Financial & Managerial Accounting
Financial & Managerial Accounting
13th Edition
ISBN: 9781285866307
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 3, Problem 3.3BPR

Adjusting entries

Crazy Mountain Outfitters Co., an outfitter store for fishing treks, prepared the following unadjusted trial balance at the end of its first year of operations:

Crazy Mountain Outfitters Co.

Unadjusted Trial Balance

April 30, 2016

  Debit Balances Credit Balances
 cash............................................................................ 11,400  
Accounts Receivable....................................... 72,600  
Supplies.................................................. 7,200  
Equipment................................................ 112,000  
Accounts Payable.........................................   12,200
Unearned Fees............................................   19,200
Common Stock...........................................   20,000
Retained Earnings........................................   117,800
Dividends................................................ 10,000  
Fees Earned...............................................   305,800
Wages Expense........................................... 157,800  
Rent Expense............................................. 55,000  
Utilities Expense.......................................... 42,000  
Miscellaneous Expense.................................... 7,000  
  475,000 475,000

For preparing the adjusting entries, the following data were assembled:

  • a. Supplies on hand on April 30 were $1,380.
  • b. Fees earned but unbilled on April 30 were $3,900.
  • c. Depreciation of equipment was estimated to be $3,000 for the year.
  • d. Unpaid wages accrued on April 30 were $2,475.
  • e. The balance in unearned fees represented the April 1 receipt in advance for services to be provided. Only $14,140 of the services was provided between April 1 and April 30.

Instructions

  1. 1. Journalize the adjusting entries necessary on April 30, 2016.
  2. 2. Determine the revenues, expenses, and net income of Crazy Mountain Outfitters Co. before the adjusting entries.
  3. 3. Determine the revenues, expense, and net income of Crazy Mountain Outfitters Co. after the adjusting entries.
  4. 4. Determine the effect of the adjusting entries on Retained Earnings.

1.

Expert Solution
Check Mark
To determine

Adjusting Entries:

Adjusting entries indicates those entries, which are passed in the books of accounts at the end of one accounting period. These entries are passed in the books of accounts as per the revenue recognition principle and the expenses recognition principle to adjust the revenue, and the expenses of a business in the period of their occurrence.

Adjusted Trial Balance:

Adjusted trial balance is a trial balance prepared at the end of a financial period, after all the adjusting entries are journalized and posted. It is prepared to prove the equality of the total debit and credit balances.

Rule of Debit and Credit:

Debit - Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.

Credit - Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.

To record: The adjusting entries on April 30, 2016 of CMO Company.

Explanation of Solution

a. The following entry shows the adjusting entry for supplies on April 30, 2016.

Date Account Titles and Explanation Debit ($) Credit ($)
April 30, 2016 Supplies Expense (1) 5,820  
         Supplies   5,820
  (To record the supplies expense at the end of the accounting period)    

Table (1)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Assets–$5,820}=Liabilities+{Stockholders'Equity$5,820}

Explanation:

  • Supplies expense is a component of stockholders’ equity, and it decreased the stockholders’ equity by $5,820. So debit supplies expense by $5,820.
  • Supplies are an asset for the business, and it is decreased by $5,820. So credit supplies by $5,820.

Working Note:

Calculation of fees earned for the accounting period

(Suppliesexpensefortheyear)=(Amountofsuppliesbeforeadjustment)(Amountofsuppliesonhand)=$7,200$1,380=$5,820 (1)

b. The following entry shows the adjusting entry for accrued fees unearned on April 30, 2016.

Date Account Titles and Explanation Debit ($) Credit ($)
April 30, 2016 Accounts Receivable 3,900  
         Fees earned   3,900
  (To record the accounts receivable at the end of the year.)    

Table (2)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Assets+$3,900} = Liabilibilities + {Stockholders' Equities+$3,900}

Explanation:

  • Accounts Receivable is an asset, and it is increased by $3,900. So debit Accounts receivable by $3,900.
  • Fees earned are component of stockholders’ equity and increased it by $3,900. So credit fees earned by $3,900.

c. The adjusting entry for recording depreciation is as follows:

Date Account Titles and Explanation Debit ($) Credit ($)
April 30, 2016 Depreciation expense 3,000  
         Accumulated Depreciation   3,000
  (To record the depreciation on office equipment for the current year.)    

Table (3)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Asset–$3,000}=Liabilities+{Stockholders'equity–$3,000}

Explanation:

  • Depreciation expense is component of stockholders’ equity and decreased it, so debit depreciation expense by $3,000.
  • Accumulated depreciation is a contra asset account, and it decreases the asset value by $3,000. So credit accumulated depreciation by $3,000.

d. The following entry shows the adjusting entry for wages expense on April 30, 2016.

Date Account Titles and Explanation Debit ($) Credit ($)
April 30, 2016 Wages expenses 2,475  
         Wages Payable   2,475
  (To record the wages accrued but not paid at the end of the accounting period.)    

Table (4)

The impact on the accounting equation for the above referred adjusting entry is as follows:

Assets={Liabilities+$2,475}+{Stockholders'equity$2,475}

Explanation:

  • Wages expense is a component of Stockholders ‘equity, and it decreased it by $2,475. So debit wage expense by $2,475.
  • Wages Payable is a liability, and it is increased by $2,475. So credit wages payable by $2,475.

e. The following entry shows the adjusting entry for unearned fees on April 30.

Date Account Titles and Explanation Debit ($) Credit ($)
April 30, 2016 Unearned Fees 14,140  
         Fees earned   14,140
  (To record the fees earned from services at the end of the accounting period.)    

Table (5)

The impact on the accounting equation for the above referred adjusting entry is as follows:

Assets={Liabilities$14,140}+{Stockholders'equity+$14,140}

Explanation:

  • Unearned fees are a liability, and it is decreased by $14,140. So debit unearned rent by $14,140.
  • Fees earned are a component of Stockholders’ equity, and it is increased by $14,140. So credit rent revenue by $14,140.

2.

Expert Solution
Check Mark
To determine
The revenues, expenses and net income of CMO Company before adjusting entries

Explanation of Solution

The revenues, expenses and net income before adjusting entries of CMO Company are stated below:

  • Revenue = $305,800 (given)
  • Expenses = $261,800 (2)
  • Net income = $44,000 (3)

Working Notes:

Calculate the value of expenses before adjusting entries:

Expenses=(Wagesexpense+Rentexpense+UtilitiesExpense+Miscellaneousexpense)=($157,800+$55,000+$42,000+$7,000)=$261,800 (2)

Calculate the value of net income before adjusting entries

Netincome=(RevenueExpenses)=$305,800$261,800=$44,000 (3)

Conclusion

Hence, the revenues, expenses and net income of CMO Company are $305,800, $261,800 and $44,000 respectively.

3.

Expert Solution
Check Mark
To determine
The revenues, expenses and net income of CMO Company after adjusting entries

Explanation of Solution

The revenues, expenses and net income after adjusting entries of CMO Company are stated below:

  • Revenue = $323,840 (5)
  • Expenses = $273,095 (4)
  • Net income = $50,745 (6)

Working Notes:

Calculate the value of expenses after adjusting entries:

Expenses=(Expensesbeforeadjusting+Suppliesexpense+Depreciationexpense+Wages)=($261,800+$5,820+$3,000+$2475)=$273,095 (4)

Calculate the value of revenue after adjusting entries

Revenue=(Revenuebeforeadjustingentries+Feesearned+Feesearnedfromservices)=$305,800+$3,900+$14,140=$323,840 (5)

Calculate the value of net income after adjusting entries

Netincome=(RevenueExpenses)=$323,840$273,095=$50,745 (6)

Conclusion

Hence, the revenues, expenses and net income of CMO Company are $323,840, $273,095 and $50,745 respectively.

4.

Expert Solution
Check Mark
To determine
The effect of the adjusting entries on the capital of CMO Company.

Explanation of Solution

The capital of CMO Company will be increased by $10,745 after the adjusting entry.

Due to the adjusting entry there is an increase in the net income of $6,745 ($50,745$44,000) . As a result the capital of CMO Company will also be increased.

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Chapter 3 Solutions

Financial & Managerial Accounting

Ch. 3 - Prob. 3.1APECh. 3 - Accounts requiring adjustment Indicate with a Yes...Ch. 3 - Type of adjustment Classify the following items as...Ch. 3 - Prob. 3.2BPECh. 3 - Adjustment for prepaid expense The supplies...Ch. 3 - Adjustment for prepaid expense The prepaid...Ch. 3 - Adjustment for unearned revenue The balance in the...Ch. 3 - Prob. 3.4BPECh. 3 - Prob. 3.5APECh. 3 - Adjustment for accrued revenues At the end of the...Ch. 3 - Adjustment for accrued expense We-Sell Realty Co....Ch. 3 - Adjustment for accrued expense Prospect Realty Co....Ch. 3 - Prob. 3.7APECh. 3 - Adjustment for depreciation The estimated amount...Ch. 3 - Effect of omitting adjustments For the year ending...Ch. 3 - Prob. 3.8BPECh. 3 - Prob. 3.9APECh. 3 - Effect of errors on adjusted trial balance For...Ch. 3 - Prob. 3.10APECh. 3 - Prob. 3.10BPECh. 3 - Classifying types of adjustments Classify the...Ch. 3 - Classifying adjusting entries The following...Ch. 3 - Prob. 3.3EXCh. 3 - Determining supplies purchased The supplies and...Ch. 3 - Effect of omitting adjusting entry At March 31,...Ch. 3 - Prob. 3.6EXCh. 3 - Adjusting entries for prepaid insurance The...Ch. 3 - Adjusting entries for unearned fees The balance in...Ch. 3 - Effect of omitting adjusting entry At the end of...Ch. 3 - Adjusting entry for accrued fees At the end of the...Ch. 3 - Prob. 3.11EXCh. 3 - Effect on omitting adjusting entry The adjusting...Ch. 3 - Prob. 3.13EXCh. 3 - Determining wages paid The wages payable and wages...Ch. 3 - Effect of omitting adjusting entry Accrued...Ch. 3 - Prob. 3.16EXCh. 3 - Prob. 3.17EXCh. 3 - Prob. 3.18EXCh. 3 - Prob. 3.19EXCh. 3 - Prob. 3.20EXCh. 3 - Prob. 3.21EXCh. 3 - Prob. 3.22EXCh. 3 - Effects of errors on financial statements The...Ch. 3 - Effects of errors on financial statements If the...Ch. 3 - Prob. 3.25EXCh. 3 - Prob. 3.26EXCh. 3 - Prob. 3.27EXCh. 3 - Prob. 3.28EXCh. 3 - Prob. 3.29EXCh. 3 - Prob. 3.1APRCh. 3 - Prob. 3.2APRCh. 3 - Prob. 3.3APRCh. 3 - Prob. 3.4APRCh. 3 - Adjusting entries and adjusted trial balances...Ch. 3 - Adjusting entries and errors At the end of April,...Ch. 3 - Prob. 3.1BPRCh. 3 - Adjusting entries Selected account balances before...Ch. 3 - Adjusting entries Crazy Mountain Outfitters Co.,...Ch. 3 - Prob. 3.4BPRCh. 3 - Adjusting entries and adjusted trial balances...Ch. 3 - Prob. 3.6BPRCh. 3 - The unadjusted trial balance that you prepared for...Ch. 3 - Prob. 3.1CPCh. 3 - Prob. 3.2CPCh. 3 - Prob. 3.3CP
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