Chapter 4, Problem 5PB

a.

To determine

Prepare the adjusting entry as at December 31, Year 1.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare the adjusting entries:

Date	Account titles and Explanation	Debit ($)	Credit ($)
December 31	Accounts receivable	3,200
	Lesson revenue earned		3,200
	(To record the accrued but uncollected lesson revenue earned)
December 31	Unearned revenue	800
	Lesson revenue earned		800
	(To record  the unearned to earned revenue)
December 31	Insurance expense (1)	400
	Unexpired insurance		400
	(To record  the insurance expense)
December 31	Rent expense (2)	1,500
	Prepaid rent		1,500
	(To record the rent expense)
December 31	Sheet music supplies expense (3)	250
	Sheet music supplies		250
	(To record the sheet music supplies expense)
December 31	Depreciation expense: Music Equipment (4)	3,000
	Accumulated depreciation: Music Equipment		3,000
	(To record the depreciation expense)
December 31	Interest expense (5)	25
	Interest payable		25
	(To record the interest expense)
December 31	Salaries expense	3,500
	Salaries payable		3,500
	(To record the salaries expense)
December 31	Income taxes expense	8,155
	Income taxes payable		8,155
	(To record the income tax expense)

Table (1)

1. To record the accrued but uncollected lesson revenue earned:

• Accounts receivable is an asset account and it is increased. Therefore, debit accounts receivable with $3,200.
• Lesson revenue earned is a revenue account and it increases the stockholders’ equity account. Therefore, credit lesson revenue earned with $3,200.

2. To record the previously unearned revenue to earned revenue:

• Unearned revenue is a liability account and it is decreased. Therefore, debit unearned revenue with $800.
• Lesson revenue earned is a revenue account and it increases the stockholders’ equity account. Therefore, credit lesson revenue earned with $800.

3. To record the insurance expense:

• Insurance expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit insurance expense with $400.
• Unexpired insurance is an asset account and it is decreased. Therefore, credit unexpired insurance with $400.

Working note:

Calculate the amount of insurance expense:

$\begin{array}{c}\text{Insurance expense}=\frac{\text{Policy amount}}{\text{Number of months }}\\ =\frac{\$4,800}{\text{12Months}}\\ =\$400\end{array}$ (1)

4. To record the rent expense:

• Rent expense is an expense account and it decreases the stockholders’ equity. Therefore, debit rent expense with $1,500.
• Prepaid rent is an asset account and it is decreased. Therefore, credit prepaid rent with $1,500.

Working note:

Calculate the amount of rent expense:

$\begin{array}{c}\text{Rent expense}=\frac{\text{Prepaid rent}}{\text{Number of months paid}}\\ =\frac{\$9,000}{\text{6Months}\left(\text{October to March}\right)}\\ =\$1,500\end{array}$ (2)

5. To record the sheet music supplies expense:

• Sheet music supplies expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit sheet music supplies expense with $250
• Sheet music supplies are an asset account and it is decreased. Therefore, credit office supplies with $250.

Working note:

Calculate the office supplies expense:

$\begin{array}{c}\text{Sheet music supplies expenses}=\left(\begin{array}{l}\text{Sheet music supplies in unadjusted trial balance}-\\ \text{Sheet music supplies in hand}\end{array}\right)\\ =\$450-\$200\\ =\$250\end{array}$ (3)

6. To record the depreciation expense, Music Equipment:

• Depreciation expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit depreciation expense with $3,000.
• Accumulated depreciation is a contra-account and it decreases the value of asset. Therefore, credit accumulated depreciation with $3,000.

Working note:

Calculate the amount of depreciation expense:

$\begin{array}{c}\text{Depreciation expense}=\frac{\text{Cost of the equipment}}{\text{Number of months depreciated}}\\ =\frac{\$180,000}{60\text{Months}}\\ =\$3,000\end{array}$ (4)

7. To record the interest expense:

• Interest expense is an expense account and it decreases the stockholders’ equity. Therefore, debit interest expenses with $25.
• Interest payable is a liability account and it is increased. Therefore, credit interest payable with $25.

Working note:

Calculate the amount of interest expense:

$\begin{array}{c}\text{Interest expense}=\text{Note payable amount}\times \text{Interest rate}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$5,000\times 6\%\times \frac{1\left(\text{December}\right)}{12}\\ =\$25\end{array}$ (5)

8. To record the salaries expense:

• Salaries expense is an expense account and it decreases the stockholders’ equity. Therefore, debit salaries expenses with $3,500.
• Salaries payable is a liability account and it is increased. Therefore, credit salaries payable with $3,500.

9. To record the income tax expense:

• Income tax expense is an expense account and it decreases the stockholders’ equity. Therefore, debit income tax expenses with $8,155.
• Income tax payable is a liability account and it is increased. Therefore, credit salaries payable with $8,155.

b.

To determine

Determine the amount for the given accounts that will be reported in the income statement for the Year 1.

Explanation of Solution

Determine the amount for the given accounts that will be reported in the income statement:

S.No	Particulars	Amount ($)
1	Lesson revenue earned (unadjusted)	$154,375
	Add: Adjusting entry (1)	$3,200
	Adjusting entry (2)	$800
	Lesson revenue Earned in Year 1	$158,375
2	Advertising expense	$7,400
3	Insurance expense (unadjusted)	$4,400
	Add: Adjusting entry (3)	$400
	Insurance expense incurred in Year 1	$4,800
4	Rent expense (unadjusted)	$16,500
	Add: Adjusting entry (4)	$1,500
	Rent expense incurred in Year 1	$18,000
5	Sheet music supplies expense (unadjusted)	$780
	Add: Adjusting entry (5)	$250
	Sheet music supplies expense incurred in Year 1	$1,030
6	Utilities expense	$5,000
7	Depreciation expense: equipment (unadjusted)	$33,000
	Add: Adjusting entry (6)	$3,000
	Equipment depreciation expense in Year 1	$36,000
8	Interest expense (unadjusted)	$25
	Add: Adjusting entry (7)	$25
	Interest expense incurred in Year 1	$50
9	Salaries expense (unadjusted)	$27,500
	Add: Adjusting entry (8)	$3,500
	Salaries expense incurred in Year 1	$31,000
10	Income taxes expense (unadjusted)	$13,845
	Add: Adjusting entry (9)	$8,155
	Income taxes expense incurred in Year 1	$22,000

Table (2)

1. Amount of lesson revenue earned that is to be reported in the income statement is $158,375.

2. Amount of advertising expense that is to be reported in the income statement is $7,400.

3. Amount of insurance expense that is to be reported in the income statement is $4,800.

4. Amount of rent expense that is to be reported in the income statement is $18,000.

5. Amount of office supplies expense that is to be reported in the income statement is $1,030.

6. Amount of utilities expense that is to be reported in the income statement is $5,000.

7. Amount of depreciation expense that is to be reported in the income statement is $36,000.

8. Amount of interest expense that is to be reported in the income statement is $50.

9. Amount of salaries expense that is to be reported in the income statement is $31,000.

10. Amount of income tax expense that is to be reported in the income statement is $22,000.

c.

To determine

Explain whether the dividends amounts to $1,000 have paid or not.

Explanation of Solution

In the adjusted trial balance there is no dividends payable is reported. Thus, the amount $1,000 reported in the unadjusted trial balance is the dividend amount which is already paid.