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.

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.

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		Particulars	Debit ($)	Credit ($)
	(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.

$\begin{array}{c}\text{Rent expense = }\left[\text{Rental value }\times \frac{\text{Number of months rent outstanding }}{\text{Number of months in a year}}\right]\\ =\$1,200\times \frac{5\text{ months (May1 to September 30)}}{12\text{ months}}\\ =\$500\end{array}$

Working note 2:

Calculate the value of deferred revenue.

$\begin{array}{c}\text{Deferred revenue =}\left[\begin{array}{l}\left(\begin{array}{l}\text{Unadjusted value }\\ \text{of deferred revenue}\end{array}\right)\times \\ \left[\frac{\text{During the current month}}{\left(\begin{array}{l}\text{Number of months between }\\ \text{September 1 to November 30}\end{array}\right)}\right]\end{array}\right]\\ =\$1,500\times \frac{1}{3}\\ =\$500\end{array}$

Working note 3:

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

$\begin{array}{c}\text{Salaries and wages expense = One month salaries }\times \frac{1}{2}\\ =\$4,000\times \frac{1}{2}(\text{half a month)}\\ =\$2,000\end{array}$

Working note 4:

Calculate the unadjusted net income.

$\begin{array}{c}\text{Unadjusted net income = Service revenue }-\left(\begin{array}{l}\text{Salaries and wages expense+}\\ \text{Rent expense+Supplies expense }\end{array}\right)\\ =\$60,700-\left(\$46,000+\$400+\$2,000\right)\\ =\$12,300\end{array}$

Working note 5:

Calculate the value of income tax expense:

$\begin{array}{c}\text{Income tax expense=Adjusted income before tax}\times \text{Tax rate}\\ \text{=}\left(\begin{array}{l}\text{\$12,300 (working note 4)}-\$1,000-\$500-\$1,500\\ +\$500+\$2,000-\$2,000+\$20\end{array}\right)\times \frac{20}{100}\\ =\$10,000\times \frac{20}{100}\\ =\$2,000\end{array}$

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

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)
		2,000	Beg.
		2,000

Income Tax Payable (L)
		250	Beg.
		2,000	h.
		2,250

Service Revenue (R)
a.	1,000	60,700	Beg.
		500	d.
		2,000	e.
		62,200

Rent Expense (E)
Beg.	Beg. 400
b.	500
	900

Accounts Receivable (A)
Beg.	1,000
e.	2,000	1,000	a.
	2,000

Equipment (A)
Beg	6,000
	6,000

Deferred Revenue (L)
		1,500	Beg.
d.	500
		1,000

Common Stock (SE)
		1,000	Beg.
		1,000

Salaries and Wages Expense (E)
Beg.	46,000
f.	2,000
	48,000

Supplies Expense (E)
Beg.	2,000
		200	g.
	1,800

Prepaid Rent (A)
Beg.	800
		500	(b)
	300

Accumulated Depreciation (xA)
		0	Beg.
		1,500	c.
		1,500

Salaries and Wages Payable (L)
		0	Beg.
		2,000	f.
		2,000

Retained Earnings (SE)
		3,750	Beg.
		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 Titles	Debit ($)	Credit ($)
Cash	13,000
Accounts Receivable	2,000
Prepaid Rent	300
Supplies	200
Equipment	6,000
Accumulated Depreciation		1,500
Accounts Payable		2,000
Deferred Revenue		1,000
Salaries and Wages Payable		2,000
Income Tax Payable		2,250
Common Stock		1,000
Retained Earnings		3,750
Service Revenue		62,200
Salaries and Wages Expense	48,000
Supplies Expense	1,800
Depreciation Expense	1,500
Rent Expense	900
Income Tax Expense	2,000
Totals	75,700	75,700

Table (2)

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 Expense	48,000
Supplies Expense	1,800
Depreciation Expense	1,500
Rent Expense	900
Income Tax Expense	2,000
Total Expenses		54,200
Net Income		8,000

Table (3)

Company B
Statement of Retained Earnings
For the Year Ended September 30
Particulars	$
Beginning Balance	3,750
Add: Net Income	8,000
Less: Dividends	-
Ending Balance	11,750

Table (4)

Figure (1)