Chapter 4, Problem 4.28P

To determine

Concept Introduction:

Adjusting entries: The adjusting entries are recorded at the end to each accounting period to adjust the account as per the accrual concept of accounting. The adjusting entries include adjustment of depreciation, adjustment of payable expenses, and adjustment of receivable revenue.

Accounting equation:

Accounting equation represents the mathematical relationship between assets, liabilities and equity. According to this equation, assets are equal to the sum of liabilities and equity. The formal for basic accounting equation is as follows:

  $\text{Assets = Liabilities + Equity}$

Requirement-1:

To indicate:

The adjustments for income statement and balance sheet and fill the missing amounts on the statements

Answer to Problem 4.28P

The adjustments for income statement and balance sheet and fill the missing amounts on the statements are as follows:

BIG BLUE RENTAL CORP.
Income Statement
August. 2016
	Adjustments/ Corrections
	Preliminary	Debit	Credit	Final
Commission Revenue	$ 27,000		a. 1500	$ 28,500
Interest Revenue	$ 5,100		f. 840	$ 5,940
Total revenue	$ 32,100			$ 34,440
Rent Expense	$ 3,060		e. 2040	$ 1,020
Wages Expense	$ 7,140	d. 780		$ 7,920
Supplies Expense	$ -	b. 1080		$ 1,080
Interest Expense	$ -	c. 240		$ 240
Total Expenses	$ 10,200			$ 10,260
Net Income	$ 21,900			$ 24,180

BIG BLUE RENTAL CORP.
Balance Sheet
August. 31, 2016
	Adjustments/ Corrections
	Preliminary	Debit	Credit	Final
Assets:
Cash	$ 2,400			$ 2,400
Notes Receivables	$ 78,000			$ 78,000
Commission receivables	$ -	a. 1500		$ 1,500
Interest Receivables	$ -	f. 840		$ 840
Prepaid Rent	$ -	e. 2040		$ 2,040
Supplies	$ 3,900		b. 1080	$ 2,820
Total Assets	$ 84,300			$ 87,600
Liabilities and Stockholder's equity:
Accounts Payable	$ 720			$ 720
Notes Payable	$ 14,400			$ 14,400
Interest payable	$ 240		c. 240	$ 480
Wages Payable	$ -		d. 780	$ 780
Dividend Payable	$ -		g. 8400	$ 8,400
Total Liabilities	$ 15,360			$ 24,780
Paid in Capital	$ 14,400			$ 14,400
Retained earnings:
Balance Aug. 1	$ 32,640			$ 32,640
Net Income	$ 21,900		$ 2,280	$ 24,180
Dividends	$ -	g. 8400		$ 8,400
Balance Aug. 31	$ 54,540			$ 48,420
Total Stockholder's Equity	$ 68,940			$ 62,820
Total Liabilities and Stockholder's equity	$ 84,300			$ 87,600

Explanation of Solution

The adjustments for income statement and balance sheet and fill the missing amounts on the statements are as follows:

BIG BLUE RENTAL CORP.
Income Statement
August. 2016
	Adjustments/ Corrections
	Preliminary	Debit	Credit	Final
Commission Revenue	$ 27,000		a. 1500	$ 28,500
Interest Revenue	$ 5,100		f. 840	$ 5,940
Total revenue	$ 32,100			$ 34,440
Rent Expense	$ 3,060		e. 2040	$ 1,020
Wages Expense	$ 7,140	d. 780		$ 7,920
Supplies Expense	$ -	b. 1080		$ 1,080
Interest Expense	$ -	c. 240		$ 240
Total Expenses	$ 10,200			$ 10,260
Net Income	$ 21,900			$ 24,180

BIG BLUE RENTAL CORP.
Balance Sheet
August. 31, 2016
	Adjustments/ Corrections
	Preliminary	Debit	Credit	Final
Assets:
Cash	$ 2,400			$ 2,400
Notes Receivables	$ 78,000			$ 78,000
Commission receivables	$ -	a. 1500		$ 1,500
Interest Receivables	$ -	f. 840		$ 840
Prepaid Rent	$ -	e. 2040		$ 2,040
Supplies	$ 3,900		b. 1080	$ 2,820
Total Assets	$ 84,300			$ 87,600
Liabilities and Stockholder's equity:
Accounts Payable	$ 720			$ 720
Notes Payable	$ 14,400			$ 14,400
Interest payable	$ 240		c. 240	$ 480
Wages Payable	$ -		d. 780	$ 780
Dividend Payable	$ -		g. 8400	$ 8,400
Total Liabilities	$ 15,360			$ 24,780
Paid in Capital	$ 14,400			$ 14,400
Retained earnings:
Balance Aug. 1	$ 32,640			$ 32,640
Net Income	$ 21,900		$ 2,280	$ 24,180
Dividends	$ -	g. 8400		$ 8,400
Balance Aug. 31	$ 54,540			$ 48,420
Total Stockholder's Equity	$ 68,940			$ 62,820
Total Liabilities and Stockholder's equity	$ 84,300			$ 87,600

To determine

Concept Introduction:

Adjusting entries: The adjusting entries are recorded at the end to each accounting period to adjust the account as per the accrual concept of accounting. The adjusting entries include adjustment of depreciation, adjustment of payable expenses, and adjustment of receivable revenue.

Accounting equation:

Accounting equation represents the mathematical relationship between assets, liabilities and equity. According to this equation, assets are equal to the sum of liabilities and equity. The formal for basic accounting equation is as follows:

  $\text{Assets = Liabilities + Equity}$

Requirement-2:

To indicate:

The why the adjustments have effect on both income statement and balance sheet

Answer to Problem 4.28P

The adjustments are made for accrual or deferred revenue or expenses which affect the income statements as well the balance sheet.

Explanation of Solution

The adjusting entries are recorded at the end to each accounting period to adjust the account as per the accrual concept of accounting. The adjusting entries include adjustment of depreciation, adjustment of payable expenses, and adjustment of receivable revenue.

The adjustments are made for accrual or deferred revenue or expenses which affect the income statements as well the balance sheet.

To determine

Concept Introduction:

Adjusting entries: The adjusting entries are recorded at the end to each accounting period to adjust the account as per the accrual concept of accounting. The adjusting entries include adjustment of depreciation, adjustment of payable expenses, and adjustment of receivable revenue.

Accounting equation:

Accounting equation represents the mathematical relationship between assets, liabilities and equity. According to this equation, assets are equal to the sum of liabilities and equity. The formal for basic accounting equation is as follows:

  $\text{Assets = Liabilities + Equity}$

Requirement-3:

To indicate:

Why the cash account is not affected by the adjustments

Answer to Problem 4.28P

The adjustments are made for accrual or deferred revenue or expenses which affect the income statements as well the balance sheet, but the adjustments do not affect the cash account, because all the cash transactions are recorded at the time of cash payments or receipts.

Explanation of Solution

Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.

The business activity for each type of adjusting entry is explained as follows:

• Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period
• Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period
• Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period
• Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period
• Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period

The adjustments are made for accrual or deferred revenue or expenses which affect the income statements as well the balance sheet, but the adjustments do not affect the cash account, because all the cash transactions are recorded at the time of cash payments or receipts.