Chapter 3 - Adjusting Entries

3131 Intermediate Financial Accounting I

PROBLE !1 The following information relates to the Airflame Company at the end of 2007. They sell merchandise and magazine subscriptions. The accounting period is the calendar year. This is the company's first year of operations. 1. Employees are paid e ery !riday for the fi e"day wor# wee# ending on that day. $alaries amount to %2&'00 per wee#. The accounting period ends on a (ednesday. )n )ctober *&2007& Airflame borrowed %+&000 cash by signing a note payable due in one year at +, interest. -nterest is due when the principal is paid. A note for %2&000 was recei ed from a customer in a sales transaction on .ay *& 2007. The note matures in one year and bears *2, interest per annum. -nterest is due when the principal is due. A portion of Airflame's par#ing lot is used by e/ecuti es of a neighboring company. A person pays %0 per day for each day's use& and the par#ing fees are due by the fifth business day following the month of use. The fees for 1ecember 2*& 2007 amount to %*&200. )n 3uly *& 2007& cash of %'+&000 was recei ed from subscribers 4customers5 for a 20"month subscription period beginning on that date. The receipt was recorded by a debit to Cash and a credit to 6nearned $ubscription 7e enue. The )ffice $upplies on 8and account showed a balance of %2&900 at the beginning of 2007. $upplies costing %*2&000 were purchased during 2007 and debited to the asset account. $upplies of %2&200 were on hand at 1ecember 2*&2007. An insurance premium of %+&000 was paid on April *& 2007& and was charged to :repaid -nsurance. The premium co ers a 2'"month period beginning April *& 2007.

2.

3.

4.

5.

6.

7.

6sing the information gi en abo e& prepare the necessary ad;usting entries at 1ecember 2*& 2007.

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PROBLE

!"

This e/ercise will pro ide you with e/amples of ad;usting entries for< :repaid e/penses when cash payments are recorded in an asset 4real5 account. :repaid e/penses when cash payments are recorded in an e/pense 4nominal5 account. 6nearned re enues when cash receipts are recorded in a liability 4real5 account. 6nearned re enues when cash receipts are recorded in a re enue 4nominal5 account. Thus& this e/ercise will re iew the alternati e treatments of prepaid e/penses and unearned re enues.Each situation described below is independent of the others. *5 )ffice supplies are recorded in an asset account when ac=uired. There were %'00 of supplies on hand at the beginning of the period. Cash purchases of office supplies during the period amount to %>00. A count of supplies at the end of the period shows %220 worth to be on hand. 25 )ffice supplies are recorded in an e/pense account when ac=uired. There were %'00 of supplies on hand at the beginning of the period. Cash purchases of office supplies during the period amount to %>00. A count of supplies at the end of the period shows %220 worth to be on hand. ?o re ersing entries are used. 25 7eceipts from customers for magazine subscriptions are recorded as a liability when cash is collected in ad ance of deli ery. The beginning balance in the liability account was %0&700. 1uring the period& %9'&000 was recei ed for subscriptions. At the end of the period& it was determined that the balance of the 6nearned $ubscription 7e enue account should be %+&000. '5 7eceipts from customers for magazine subscriptions are recorded as re enue when cash is collected in ad ance of deli ery. The beginning balance in the liability account was %0&700. 1uring the period& %9'&000 was recei ed for subscriptions. At the end of the period& it was determined that the balance of the 6nearned $ubscription 7e enue account should be %+&000. ?o re ersing entries are used. -nstructions !or each of the independent situations abo e< 4a5 :repare the appropriate ad;usting entry in general ;ournal form. 4b5 -ndicate the amount of re enue or e/pense which will appear on the income statement for the period. 4c5 -ndicate the balance of the applicable asset or liability account at the end of the period. 4d5 -ndicate the amount of cash recei ed or paid during the period. 4e5 -ndicate the change in the applicable asset or liability account from the beginning of the period to the end of the period.

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SOLUTIONS FOR PROBLEMS PROBLE !1 #olutions$ 17 *''0 C7 *''0

*. $alaries E/pense $alaries :ayable 42&'00 @ 9 A %'+05B 4%'+0 / 2 A %*&''05 -nterest E/pense -nterest :ayable 4%+000 / +, / 2@*2 A %*005 2. -nterest 7ecei able -nterest 7e enue 4%2&000 / *2, / +@*2 A %*005 :ar#ing !ees 7ecei able :ar#ing !ees 7e enue 2.

*00 *00

*00 *00

'.

*200 *200 +000 +000

9. 6nearned $ubscription 7e enue $ubscription 7e enue 4%'+&000 / 0@20 A %+&000 earned re enue5 0. $upplies E/pense )ffice $upplies -n entory 4%2&900 C %*2&000 " %2&200 A %*2&2005 -nsurance E/pense :repaid -nsurance 4%+&000 / >@2' A %2&000 e/pired cost5

%*2&200 *2&200

7.

2000 2000

Approach and E/planation< (rite down the definitions for accrued e/pense and accrued re enue. Thin# about what is to be accomplished by each of the ad;ustments re=uired in this e/ercise. An accrued e/pense is an e/pense that has been incurred but not paid. The DincurredD part results in an increase in E/pense 4debit5 and the Dnot paidD part results in an increase in :ayable 4credit5. An accrued re enue is a re enue that has been earned but not recei ed. The DearnedD part results in an increase in 7e enue 4credit5 and the Dnot recei edD part results in an increase in 7ecei able 4debit5. ?otes< *. -n an ad;usting entry to record accrued salaries e/penses 4e/penses incurred& but not paid5 the debit is to an e/pense account and the credit is to a liability account. The e/pense account is usually titled $alaries E/pense. :ossible names for the liability account include $alaries :ayable and Accrued $alaries :ayable. 2. -n an ad;usting entry to record accrued interest re enue 4re enue earned but not recei ed5 the debit is to an asset account and the credit is to a re enue account. :ossible names for that asset account are -nterest 7ecei able and Accrued -nterest 7ecei able. :ossible names for the re enue account include -nterest 7e enue& -nterest -ncome& and -nterest Earned.

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#OL%&IO' PROBLE

!" $upplies E/pense $upplies %>+0 E/pense %220 $upplies %>00 4%+05 $upplies E/pense $upplies %+0 %+0 %>+0 %>+0

1( Ad;usting Entry
Amount of 7e enue or e/pense appearing on -ncome $tatement Ealance of asset or liability account at the end of the period Cash recei ed or paid during the period Change in the asset or liability account from beg. to end of period. "( Ad;usting Entry< )riginal entry was< $upplies E/pense >00 Cash >00 $ince the $upplies account dropped from a beg. Ealance of %'00 to ending of %220& that means they need to e/pense %+0 more for a total of %>+0. Amount of 7e enue or e/pense appearing on -ncome $tatement Ealance of asset or liability account at the end of the period Cash recei ed or paid during the period Change in the asset or liability account from beg. to end of period. 3( Ad;usting Entry Amount of 7e enue or e/pense appearing on -ncome $tatement Ealance of asset or liability account at the end of the period Cash recei ed or paid during the period Change in the asset or liability account from beg. to end of period. )( Ad;usting Entry< The original entry was< Cash 9'000 $ubcrip. 7e enue 9'000 $ince they only earned %92700 they need to ad;ust earned re enue downward by %*200. Amount of 7e enue or e/pense appearing on -ncome $tatement Ealance of asset or liability account at the end of the period Cash recei ed or paid during the period Change in the asset or liability account from beg. to end of period.

%>+0 E/pense %220 $upplies %>00 4%+05 6nearned $ubscription 7e enue %92700 $ubscription 7e enue %92700 %92700 7e enue %+000 liability %9'000 %*200 $ubscription 7e enue %*200 6nearned $ubscription 7e enue %*200

%92700 7e enue %+000 liability %9'000 %*200

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