
Concept explainers
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.
- Rent expenses $400
Depreciation expense- 0ffice equipment $150- Chemical expenses $8,100
- Wages and salaries accrued $1,080
- 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 | Income Statement | ||||
Assets = | Liability + | 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:
b. Adjustments for depreciation on office equipment
Activity: Operating
Accounts: Depreciation expense − equipment: Increases.
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) |
Monthly depreciation is calculated as follows:
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 |
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