Chapter 4, Problem 3AP

1.

To determine

Classify the given transactions as deferred revenue, deferred expense, accrued expense, and accrued revenue.

Explanation of Solution

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.

Classification:

Transactions	Type of Adjustment
a.	Deferred expense
b.	Accrued revenue
c.	Deferred expense
d.	Accrued expense
e.	Deferred expense
f.	Deferred expense
g.	Accrued revenue
h.	Accrued expense

Table (1)

Description:

Accrued revenue: This is the revenue earned but cash is not received. It is treated as asset until the cash is received. Hence, accrued revenues require adjustment at the end of the year.

Accrued expense: This is the expense incurred but not yet paid. It is treated as liability until the expense is paid. Hence, accrued expenses require adjustment at the end of the year.

Deferred expense: This is the expense paid by a company in advance and would be treated as asset until the cost expires or the benefit is consumed. Hence, prepaid expenses require adjustment at the end of the year.

2.

To determine

Journal the adjusting entries for Company C.

Explanation of Solution

Transaction (a):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Supplies Expense (+E, –SE)			1,250
			Supplies (–A)			1,250
		(Record part of supplies consumed)

Table (2)

Working note:

Calculate supplies expense.

$\begin{array}{c}\text{Supplies expense}=\text{Supplies on hand + Purchases }-\text{Ending supplies}\\ =\$450+\$1,200-\$400\\ =\$1,250\end{array}$

Transaction (b):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Accounts Receivable (+A)			7,440
			Catering Revenue (+R, +SE)			7,440
		(Record accrued revenue)

Table (3)

Transaction (c):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Insurance Expense (+E, –SE)			200
			Prepaid Insurance (–A)			200
		(Record part of prepaid insurance expired)

Table (4)

Working Notes:

Calculate insurance expense.

$\begin{array}{c}\text{Insurance expense for 2 months}=\text{Total amount}\times \frac{2}{12}\\ =\$1,200\times \frac{2}{12}\\ =\$200\end{array}$

Transaction (d):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Repairs Expense (+E, –SE)			600
			Accounts Payable (+L)			600
		(Record accrued expense)

Table (5)

Transaction (e):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Rent Expense (+E, –SE)			700
			Prepaid Rent (–A)			700
		(Record part of prepaid rent expired)

Table (6)

Working Notes:

Calculate rent expense.

$\begin{array}{c}\text{Rent expense for 1 month}=\text{Total amount}\times \frac{1}{3}\\ =\$2,100\times \frac{1}{3}\\ =\$700\end{array}$

Transaction (f):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Depreciation Expense (+E, –SE)			2,570
			Accumulated Depreciation (+XA, –A)			2,570
		(Record depreciation expense)

Table (7)

Transaction (g):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Interest Receivable (+A)			4,000
			Interest Income (+R, +SE)			4,000
		(Record accrued revenue)

Table (8)

Working Notes:

Ascertain the amount of interest income adjustment.

$\begin{array}{c}\text{Interest income = Principal amount }\times \text{ Annual rate of interest }\times \text{Time period}\\ \text{= \$4,000 ×}\frac{12}{\text{100}}\text{×}\frac{2}{\text{12}}\\ =\$80\end{array}$

Transaction (h):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Income Tax Expense (+E, –SE)			6,150
			Income Tax Payable (+L)			6,150
		(Record accrued expense)

Table (9)

Working notes:

Calculate income before taxes.

$\begin{array}{c}\text{Income before income taxes = }\left\{\begin{array}{l}\text{Income before adjustments}-\\ \text{Effects of adjustments }\left(\text{a}\right)\text{ to }\left(\text{g}\right)\end{array}\right\}\\ \text{= }\left[\begin{array}{l}\text{\$22,400}-\\ \left(\begin{array}{l}-\$1,250+\$7,440–\$200–\$600–\\ \$700–\$2,570+\$80\end{array}\right)\end{array}\right]\\ =\$22,400+\$2,200\\ =\$24,600\end{array}$

Calculate income tax expense.

$\begin{array}{c}\text{Income tax expense = Income before income taxes }\times \text{ Income tax rate}\\ \text{= \$24,600}\times \frac{25}{100}\\ =\$6,150\end{array}$