Concept explainers
a.
Prepare the adjusting entry as at December 31, Year 1.
a.
Explanation of Solution
Prepare the adjusting entries:
Date | Account titles and Explanation | Debit ($) | Credit ($) |
December 31 | Unearned Member dues | 25,200 | |
Client fees earned | 25,200 | ||
(To record the unearned to earned revenue) | |||
December 31 | Insurance expense (1) | 3,840 | |
Unexpired insurance | 3,840 | ||
(To record the insurance expense) | |||
December 31 | Rent expense ($26,2803 months) | 8,760 | |
Prepaid rent | 8,760 | ||
(To record the rent expense) | |||
December 31 | Office supplies expense (2) | 2,064 | |
Office supplies | 2,064 | ||
(To record the office supplies expense) | |||
December 31 | 3,600 | ||
3,600 | |||
(To record the depreciation expense) | |||
December 31 | Interest expense (4) | 900 | |
Interest payable | 900 | ||
(To record the interest expense) | |||
December 31 | Salaries expense | 12,600 | |
Salaries payable | 12,600 | ||
(To record the salaries expense) | |||
December 31 | Income taxes expense | 2,400 | |
Income taxes payable | 2,400 | ||
(To record the income tax expense) |
Table (1)
1. To record the previously unearned revenue to earned revenue:
- Unearned revenue is a liability account and it is decreased. Therefore, debit unearned revenue with $25,200.
- Client revenue earned is a revenue account and it increases the stockholders’ equity account. Therefore, credit fees earned with $25,200.
3. To record the insurance expense:
- Insurance expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit insurance expense with $3,840.
- Unexpired insurance is an asset account and it is decreased. Therefore, credit unexpired insurance with $3.840.
Working note:
Calculate the amount of insurance expense:
Insurance expense=Policy amountNumber of months =$23,0406Months=$3,840 (1)
4. To record the rent expense:
- Rent expense is an expense account and it decreases the stockholders’ equity. Therefore, debit rent expense with $8,760.
- Prepaid rent is an asset account and it is decreased. Therefore, credit prepaid adverting with $8,760.
5. To record the office supplies expense:
- Office supplies expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit office supplies expense with $2,064.
- Office supplies are an asset account and it is decreased. Therefore, credit office supplies with $2,064.
Working note:
Calculate the climbing supplies expense:
Office supplies expenses=(Office supplies in unadjusted trial balance−Office supplies in hand)=$2,592−$528=$2,064 (3)
6. To record the depreciation expense, Climbing Equipment:
- Depreciation expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit depreciation expense with $3,600.
- Accumulated depreciation is a contra-account and it decreases the value of asset. Therefore, credit accumulated depreciation with $3,600.
Working note:
Calculate the amount of depreciation expense:
Depreciation expense=Cost of the computer equipmentNumber of months depreciated=$129,60036Months=$3,600 (3)
7. To record the interest expense:
- Interest expense is an expense account and it decreases the stockholders’ equity. Therefore, debit interest expenses with $900.
- Interest payable is a liability account and it is increased. Therefore, credit interest payable with $900.
Working note:
Calculate the amount of interest expense:
Interest expense=Note payable amount×Interest rate×Number of monthsMonths in a year=$108,000×10%×1(December)12=$900 (4)
7. To record the salaries expense:
- Salaries expense is an expense account and it decreases the stockholders’ equity. Therefore, debit salaries expenses with $12,600.
- Salaries payable is a liability account and it is increased. Therefore, credit salaries payable with $12,600.
8. 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 $2,400.
- Income tax payable is a liability account and it is increased. Therefore, credit salaries payable with $2,400.
b.
Determine the amount for the given accounts that will be reported in the balance sheet for the Year 1.
b.
Explanation of Solution
Determine the amount for the given accounts that will be reported in the balance sheet:
S.No | Particulars | Amount ($) |
1 | Cash (No adjustments) | $203,400 |
2 | Unexpired insurance (unadjusted) | $15,360 |
Less: Adjusting entry (2) | $3,840 | |
Unexpired insurance at December, Year 1 | $11,520 | |
3 | Prepaid rent (unadjusted) | $17,520 |
Less: Adjusting entry (3) | $8,760 | |
Prepaid rent at December, Year 1 | $8,760 | |
4 | Office supplies (unadjusted) | $2,592 |
Less: Adjusting entry (4) | $2,064 | |
Office supplies at December, Year 1 | $528 | |
5 | Computer equipment (No adjustments) | $129,600 |
6 | Accumulated depreciation: Computer equipment (unadjusted) | $64,800 |
Add: Adjusting entry (5) | $3,600 | |
Accumulated depreciation at December, Year 1 | $68,400 | |
7 | Accounts payable (No adjustments) | $5,160 |
8 | Notes payable (No adjustments) | $108,000 |
9 | Salaries payable (unadjusted) | 0 |
Add: Adjusting entry (7) | $12,600 | |
Salaries payable at December 31, Year 1 | $12,600 | |
10 | Interest payable (unadjusted) | $8,100 |
Add: Adjusting entry (6) | $900 | |
Interest payable at December 31, Year 1 | $9,000 | |
11 | Income taxes payable (unadjusted) | $9,000 |
Add: Adjusting entry (8) | $2,400 | |
Income taxes payable at December 31, Year 1 | $11,400 | |
12 | Unearned client revenue (unadjusted) | $43,200 |
Less: Adjusting entry (1) | $25,200 | |
Unearned client revenue at December 31, Year 1 | $18,000 |
Table (2)
1. Amount of cash that is to be reported in the balance sheet is $203,400.
2. Amount of unexpired insurance that is to be reported in the balance sheet is $11,520.
3. Amount of prepaid rent that is to be reported in the balance sheet is $8,760.
4. Amount of office supplies that is to be reported in the balance sheet is $528.
5. Amount of computer equipment that is to be reported in the balance sheet is $129,600.
6. Amount of accumulated depreciation, computer equipment that is to be reported in the balance sheet is $68,400.
7. Amount of Accounts payable that is to be reported in the balance sheet is $5,160.
8. Amount of notes payable that is to be reported in the balance sheet is $108,000.
9. Amount of salaries payable that is to be reported in the balance sheet is $12,600.
10. Amount of interest payable that is to be reported in the balance sheet is $9,000.
11. Amount of income tax payable that is to be reported in the balance sheet is $11,400.
12. Amount of unearned member due that is to be reported in the balance sheet is $18,000.
c.
Explain the reason for not recording the advance payments from customers as revenue immediately.
c.
Explanation of Solution
Following are the reason for not recording the advance payments from customers as revenue immediately:
According to the revenue recognition principle, the revenue is not recognized until it is earned. Company ME is following the revenue recognition principle. Various clients will be paying advance for the services that are to be provided in the future. When the services are provided, then the company converts the liability account (unearned member dues) to the revenue account (client fees earned).
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