Concept explainers
Expense Adjustments
Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities:
- On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance.
- At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid.
- Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31.
- In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for 3 months' sponsorship-November 2019, December 2019, and January 2020-in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months' advertising has been and I month remains unused.
Required:
- Prepare
adjusting entries at December 31 for these four activities. - CONCEPTUAL CONNECTION What would be the effect on expenses if the adjusting entries were not made?
Concept Introduction:
Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.
The business activity for each type of adjusting entry is explained as follows:
- Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
- Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
- Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
- Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
- Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period. Requirement-1:
To prepare:
The adjusting entry for the given adjustments.
Answer to Problem 48E
The adjusting entries for the given adjustments are as follows:
Faraday Electronic Service | |||||
Adjusting entries | |||||
As on Dec. 31, 2019 | |||||
# | Date | Account titles | Debit | Credit | |
a. | Dec. 31 | Insurance Expense | $ 1,620 | ||
Prepaid Insurance | $ 1,620 | ||||
b. | Dec. 31 | Utilities Expense | $ 1,520 | ||
Utilities payable | $ 1,520 | ||||
c. | Dec. 31 | Rent Expense | $ 1,440 | ||
Rent Payable | $ 1,440 | ||||
c. | Dec. 31 | Advertisement Expense | $ 2,900 | ||
Prepaid Advertisement | $ 2,900 |
Explanation of Solution
The adjusting entries for the given adjustments are explained as follows:
Faraday Electronic Service | |||||
Adjusting entries | |||||
As on Dec. 31, 2019 | |||||
# | Date | Account titles | Debit | Credit | |
a. | Dec. 31 | Insurance Expense (4860*4/12) | $ 1,620 | ||
Prepaid Insurance | $ 1,620 | ||||
(being adjustment made for the expense accrued) | |||||
b. | Dec. 31 | Utilities Expense | $ 1,520 | ||
Utilities payable | $ 1,520 | ||||
(being adjustment made for the expense accrued) | |||||
c. | Dec. 31 | Rent Expense | $ 1,440 | ||
Rent Payable | $ 1,440 | ||||
(being adjustment made for the expense accrued) | |||||
c. | Dec. 31 | Advertisement Expense (4350*2/3) | $ 2,900 | ||
Prepaid Advertisement | $ 2,900 | ||||
(being adjustment made for the expense accrued) |
Concept Introduction:
Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.
The business activity for each type of adjusting entry is explained as follows:
- Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
- Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
- Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
- Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
- Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period. Requirement-1:
To prepare:
The adjusting entry for the given adjustments.
Answer to Problem 48E
The adjusting entries for the given adjustments are as follows:
Faraday Electronic Service | |||||
Adjusting entries | |||||
As on Dec. 31, 2019 | |||||
# | Date | Account titles | Debit | Credit | |
a. | Dec. 31 | Insurance Expense | $ 1,620 | ||
Prepaid Insurance | $ 1,620 | ||||
b. | Dec. 31 | Utilities Expense | $ 1,520 | ||
Utilities payable | $ 1,520 | ||||
c. | Dec. 31 | Rent Expense | $ 1,440 | ||
Rent Payable | $ 1,440 | ||||
c. | Dec. 31 | Advertisement Expense | $ 2,900 | ||
Prepaid Advertisement | $ 2,900 |
Explanation of Solution
The adjusting entries for the given adjustments are explained as follows:
Faraday Electronic Service | |||||
Adjusting entries | |||||
As on Dec. 31, 2019 | |||||
# | Date | Account titles | Debit | Credit | |
a. | Dec. 31 | Insurance Expense (4860*4/12) | $ 1,620 | ||
Prepaid Insurance | $ 1,620 | ||||
(being adjustment made for the expense accrued) | |||||
b. | Dec. 31 | Utilities Expense | $ 1,520 | ||
Utilities payable | $ 1,520 | ||||
(being adjustment made for the expense accrued) | |||||
c. | Dec. 31 | Rent Expense | $ 1,440 | ||
Rent Payable | $ 1,440 | ||||
(being adjustment made for the expense accrued) | |||||
c. | Dec. 31 | Advertisement Expense (4350*2/3) | $ 2,900 | ||
Prepaid Advertisement | $ 2,900 | ||||
(being adjustment made for the expense accrued) |
Concept Introduction:
Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.
The business activity for each type of adjusting entry is explained as follows:
- Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
- Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
- Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
- Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
- Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period. Requirement-2:
To Indicate:
The effect of omission of above adjusting entries on the expenses.
Answer to Problem 48E
The of omission of above adjusting entries would result in understatement of expenses by $7,480.
Explanation of Solution
The adjusting entries for the given adjustments are explained as follows:
Faraday Electronic Service | |||||
Adjusting entries | |||||
As on Dec. 31, 2019 | |||||
# | Date | Account titles | Debit | Credit | |
a. | Dec. 31 | Insurance Expense (4860*4/12) | $ 1,620 | ||
Prepaid Insurance | $ 1,620 | ||||
(being adjustment made for the expense accrued) | |||||
b. | Dec. 31 | Utilities Expense | $ 1,520 | ||
Utilities payable | $ 1,520 | ||||
(being adjustment made for the expense accrued) | |||||
c. | Dec. 31 | Rent Expense | $ 1,440 | ||
Rent Payable | $ 1,440 | ||||
(being adjustment made for the expense accrued) | |||||
c. | Dec. 31 | Advertisement Expense (4350*2/3) | $ 2,900 | ||
Prepaid Advertisement | $ 2,900 | ||||
(being adjustment made for the expense accrued) |
The of omission of above adjusting entries would result in understatement of expenses by $1620+1520+1440+2900 = $7,480
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Chapter 3 Solutions
Cornerstones of Financial Accounting
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