Chapter 4, Problem 4.2.1P

To determine

Introduction: Each financial transaction or economic event will affect either assets, liabilities or owners’ equity. Thus the basis for recording these transactions in the accounting system depends on the accounting equation.

  $\text{Assets}\text{=}\text{Liabilities}\text{+}\text{Stockholder's}\text{Equity}$

Adjustments: Number of adjustment entries are required to be made at the end of a period for a company using the accrual basis of accounting. Thereare five types of adjustments. (1) Cash for expenses paid in advance. (2) Cash received in advance before revenue recognized. (3) Expense incurred but cash not paid. (4) Revenue recognized but cash not received. (5) adjustment for the non-cash expense.

The necessary adjustments for each of the given situations on December 31, 2017.

Answer to Problem 4.2.1P

Following are the adjustments required.

1. Depreciation expense $2,950
2. Supply expenses $19,350
3. Customer deposits in advance $20,000
4. Rent expenses $5,400
5. Interest expense $3,000
6. Wages expenses $500

Explanation of Solution

 a. Adjustment for depreciation on office furniture purchased last year

Activity: Operating

Accounts: Accumulated Depreciation − Equipment. Increase

      Depreciation expense − Equipment. Increase

       Equipment − Decrease.

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Equipment ($2,950)		($2,950)		Depreciation Expense − Furniture $2,950	($2,950)

  $\text{Depreciation}\text{=}\frac{\text{Cost}\text{of}\text{Asset}\text{-}\text{Salvage}\text{value}}{\text{Useful}\text{life}}$

  $\begin{array}{c}\text{Annual depreciation }=\frac{\$15,000-\$250}{5\text{years}}\\ =\$2,950\end{array}$

 b. Adjustment for supplies used during the year

Activity: Operating

Accounts: Supply inventory. Decrease

      Supplies expense. Increase

Statements: Balance sheet and Income statement

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Supply inventory ($19,350)		($19,350)		Supply expenses $19,350	($19,350)

Supplies consumed during the year

Supplies in hand on January 1, 2017	$3,600
Supplies purchased during the year	$17,600
Less: Supplies in hand at the end of December 31, 2017	($1,850)
Supplies consumed	$19,350

 c. Adjustments for customer paid in advance.

Activity: Operating

Accounts: Customer deposits in advance. Decreases.

      Revenue. Increase

Statement: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets=	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Customer deposit in advance ($20,000)	$20,000	$20,000		$20,000

Customer deposits for $24,000 received on August 1, 2017, to be used for six months.

As P Industries closes accounts in December every year. Hence deposits of five months from August to December can be used.

Customer deposit fivemonths $20,000 = $\$24,000\times \frac{5}{6}$

 d. Adjustment for prepaid rent.

Activity: Operating

Accounts: Prepaid rent. Decreases

      Rent expense. Increases

Statements: Balance sheet and income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
Prepaid rent ($5,400)		($5,400)		Rent expense $5,400	($5,400)

P rented warehouse on November 1, 2017, with three-month prepaid rent, as P closes account in December, only two months’ rent out of three months advance payment is expensed that is $5,400 = $\$2,700\times 2$

 e. Adjustment for Interest on notes payable

Activity: Financing

Accounts: Interest payable. Increases

      Interest expense. Increases

Statement: Balance sheet and Income Statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Interest payable $3,000	($3,000)		Interest expense $3,000	($3,000)

120 days note taken for $200,000 at 9 percent interest payable at maturity. Hence interest for only 60 days or first two months can be taken this year

  $\$3,000=(\$200,000\times 0.09)\times \frac{2}{12}$

 f. Adjustment for wages payable

Activity: Operating

Accounts: Wages payable. Increases

      Wages expense. Increases

Statements: Balance sheet and Income statement.

Balance sheet			Income Statement
Assets =	Liability +	Stockholders’ equity	Revenues -	Expenses =	Net income
	Wages payable $500	($500)		$500	($500)

As wages are paid every Thursday and month-end is Sunday, only three days from Friday to Sunday require adjustment.

The average daily pay is $500. As wages are paid on every Thursday, therefore, only wages for one day is taken that is only Friday.