Chapter 4, Problem 4.9.1AAMCP

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 (g) on January 31, 2017.

Explanation of Solution

a. 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 ($750)		($750)		Insurance expense $750	($750)

Computation of insurance expenses:

Prepaid insurance is $18,000

Monthly insurance expense is calculated as follows:

  $\begin{array}{c}\text{Monthly}\text{insurance}\text{expense}=\frac{\text{prepaid}\text{insurance}}{\text{number}\text{of}\text{months}}\\ =\frac{\$18,000}{24}\\ =\$750\end{array}$

b. Adjustments for depreciation on warehouse

Activity:  Operating

Accounts:  Depreciation expense − warehouse: Increases.

      Accumulated depreciation − warehouse: Increase

      Warehouse: Decrease

Statements: Balance sheet and Income statement.

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

  $\begin{array}{c}\text{Annual}\text{depreciation}\text{=}\frac{\text{Cost}\text{of}\text{Asset}-\text{Salvage}\text{value}}{\text{Useful}\text{life}}\\ =\frac{\$40,000-\$4,000}{20}\\ =\$1,800\end{array}$

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. Adjustments for depreciation on truck fleet

Activity:  Operating

Accounts:  Depreciation expense − truck fleet: Increases.

      Accumulated depreciation − truck fleet: Increase

       Truck fleet: Decrease

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Truck fleet ($3,125)		($3,125)		Depreciation expense −truck fleet $3,125	($3,125)

  $\begin{array}{c}\text{Annual}\text{depreciation}\text{=}\frac{\text{Cost}\text{of}\text{Asset}-\text{Salvage}\text{value}}{\text{Useful}\text{life}}\\ =\frac{\$240,000-\$15,000}{6}\\ =\$37,500\end{array}$

Monthly depreciation is calculated as follows:

  $\begin{array}{c}\text{Monthly}\text{depreciation}=\frac{\text{annual}\text{depreciation}}{\text{number}\text{of}\text{months}}\\ =\frac{\$37,500}{12}\\ =\$3,125\end{array}$

d. Adjustment for interest payable

Activity:  Operating

Accounts:  Interest payable: Increase

      Interest expense: Increase

Statements: Balance sheet and Income statement

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Interest payable $375	($375)		Interest expenses $375	($375)

Calculation of interest expense:

  $\begin{array}{c}\text{Annual}\text{interest}=\text{principal}\times \text{rate}\\ =\text{\$50,000}\times \text{9\%}\\ =\text{\$4,500}\end{array}$

Monthly interest expense is calculated as follows:

  $\begin{array}{c}\text{Monthly}\text{interest}\text{expense}=\frac{\text{annual}\text{interest}\text{expense}}{\text{number}\text{of}\text{months}}\\ =\frac{\$4,500}{12}\\ =\$375\end{array}$

e. Adjustment for revenue recognized

Activity:  Operating

Accounts:  Revenue: Increase

      Customer deposits: Decrease

Statements: Balance sheet and Income statement

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Customer deposits ($4,500)	$4,500	Revenue $4,500		$4,500

f. Adjustment for accrued wages and salary

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 $8,200	($8,200)		Wages and salary expense $8,200	($8,200)

g. Adjustments for income tax.

Activity:  Operating

Accounts:  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 $9,237	($9,237)		Income tax expenses $9,237	($9,237)

Computation of income tax for month:

Particular	Amount ($)
Revenue:
Freight revenue	165,670
Revenue recognized (customer deposit)	4,500
Total revenue (a)	170,170
Less: expenses:
Gas and oil expense	57,330
Maintenance expense	26,400
Depreciation expense −warehouse	150
Depreciation expense − truck fleet	3,125
Wages and salaries ($43,050 + $8,200)	51,250
Interest expenses	375
Insurance expense	750
Total expenses (b)	139,380
Net income (a − b)	30,790
Income tax ($30,790 × 30%)	9,237