Chapter 4, Problem 4.7.1AAP

To determine

Introduction: Accrual basis accounting requires a number of adjustments at the end of the period. The adjustment is made for unearned revenue, accrued expenses, revenue received in advance and prepaid expenses.

To identify & analyze:The necessary adjustments for each of the given transactions from (a) through (e) on June 30, 2017.

Answer to Problem 4.7.1AAP

Following are the adjustments required.

1. Rent expenses $400
2. Depreciation expense- 0ffice equipment $150
3. Chemical expenses $8,100
4. Wages and salaries accrued $1,080
5. Income tax payable $1,881

Explanation of Solution

a. Adjustment for rent expense

Activity:   Operating

Accounts:   Prepaid rent − Decreases

        Rent expense − Increase

Statements:  Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Prepaid rent ($400)		($400)		Rent expense $400	($400)

Computation of rent expenses:

Annual rent is $4,800

Monthly rent is calculated as follows:

  $\begin{array}{c}\text{Monthly}\text{rent}=\frac{\text{prepaid}\text{rent}}{\text{number}\text{of}\text{months}}\\ =\frac{\$4,800}{12}\\ =\$400\end{array}$

b. Adjustments for depreciation on office equipment

Activity:   Operating

Accounts:   Depreciation expense − equipment: Increases.

         Accumulated depreciation − equipment: Increase

        Equipment: Decrease

Statements:  Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Equipment ($150)		($150)		Depreciation expense −equipment $150	($150)

  $\begin{array}{c}\text{Annual}\text{depreciation}\text{=}\frac{\text{Cost}\text{of}\text{Asset}-\text{Salvage}\text{value}}{\text{Useful}\text{life}}\\ =\frac{\$18,200-\$200}{10}\\ =\$1,800\end{array}$

Monthly depreciation is calculated as follows:

  $\begin{array}{c}\text{Monthly}\text{depreciation}=\frac{\text{annual}\text{depreciation}}{\text{number}\text{of}\text{months}}\\ =\frac{\$1,800}{12}\\ =\$150\end{array}$

c. Adjustment for supplies used during the year

Activity:  Operating

Accounts:  Chemical Inventory:Decrease

      Chemicalinventory expense: Increase

Statements: Balance sheet and Income statement

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Chemical inventory ($8,100)		($8,100)		Chemicalinventory expenses $8,100	($8,100)

Calculation of inventory consumed during June:

Particular	Amount ($)
Chemical inventory	9,400
Less: Chemical inventory balance at the end of month	(1,300)
Chemical inventory consumed during June	8,100

d. Adjustment for wages and salary accrued

Activity:  Operating

Accounts:  Wages and salaries payable. Increase

      Wages and salaries expense. Increase

Statements:  Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Wages and salary payable $1,080	($1,080)		Wages and salary expense $1,080	($1,080)

e. Adjustments for income tax payable

Activity:  Operating

Account:  Income tax payable − Increase

      Income tax expenses − Increase

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets=	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Income tax payable $1,881	($1,881)		Income tax expenses $1,881	($1,881)

Computation of income tax for month:

Particular	Amount ($)
Revenue	40,600
Less: expenses:
Rent expense	(400)
Chemical consumed	(8,100)
Depreciation expense - equipment	(150)
Wages and salaries ($22,500 + $1,080)	(23,580)
Utility expenses	(1,240)
Advertising	(860)
Net income	6,270
Income tax ($6,270 × 30%)	1,881