Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
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Chapter 4, Problem 17E

1.

To determine

Prepare adjusting entry for the items (a) to (g) for the Incorporation J at December 31, 2014.

1.

Expert Solution
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Answer to Problem 17E

Prepare adjusting entry for the items (a) to (g) for the Incorporation J at December 31, 2014:

Date

Account Title and ExplanationDebit ($)Credit ($)
 a.Salaries and wages expense (+E, -SE)730 
  Salaries and wages payable (+L) 730
  (To record salaries and wages expense)  
 
b.Utilities expense (+E, -SE)440 
  Utilities payable  (+L) 440
  (To record utilities expenses)  
     
 c.Depreciation expense (+E, -SE)24,000 
  Accumulated depreciation- (+A, -A) 24,000
  (To record the accumulated depreciation)  
  
d.Interest expense (+E, -SE) (1)300 
  Interest payable (+L) 300
  (To record interest payable)  
  
 e.Maintenance expense (+E, -SE)1,100 
  Maintenance supplies (-A) 1,100
  (To record maintenance expense)  
     
 f.No adjustment is needed because the revenue will not be earned until January of next year.
     
 g.Income tax expense (+E, -SE)5,800 
  Income tax payable (+L) 5,800
  (To record income tax expense)  

Table (1)

Explanation of Solution

Adjusting entries:

Adjusting entries are those entries which are made at the end of the accounting period, to record the revenues in the period of which they have been earned and to record the expenses in the period of which have been incurred, as well as to update all the balances of assets and liabilities accounts on the balance sheet, and to ascertain accurate amount of net income (loss) on the income statement to maintain the records according to the accrual basis principle.

(a)

  • Salaries and wages expense is the expense account which is a component of stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit salaries and wages expense with $730.
  • Salaries and wages payable is a liability. There is an increase in liability. Hence, credit salaries and wages payable with $730.

(b)

  • Utilities expense is the expense account which is a component of stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit utilities expense with $440.
  • Utilities payable is a liability. There is an increase in liability. Hence, credit utilities payable with $440.

(c)

  • Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit depreciation expense with $24,000.
  • Accumulated depreciation is a contra-asset. There is a decrease in the asset. Hence, credit accumulated depreciation with $24,000.

(d)

  • Interest expense is the expense account which is a component of stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit interest expense with $300.
  • Interest payable is a liability. There is an increase in liability. Hence, credit interest payable with $300.

Working notes:

Calculation of interest expense:

Interest expense= Principal amount × Annual rate ×Number of months= $15,000 ×8100×312=$300 (1)

(e)

  • Maintenance expense is the expense account which is a component of stockholders’ equity. There is an increase in the expense which decreases the stockholders’ equity. Hence, debit interest expense with $1,100.
  • Maintenance supplies are asset. There is a decrease in asset. Hence, credit maintenance supplies with $1,100.

(f)

No adjustment is needed because the revenue will not be earned until January of next year.

(g)

  • Income tax expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit income tax expense with $5,800.
  • Income tax payable is a liability. There is a increase in the liability. Hence, credit income tax payable with $5,800.

2.

To determine

Prepare a corrected income statement for the current year including earnings per share.

2.

Expert Solution
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Explanation of Solution

Prepare a corrected income statement for the current year including earnings per share:

Incorporation J
Income Statement
For the Current Year Ended December 31, 2014
ParticularsAmount ($)
Operating Revenue:
           Rental revenue $109,000
Operating Expenses:
Salaries and wages  (1)$27,230
Maintenance expense (2)13,100
Rent expense8,800
Utilities expense (3)4,740
Gas and oil expense3,000
Depreciation expense24,000
Miscellaneous expenses1,000
Total expenses81,870
Operating Income27,130
Other Item:
Interest expense (4)300
Pretax income26,830
Income tax expense5,800
Net income$  21,030
Earnings per share ($21,0307,000shares)$3.00

Table (2)

The income statement of the Incorporation J shows the net income with $21,030.

Working notes:

Calculation of salaries and wages expenses:

Salaries and wages expenses ($26,500 +$730) = $27,230 (1)

Calculation of maintenance expenses:

Maintenance expenses ($12,000 + $1,100) = $13,100 (2)

Calculation of utilities expenses:

Utilities expenses ($4,300 +$440) = $4,740 (3)

Calculation of interest expense:

Interest expense= Principal amount × Annual rate ×Number of months= $15,000 ×8100×312=$300 (4)

3.

To determine

Compute the total asset turnover ratio based on the corrected information and to say what does this ratio suggests and to infer about the Incorporation J.

3.

Expert Solution
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Explanation of Solution

Total asset turnover ratio:

Total asset turnover ratio is used to determine the asset’s efficiency towards sales.

Calculation of total asset turnover ratio:

Total asset turnover ratio =SalesrevenuesAverage total assets=$109,000($58,020+$65,180)2=$109,000$61,600=1.77

The total asset turnover ratio represents that, for every $1 of assets, Incorporation J The total asset turnover ratio represents that, for every $1 of assets, and Incorporation J earns $1.77 in rental revenue. This ratio is lower than the industry average total asset turnover of 2.31, which implies the Incorporation J is less effective at utilizing assets to generate revenue than the average company in the industry.

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Chapter 4 Solutions

Financial Accounting, 8th Edition

Ch. 4 - Explain why the income statement accounts are...Ch. 4 - Prob. 12QCh. 4 - Which of the following accounts would not appear...Ch. 4 - Which account is least likely to appear in an...Ch. 4 - Prob. 3MCQCh. 4 - Prob. 4MCQCh. 4 - Prob. 5MCQCh. 4 - An adjusted trial balance a. Shows the ending...Ch. 4 - JJ Company owns a building. Which of the following...Ch. 4 - Prob. 8MCQCh. 4 - Prob. 9MCQCh. 4 - If a company is successful in acquiring several...Ch. 4 - Prob. 1MECh. 4 - Matching Definitions with Terms Match each...Ch. 4 - Matching Definitions with Terms Match each...Ch. 4 - Prob. 4MECh. 4 - Prob. 5MECh. 4 - Prob. 6MECh. 4 - Prob. 7MECh. 4 - Prob. 8MECh. 4 - Prob. 9MECh. 4 - Prob. 10MECh. 4 - Prob. 11MECh. 4 - Prob. 12MECh. 4 - Prob. 1ECh. 4 - Prob. 2ECh. 4 - Prob. 3ECh. 4 - Prob. 4ECh. 4 - Prob. 5ECh. 4 - Prob. 6ECh. 4 - Prob. 7ECh. 4 - Prob. 8ECh. 4 - Prob. 9ECh. 4 - Recording Transactions Including Adjusting and...Ch. 4 - Prob. 11ECh. 4 - Prob. 12ECh. 4 - Inferring Transactions Deere Company is the...Ch. 4 - Analyzing the Effects of Errors on Financial...Ch. 4 - Prob. 15ECh. 4 - Prob. 16ECh. 4 - Prob. 17ECh. 4 - Prob. 18ECh. 4 - Prob. 19ECh. 4 - Prob. 20ECh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7PCh. 4 - Prob. 1APCh. 4 - Prob. 2APCh. 4 - Prob. 3APCh. 4 - Prob. 4APCh. 4 - Prob. 5APCh. 4 - Prob. 6APCh. 4 - Prob. 7APCh. 4 - Prob. 1COMPCh. 4 - Prob. 2COMPCh. 4 - Prob. 1CPCh. 4 - Prob. 2CPCh. 4 - Prob. 3CPCh. 4 - Prob. 4CPCh. 4 - Prob. 5CPCh. 4 - Prob. 6CPCh. 4 - Prob. 7CPCh. 4 - Prob. 8CPCh. 4 - Prob. 9CPCh. 4 - Prob. 1CC
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