Concept explainers
Exercise 3-50 Prepayment of Expenses
JDM Inc. made the following prepayments for expense items during 2019:
- Prepaid building rent for I year on April I by paying $6,600. Prepaid rent was debited for the amount paid.
- Prepaid 12 months' insurance on I by paying Prepaid insurance was debited.
- Purchased $5,250 of office supplies on 15, debiting supplies for the full amount. There were no office supplies on hand as of October 15. Office supplies costing $1,085 remain unused at December 3 1, 2019.
- Paid $600 for a 12-month service contract for repairs and maintenance on a computer. The contract begins November 1. The full amount of the payment was debited to prepaid repairs and maintenance.
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 journal entries for the cash payments.
Answer to Problem 50E
The journal entries for the cash payments are as follows:
JDM Inc. | ||||
Journal Entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Apr. 1 | Prepaid Rent | $ 6,600 | |
Cash | $ 6,600 | |||
b | Oct. 1 | Prepaid Insurance | $ 4,200 | |
Cash | $ 4,200 | |||
c | Oct. 15 | Supplies | $ 5,250 | |
Cash | $ 5,250 | |||
d | Nov. 1 | Prepaid Repair and maintenance | $600 | |
Cash | $600 |
Explanation of Solution
The journal entries for the cash payments are explained as follows:
JDM Inc. | ||||
Journal Entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Apr. 1 | Prepaid Rent | $ 6,600 | |
Cash | $ 6,600 | |||
(Being amount paid for rent in advance) | ||||
b | Oct. 1 | Prepaid Insurance | $ 4,200 | |
Cash | $ 4,200 | |||
(Being amount paid for insurance in advance) | ||||
c | Oct. 15 | Supplies | $ 5,250 | |
Cash | $ 5,250 | |||
(Being supplies purchased for cash) | ||||
d | Nov. 1 | Prepaid Repair and maintenance | $600 | |
Cash | $600 | |||
(Being amount paid in advance) |
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 prepare:
The adjusting entries at the end of the year.
Answer to Problem 50E
The adjusting entries at the end of the year are as follows:
JDM Inc. | ||||
Adjusting entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Dec. 31 | Rent Expense | $ 4,950 | |
Prepaid Rent | $ 4,950 | |||
b | Dec. 31 | Insurance Expense | $ 1,050 | |
Prepaid Insurance | $ 1,050 | |||
c | Dec. 31 | Supplies Expense | $ 4,165 | |
Supplies | $ 4,165 | |||
d | Dec. 31 | Repair and maintenance Expense | $100 | |
Prepaid Repair and maintenance | $100 |
Explanation of Solution
The adjusting entries at the end of the year are explained as follows:
JDM Inc. | ||||
Adjusting entries | ||||
For the year 2019 | ||||
# | Date | Account Title | Debit | Credit |
a | Dec. 31 | Rent Expense (6600*9/12) | $ 4,950 | |
Prepaid Rent | $ 4,950 | |||
(Being adjustment made for accrued expense) | ||||
b | Dec. 31 | Insurance Expense (4200*3/12) | $ 1,050 | |
Prepaid Insurance | $ 1,050 | |||
(Being adjustment made for accrued expense) | ||||
c | Dec. 31 | Supplies Expense (5250-1085) | $ 4,165 | |
Supplies | $ 4,165 | |||
(Being adjustment made for accrued expense) | ||||
d | Dec. 31 | Repair and maintenance Expense (600*2/12) | $100 | |
Prepaid Repair and maintenance | $100 | |||
(Being adjustment made for accrued expense) |
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-3:
To Indicate:
The effect of omission of adjusting entries on the Income statement and balance sheet for the year/
Answer to Problem 50E
The effect of omission of adjusting entries on the Income statement and balance sheet for the year is as follows:
# | Effect of Omission |
a | Understatement of Expenses by $4950 |
Overstatement of assets by $4950 | |
b | Understatement of Expenses by $1050 |
Overstatement of assets by $1050 | |
c | Understatement of Expenses by $4165 |
Overstatement of assets by $4165 | |
d | Understatement of Expenses by $100 |
Overstatement of assets by $100 | |
Explanation of Solution
The effect of omission of adjusting entries on the Income statement and balance sheet for the year is explained as follows:
JDM Inc. | |||||
Adjusting entries | |||||
For the year 2019 | |||||
# | Date | Account Title | Debit | Credit | Effect of Omission |
a | Dec. 31 | Rent Expense (6600*9/12) | $ 4,950 | Understatement of Expenses by $4950 | |
Prepaid Rent | $ 4,950 | Overstatement of assets by $4950 | |||
(Being adjustment made for accrued expense) | |||||
b | Dec. 31 | Insurance Expense (4200*3/12) | $ 1,050 | Understatement of Expenses by $1050 | |
Prepaid Insurance | $ 1,050 | Overstatement of assets by $1050 | |||
(Being adjustment made for accrued expense) | |||||
c | Dec. 31 | Supplies Expense (5250-1085) | $ 4,165 | Understatement of Expenses by $4165 | |
Supplies | $ 4,165 | Overstatement of assets by $4165 | |||
(Being adjustment made for accrued expense) | |||||
d | Dec. 31 | Repair and maintenance Expense (600*2/12) | $100 | Understatement of Expenses by $100 | |
Prepaid Repair and maintenance | $100 | Overstatement of assets by $100 | |||
(Being adjustment made for accrued expense) |
Want to see more full solutions like this?
Chapter 3 Solutions
Cornerstones of Financial Accounting
- 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?arrow_forwardExercise 3-40 Revenue and Expense Recognition Electronic Repair Company repaired a high-definition television for Sarah Merrifield in December 2019. Sarah paid $80 at the time of the repair and agreed to pay Electronic Repair $80 each month for 5 months beginning on January 15, 2020. Electronic Repair used $120 of supplies, which were purchased in November 2020, to repair the television. Assume that Electronic Repair uses accrual-basis accounting. Required: In what month or months should revenue from this service be recorded by Electronic Repaid? In what month or months should the expense related to the repair of the television be recorded by Electronic Repair? CONCEPTUAL CONNECTION Describe the accounting principles used to answer the above questions.arrow_forwardExercise 3-43 Recognizing Expenses Treadway Dental Services gives each of its patients a toothbrush with the name and phone number of the dentist office and a logo imprinted on the brush. Treadway purchased 15,000 of the toothbrushes in October 2019 for $3,130. The toothbrushes were delivered in November and paid for in December 2019. Treadway began to give the patients the toothbrushes in February 2020. By the end of 2020, 4,500 of the toothbrushes remained in the supplies account. Required: How much expense should be recorded for the toothbrushes in 2019 and 2020 to properly match expenses with revenues? Describe how the 4,500 toothbrushes that remain in the supplies account will handled in 2021.arrow_forward
- Exercise 2-38 Events and Transactions The following economic events related to K the bill need not be paid until March 1, 2019. On February, 15, Kqualify and does not qualify. indicate whether each of the above events would qualify as a transaction and be recognized and recorded in the accounting system on the date indicated. 2. CONCEPTUAL CONNECTION For any events that did not qualify as a transaction to be recognized and recorded, explain why it does not qualify.arrow_forwardProblem 2-593 Journalizing Transactions Monilast Chemicals engaged in the following transactions during December 2019: Dec 2 Paid rent on office furniture, $1,200. 3 Borrowed $25,030 on a 9-month, 3% note. 7 Provided services on credit. $42,600. 10 Purchased supplies on credit, $2,850. 13 Collected accounts receivable, $20,150. 19 Issued common stock, $50000. 22 Paid employee wages for December. $13,825. 23 Paid accounts payable, $1,280. 25 Provided services for cash, $13,500. 30 Paid utility bills for December, $1,975. Required: Prepare a journal entry for each transaction.arrow_forwardProblem 3-71B Preparing a Worksheet (Appendix 3A) Flint Inc. operates a cable television System. At December 31, 2019, the following unadjusted account balances were available: The following data are available for adjusting entries: At year end, $1,500 Of office supplies remain unused. Annual depreciation on the building is $20,000. Annual depreciation on the equipment is $150,000 The interest rate on the note is 8%. Four months' interest is unpaid and unrecorded at December 31, 2019. At December 31, 2019, services of $94,000 have performed but are unbilled and unrecorded. Utility bills of $2,800 are unpaid and unrecorded at December 31, 2019. Income taxes of $49,633 were unpaid and unrecorded at year end. Â Required: Prepare a worksheet for Flint. Prepare an income statement, a retained earnings statement, and a classified balance sheet for Flint. Prepare the closing entries.arrow_forward
- Cornerstone Exercise 3-20 Deferred Expense Adjusting Entries Best Company had the following items that require adjustment at year end. Cash for equipment rental in the amount of $3,800 was paid in advance. The $3,800 was debited to prepaid rent When paid. At year end, $2,950 Of the prepaid rent had expired. Cash for insurance in the amount of $8,200 was paid in advance. The $8,200 was debited to prepaid insurance when paid. At year end, $1,8SO of the prepaid insurance was still unused. Required: Prepare the adjusting journal entries needed at December 31. What is the effect on the financial statements if these adjusting entries are not made? What is the balance in prepaid equipment rent and insurance expense at December 31?arrow_forwardExercise 3-46 Identification and Analysis of Adjusting Entries Medina Motor Service is preparing adjusting entries for the year ended December 31, 2019. The following items describe Medina s continuous transactions during 2019: Medinas salaried employees are paid on the last day of every month. Medinas hourly employees are paid every other Friday for the 2 weeks' work. The next payday falls on January 5, 2020. In November 2019, Medina borrowed $600,000 from Bank One, giving a 9% note payable with interest due in January 2020. The note was properly recorded. Medina rents a portion of its parking lot to the neighboring business under a long-term lease agreement that requires payment of rent 6 months in advance on April 1 and October 1 of each year. The October 1, 2019, payment was made and recorded as prepaid rent. Medinas department recognizes the entire revenue on every auto service job when the job is complete. At December 31, several service jobs are in process. Medina recognizes depreciation on shop equipment annually at the end of each year. Medina purchases all of its office supplies from Office Supplies Inc. All purchases are recorded in the supplies account. Supplies expense is calculated and recorded annually at the end of each year. Required: Indicate whether or not each item requires an adjusting entry at December 31, 2019. If an item requires an adjusting entry, indicate which accounts are increased by the adjustment and which are decreased.arrow_forwardProblem 3-71 A Preparing a Worksheet (Appendix 3A) Marsteller Properties Inc. owns apartments that it rents to university students. At December 31, 2019, the following unadjusted account balances were available: The following information is available for adjusting entries: An analysis of apartment rental contracts indicates that S3,800 of apartment rent is unbilled and unrecorded at year end. A physical count Of supplies reveals that $1,400 of supplies are on hand at December 31 , 2019. Annual depreciation on the buildings is $204,250. An examination of insurance policies indicates that $12,000 Of the prepaid insurance applies to coverage for 2019. Six months' interest at 9% is unrecorded and unpaid on the notes payable.arrow_forward
- Brief Exercise 3-32 Adjusting Entries-Deferrals Tyndal Company had the following items that required adjustment at December 31, 2019. Purchased equipment for $40,000 on January 1, 2019. Tyndal estimates annual depreciation to be $3,100. Paid $2,400 for a 2-year insurance policy on July 1, 2019. The amount was debited to Pre-paid Insurance when paid. Collected $1,200 rent for the period December 1, 2019 to March 30, 2020. The amount was credited to Unearned Service Revenue when received. Required: Prepare the adjusting entries needed at December 31. CONCEPTUAL CONNECTION What is the effect on the financial statements if these adjusting entries were not made?arrow_forwardCase 2-68 Accounting for Partially Completed Events: 3 Prelude to Chapter 3 Ehrlich Smith. the owner of The Shoe Bone has asked you to help him understand the proper way to account for certain accounting items as he prepares his 2019 financial statements. Smith has provided the following information and observations: (Continued) a. A 3-year fire insurance policy was purchased on 2019, for $2,400. Smith believes that a part of the cost of the insurance policy should be allocated to each period that benefits from its coverage. b. The store building was purchased for 580,000 in January 2011. Smith expected then (as he does now) that the building will be serviceable as a shoe store for 20 years from the date of purchase. In 2011, Smith estimated that he could sell the property for $6,000 at the end of its serviceable life. He feels that each period should bear some portion of the cost of this long-lived asset that is slowly being consumed. c. The Shoe Box borrowed 520300 on a 1-year, 8% note that is due on September 1 next year) Smith notes that $21,600 cash will be required to repay the note at maturity. The $1,600 difference is, he feels, a cost of using the loaned funds and should be spread over the periods that benefit from the use of' the loan funds; Required: Explain what Smith is trying to accomplish with the three items. Are his objectives supported by the concepts that underlie accounting?arrow_forwardExercise 3-47 Revenue Adjustments Sentry Transport Inc. of Atlanta provides in-town parcel delivery services in addition to a full range of passenger services. Sentry engaged in the following activities during the current year: Sentry received $5,000 cash in advance from Richs Department Store for an estimated 250 deliveries during December 2019 and January and February of 2020. The entire amount was recorded as unearned revenue when received. During December 2019, 110 deliveries were made for Richs. Sentry operates several small buses that take commuters from suburban communities to the central downtown area of Atlanta. The commuters purchase, in advance, tickets for 50 one-way rides. Each So-ride ticket costs S500. At the time of purchase, Sentry credits the cash received to unearned revenue. At year end, Sentry determines that 10,160 one-way rides have been taken. Sentry operates buses that provide transportation for the clients of a social agency in Atlanta. Sentry bills the agency quarterly at the end of January, April, July, and October for the that quarter. The contract price is S7,500 per quarter. Sentry follows the practice of recognizing revenue from this contract in the in which the service is On December 23, Delta Airlines chartered a bus to transport its marketing group to a meeting at a resort in southern Georgia. The meeting will be held during the last week in January 2020, and Delta agrees to pay for the entire trip on the day the bus departs. At year end, none Of these arrangements have been recorded by Sentry. Required: Prepare adjusting entries at December 31 for these four activities. CONCEPTUAL CONNECTION What would be the effect on revenue if the adjusting entries were not made?arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning