Chapter 4, Problem 4.5.1P

To determine

Introduction: Each financial transaction or economic event will affect either assets, liabilities, or owners’ equity. Thus, the basis for recording the transaction in the accounting system depends on the accounting equation. The accounting equation is:

  $\text{Assets}\text{=}\text{Liabilities}\text{+}\text{Stockholder's}\text{Equity}$

The necessary adjustments for each of the given transactions from (a) through (h) on April 30, 2017.

Answer to Problem 4.5.1P

Following are the adjustments required.

1. Insurance expense$50
2. Supply expenses $70
3. Depreciation expense office equipment $417
4. Depreciation expense Automobile $200
5. Commission revenue $4,500
6. Commission revenue $1,500
7. Interest expense $20
8. Salary $2,500

Explanation of Solution

1. Adjustment for prepaid insurance

Activity: Operating

Accounts: Prepaid insurance − Decreases

     Insurance expense − Increase

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Prepaid insurance ($50)		($50)		Insurance expense $50	($50)

Computation of prepaid insurance:

Prepaid insurance balance $450

Given insurance expense $50, thus insurance expense can be taken.

 b. Adjustment for supplies used during the year

Activity: Operating

Accounts: Supply inventory. Decrease

      Supplies expense. Increase

Statements: Balance sheet and Income statement

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Supply inventory ($70)		($70)		Supply expenses $70	($70)

Supplies consumed during the year

Supplies in hand	$250
Less: Supplies in hand at the end of April 30, 2017	($180)
Supplies consumed	$70

 c. Adjustments for depreciation on office equipment

Activity: Operating

Accounts: Depreciation expense − office equipment Increases.

      Accumulated depreciation − Office equipment. Increase

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets=	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Office equipment ($417)		($417)		Depreciation expense − office equipment $417	($417)

  $\begin{array}{c}\text{Depreciation}=\frac{\text{Cost}\text{of}\text{Asset}\text{-}\text{Salvage}\text{value}}{\text{Useful}\text{life}}\\ \text{=}\frac{\text{\$50,000}-\text{\$0}}{\text{120}\text{months}}\\ =\$417\end{array}$

 d. Adjustments of depreciation on the automobile.

Activity: Operating

Accounts: Depreciation expense − office equipment Increases.

      Accumulated depreciation − Office equipment. Increase

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets=	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Automobile ($200)		($200)		Depreciation expense − Automobile $200	($200)

  $\text{Depreciation}\text{=}\frac{\text{Cost}\text{of}\text{Asset}\text{-}\text{Salvage}\text{value}}{\text{Useful}\text{life}}$

  $\begin{array}{c}\text{Annual depreciation }=\frac{\$12,000-0}{5\text{years}}\\ =\$2,400\end{array}$

Depreciation expense for each month will be:

  $\$200=\frac{\$2,400}{12}$

 e. Adjustment for deferred commission

Activity: Operating

Accounts: Deferred commission. Decreases

     Commission’s revenue. Increases

Statements: Balance sheet and income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Deferred commission($4,500)		$4,500	Commission revenue $4,500		$4,500

  $\text{Deferred commission at the end of April }\$4,500=\$9,500-\$5,000.$

 f. Adjustment for commission receivable

Activity: Operations

Accounts: Commission Receivable. Increases

     Commission revenue. Increases

Statements: Balance sheet and Income Statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Commission receivable $1,500		$1,500	Commission revenue $1,500		$1,500

 g. Adjustment for interest owed

Activity: Operating

Accounts: Interest payable. Increases

     Interest expense. Increases

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Interest payable $20	($20)		Interest expense $20	($20)

 h. Adjustment for Salaries owed

Activity: Operating

Account: Salarypayable. Increases

     Salary expenses expense. Increases

Statements:  Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Salary payable $2,500	($2,500)		Salary expense $2,500	($2,500)