Chapter 3, Problem 3.5BPR

Adjusting entries and adjusted trial balances

Reece Financial Services Co., which specializes in appliance repair services, it owned and operated by Joni Reece. Reece Financial Services’ accounting clerk prepared the following unadjusted trial balance at July 31, 20Y9:

  The data needed to determine year-end adjustment’ are as follows:

• Depreciation of building for the year, $6,400.
• Depreciation of equipment for the year, $2,800.
• Accrued salaries and wages at July 31, $900.
• Unexpired insurance at July 31, $1,500.
• Fees earned but unbilled on July 31, $10,200.
• Supplies on hand at July 31, $615.
• Rent unearned at July 31, $300.

  Instructions

1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Rent Revenue; Insurance Expense; Depreciation Expense—Building; Depreciation Expense—Equipment; and Supplies Expense.

2. Determine the balances of tile accounts affected by the adjusting entries, and prepare an adjusted trial balance.

To determine

To journalize: The adjusting entries for RF Services as on July 31, 20Y9

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

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 adjusting entry for the depreciation expense as on July 31, 20Y9.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20Y9		20Y9
July	31	Depreciation Expense			6,400
			Accumulated Depreciation–Buildings			6,400
		(To record depreciation expense)

Table (1)

Description:

• Depreciation Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation–Buildings is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

Prepare adjusting entry for the depreciation expense as on July 31, 20Y9.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20Y9
July	31	Depreciation Expense			2,800
			Accumulated Depreciation–Equipment			2,800
		(To record depreciation expense)

Table (2)

Description:

• Depreciation Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation–Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

Prepare adjusting entry for the salaries expense as on July 31, 20Y9.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20Y9
July	31	Salaries and Wages Expense			900
			Salaries and Wages Payable			900
		(To record accrued expenses)

Table (3)

Description:

• Salaries and Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Salaries and Wages Payable is a liability account. Since amount of payables has increased, liability decreased, and an increase in liability is credited.

Prepare adjusting entry for the prepaid insurance as on July 31, 20Y9.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20Y9
July	31	Insurance Expense			4,500
			Prepaid Insurance			4,500
		(To record part of prepaid insurance expired)

Table (4)

Description:

• Insurance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Prepaid Insurance is an asset account. Since amount of insurance is expired, asset account decreased, and a decrease in asset is credited.

Working Note:

Determine insurance expense as on July 31, 20Y9.

$\begin{array}{c}\text{Insurnace expense = }\left(\begin{array}{l}\text{Value of prepaid insurance before adjustment}-\\ \text{Value of unexpired prepaid insurance }\end{array}\right)\\ \text{= \$6,000}-\text{\$1,500}\\ \text{= \$4,500}\end{array}$

Prepare adjusting entry for the accounts receivable as on July 31, 20Y9.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20Y9
July	31	Accounts Receivable			10,200
			Fees Earned			10,200
		(To record revenue earned on account for the services performed)

Table (5)

Description:

• Accounts Receivable is an asset account. Since amount to be received has increased, asset account increased, and an increase in asset is debited.
• Fees Earned is a revenue account. Since revenues increase equity, equity value is increased. An increase in equity is credited.

Prepare adjusting entry for the supplies as on July 31, 20Y9.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20Y9
July	31	Supplies Expense			1,110
			Supplies			1,110
		(To record part of supplies consumed)

Table (2)

Description:

• Supplies Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Supplies is an asset account. Since amount of supplies is used, asset account decreased, and a decrease in asset is credited.

Working Note:

Determine supplies expense as on July 31, 20Y9.

$\begin{array}{c}\text{Supplies expense = }\left(\begin{array}{l}\text{Value of supplies before adjustment}-\\ \text{Value of supplies on hand}\end{array}\right)\\ \text{= \$1,725 }-\text{\$615 }\\ \text{= \$1,110}\end{array}$

Prepare adjusting entry for the unearned rent revenue as on July 31, 20Y9.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20Y9
July	31	Unearned Rent			3,300
			Rent Revenue			3,300
		(To record portion of advance earned till January)

Table (5)

Description:

• Unearned Rent is a liability account. Since the unearned rent value is earned, liability is reduced, and a decrease in liability is debited.
• Rent Revenue is a revenue account. Since the unearned revenue has been earned, revenue value increased, and an increase in revenues increases stockholders’ equity. Hence, the account is credited.

Working Notes:

Determine rent revenue as on July 31, 20Y9.

$\begin{array}{c}\text{Rent revenue = }\left(\begin{array}{l}\text{Value of unearned rent before adjustment}-\\ \text{Value of unearned rent at July 31}\end{array}\right)\\ \text{= \$3,600 }-\text{\$300 }\\ \text{= \$3,300}\end{array}$

To determine

To prepare: Trial balance of the RF Services as on July 31, 20Y9

Explanation of Solution

Adjusted trial balance: It is that statement which shows all the asset, liability, and equity account balances at the year-end, after recording of adjusting entries.

Prepare adjusted trial balance of RF Services as on July 31, 20Y9.

RF Services
Adjusted Trial Balance
July 31, 20Y9
Particulars	Debit $	Credit $
Cash	$10,200
Accounts Receivable	44,950
Prepaid Insurance	1,500
Supplies	615
Land	50,000
Building	155,750
Accumulated Depreciation - Building		$69,250
Equipment	45,000
Accumulated Depreciation - Equipment		20,450
Accounts Payable		3,750
Unearned Rent		300
Salaries and Wages Payable		900
Common Stock		60,000
Retained Earnings		93,550
Dividend	8,000
Fees Earned		168,800
Rent Revenue		3,300
Salaries and Wages Expense	57,750
Utilities Expense	14,100
Advertising Expense	7,500
Repairs Expense	6,100
Depreciation Expense - Building	6,400
Depreciation Expense - Equipment	2,800
Insurance Expense	4,500
Supplies Expense	1,110
Miscellaneous Expense	4,025
Total	$420,300	$420,300

Table (8)

Working Notes:

Determine accounts receivable value as on July 31, 20Y9.

$\begin{array}{c}\text{Accounts receivable = }\left(\begin{array}{l}\text{Value before adjustment+}\\ \text{Unbilled fee }\end{array}\right)\\ \text{= \$34,750+\$10,200}\\ \text{= \$44,950}\end{array}$

Determine accumulated depreciation-building value as on July 31, 20Y9.

$\begin{array}{c}\text{Accumulated depreciation-building = }\left(\begin{array}{l}\text{Value before adjustment+}\\ \text{Depreciation expense }\end{array}\right)\\ \text{= \$62,850+\$6,400}\\ \text{= \$69,250}\end{array}$

Determine accumulated depreciation-equipment value as on July 31, 20Y9.

$\begin{array}{c}\text{Accumulated depreciation-equipment = }\left(\begin{array}{l}\text{Value before adjustment+}\\ \text{Depreciation expense }\end{array}\right)\\ \text{= \$17,650+\$2,800}\\ \text{= \$20,450}\end{array}$

Determine salaries and wages payable value as on July 31, 20Y9.

$\begin{array}{c}\text{Salaries and wages payable = }\left(\begin{array}{l}\text{Value before adjustment+}\\ \text{Accrued expenses }\end{array}\right)\\ \text{= \$0+\$900}\\ \text{= \$900}\end{array}$

Determine fees earned value as on July 31, 20Y9.

$\begin{array}{c}\text{Fees earned = }\left(\begin{array}{l}\text{Value before adjustment+}\\ \text{Unbilled fee earned }\end{array}\right)\\ \text{= \$158,600+\$10,200}\\ \text{= \$168,800}\end{array}$

Determine rent revenue value as on July 31, 20Y9.

$\begin{array}{c}\text{Rent revenue = }\left(\begin{array}{l}\text{Value of unearned rent before adjustment}-\\ \text{Value of unearned rent at July 31}\end{array}\right)\\ \text{= \$3,600 }-\text{\$300 }\\ \text{= \$3,300}\end{array}$

Determine salaries and wages expense value as on July 31, 20Y9.

$\begin{array}{c}\text{Salaries and wages expense = }\left(\begin{array}{l}\text{Value before adjustment+}\\ \text{Accrued expenses }\end{array}\right)\\ \text{= \$56,850+\$900}\\ \text{= \$57,750}\end{array}$

Determine insurance expense as on July 31, 20Y9.

$\begin{array}{c}\text{Insurance expense = }\left(\begin{array}{l}\text{Value of prepaid insurance before adjustment}-\\ \text{Value of unexpired prepaid insurance }\end{array}\right)\\ \text{= \$6,000}-\text{\$1,500}\\ \text{= \$4,500}\end{array}$

Determine supplies expense as on July 31, 20Y9.

$\begin{array}{c}\text{Supplies expense = }\left(\begin{array}{l}\text{Value of supplies before adjustment}-\\ \text{Value of supplies on hand}\end{array}\right)\\ \text{= \$1,725 }-\text{\$615 }\\ \text{= \$1,110}\end{array}$