) update the rent accounts, (c) account for the use of equipment, (d) update deferred revenue, (e) accrue revenue not yet billed, (f ) accrue unpaid wages, (g) correct the supplies accounts, and (h) accrue income taxes for the year.
  2. 2. Post the adjusting journal entries from requirement 1 to T-accounts to determine new adjusted balances, and prepare an adjusted trial balance. (If you are completing this exercise using the general ledger tool in Connect, this requirement will be completed automatically for you.)
  3. 3. Using the adjusted account balances from requirement 2, prepare an income statement, statement of retained earnings, and classified balance sheet.

a.

Expert Solution
Check Mark
To determine

Record the adjusting journal entries needed on September 30.

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 balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Record the adjusting journal entries needed on September 30 as follows:

Date ParticularsDebit ($)Credit ($)
 (a)Service Revenue (+R, +SE)1,000 
   Accounts Receivable (+A) 1,000
  (To record the service revenue recognized on account)  
 (b)Rent Expense (+E, –SE) (1)500 
   Prepaid Rent (–A) 500
  (To record the interest expense incurred at the end of the accounting year)  
 (c)Depreciation Expense (+E, –SE)1,500 
   Accumulated Depreciation (+xA, –A) 1,500
  (To record the depreciation expense incurred at the end of the accounting year)  
 (d)Deferred Revenue (–L) (2)500 
   Service Revenue (+R, +SE) 500
  (To record the service revenue recognized at the end of the accounting year)  
 (e)Accounts Receivable (+A)2,000 
   Service Revenue (+R, +SE) 2,000
  (To record the service revenue earned on account)  
 (f)Salaries and Wages Expense (+E, –SE) (3)2,000 
   Salaries and Wages Payable (+L) 2,000
  (To record the salaries and wages expense incurred at the end of the accounting year)  
 (g)Supplies (+A)200 
   Supplies Expense (–E, +SE) 200
  (To record supplies expense incurred at the end of the accounting year)  
 (h)Income Tax Expense (+E, –SE) ( 5)2,000 
   Income Tax Payable (+L) 2,000
  (To record the income tax expense incurred at the end of the accounting year)  

Table (1)

Working note 1:

Calculate the value of rent expense.

Rent expense = [Rental value ×Number of months rent outstanding Number of months in a year]=$1,200×5 months (May1 to September 30)12 months=$500

Working note 2:

Calculate the value of deferred revenue.

Deferred revenue =[ (Unadjusted value of deferred revenue) ×[During the current month(Number of months between September 1 to November 30)]]=$1,500×13=$500

Working note 3:

Calculate the value of salaries and wages expense (adjusted).

Salaries and wages expense = One month salaries ×12=$4,000×12(half a month)=$2,000

Working note 4:

Calculate the unadjusted net income.

Unadjusted net income = Service revenue (Salaries and wages expense+Rent expense+Supplies expense )=$60,700($46,000+$400+$2,000)=$12,300

Working note 5:

Calculate the value of income tax expense:

Income tax expense=Adjusted income before tax×Tax rate=($12,300 (working note 4)$1,000$500$1,500+$500+$2,000$2,000+$20)×20100=$10,000×20100=$2,000

Note: Supplies costing of $200 on hand on September 30 is considered as the supplies expense incurred at the end of the accounting year.

b.

Expert Solution
Check Mark
To determine

Post the adjusting journal entries to T-accounts to determine the new adjusted balance and prepare the adjusted trial balance.

Explanation of Solution

Post the adjusting journal entries to T-accounts to determine the new adjusted balance as follows:

Cash (A)
Beg. 13,000 
    
13,000 
Supplies (A)
Beg.0 
g.200  
200 
Accounts Payable (L)
2,000Beg.
    
2,000
Income Tax Payable (L)
250Beg.
  2,000h.
2,250
Service Revenue (R)
a.1,00060,700Beg.
500d.
  2,000e.
62,200
Rent Expense (E)
Beg.Beg. 400 
b.500  
900 
  Accounts Receivable (A)
Beg.1,000 
e.2,0001,000a.
2,000 
  Equipment (A)
Beg6,000 
    
6,000 
  Deferred Revenue (L)
1,500Beg.
d.500  
1,000
  Common Stock (SE)
1,000Beg.
    
1,000
  Salaries and Wages Expense (E)
Beg.46,000 
f.2,000 
    
48,000 
  Supplies Expense (E)
Beg.2,000 
  200g.
1,800 
  Prepaid Rent (A)
Beg.800 
  500(b)
300 
  Accumulated Depreciation (xA)
0Beg.
  1,500c.
1,500
  Salaries and Wages Payable (L)
0Beg.
  2,000f.
2,000
  Retained Earnings (SE)
3,750Beg.
    
3,750
  Depreciation Expense (E)
Beg.0 
c.1,500 
    
1,500 
  Income Tax Expense
Beg.0 
h.2,000  
2,000 

Prepare the adjusted trial balance as follows:

Company B
Adjusted Trial Balance
September, 30
Account TitlesDebit ($)Credit ($)
Cash13,000
Accounts Receivable2,000
Prepaid Rent300
Supplies200
Equipment6,000
Accumulated Depreciation1,500
Accounts Payable2,000
Deferred Revenue1,000
Salaries and Wages Payable2,000
Income Tax Payable2,250
Common Stock1,000
Retained Earnings3,750
Service Revenue62,200
Salaries and Wages Expense48,000
Supplies Expense1,800
Depreciation Expense1,500
Rent Expense900
Income Tax Expense2,000
     Totals75,70075,700

Table (2)

c.

Expert Solution
Check Mark
To determine

Prepare an income statement, statement of retained earnings, and classified balance sheet of company B.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare an income statement, statement of retained earnings, and classified balance sheet as follows:

Company B
Income Statement
For the Year Ended September 30
Particulars $ $
Service Revenue 62,200
Less: Expenses
Salaries and Wages Expense48,000
Supplies Expense1,800
Depreciation Expense1,500
Rent Expense900
Income Tax Expense2,000
Total Expenses54,200
Net Income8,000

Table (3)

Company B
Statement of Retained Earnings
For the Year Ended September 30
Particulars $
Beginning Balance3,750
Add: Net Income8,000
Less: Dividends -
Ending Balance11,750

Table (4)

Fundamentals Of Financial Accounting, Chapter 4, Problem 20E

Figure (1)

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Chapter 4 Solutions

Fundamentals Of Financial Accounting

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