Chapter 4, Problem 6AP

a.

To determine

Prepare the adjusting entry as at December 31, Year 1.

Explanation of Solution

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 the adjusting entries:

Date	Account titles and Explanation	Debit ($)	Credit ($)
December 31	Accounts receivable	6,400
	Client revenue earned		6,400
	(To record the accrued but uncollected revenue)
December 31	Unearned client revenue	6,600
	Client revenue earned		6,600
	(To record  the unearned to earned revenue)
December 31	Insurance expense (1)	3,000
	Unexpired insurance		3,000
	(To record  the insurance expense)
December 31	Advertising expense	1,100
	Prepaid advertising		1,100
	(To record the advertising expense)
December 31	Climbing supplies expense (2)	2,900
	Climbing supplies		2,900
	(To record the climbing supplies expense)
December 31	Depreciation expense: Climbing Equipment (3)	1,200
	Accumulated depreciation: Climbing Equipment		1,200
	(To record the depreciation expense)
December 31	Interest expense (4)	75
	Interest payable		75
	(To record the interest expense)
December 31	Salaries expense	3,100
	Salaries payable		3,100
	(To record the salaries expense)
December 31	Income taxes expense	1,250
	Income taxes payable		1,250
	(To record the income tax expense)

Table (1)

1. To record the accrued but uncollected revenue:

• Accounts receivable is an asset account and it is increased. Therefore, debit accounts receivable with $6,400.
• Client revenue earned is a revenue account and it increases the stockholders’ equity account. Therefore, credit client revenue earned with $1,500.

2. To record the previously unearned revenue to earned revenue:

• Unearned revenue is a liability account and it is decreased. Therefore, debit unearned revenue with $6,600.
• Client revenue earned is a revenue account and it increases the stockholders’ equity account. Therefore, credit fees earned with $6,600.

3. To record the insurance expense:

• Insurance expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit insurance expense with $3,000.
• Unexpired insurance is an asset account and it is decreased. Therefore, credit unexpired insurance with $3,000.

Working note:

Calculate the amount of insurance expense:

$\begin{array}{c}\text{Insurance expense}=\frac{\text{Policy amount}}{\text{Number of months }}\\ =\frac{\$36,000}{\text{12Months}}\\ =\$3,000\end{array}$ (1)

4. To record the advertising expense:

• Advertising expense is an expense account and it decreases the stockholders’ equity. Therefore, debit advertising expense with $1,100.
• Prepaid advertising is an asset account and it is decreased. Therefore, credit prepaid adverting with $1,100.

5. To record the climbing supplies expense:

• Climbing supplies expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit climbing supplies expense with $2,900.
• Climbing supplies are an asset account and it is decreased. Therefore, credit climbing supplies with $2,900.

Working note:

Calculate the climbing supplies expense:

$\begin{array}{c}\text{Climbing supplies expenses}=\left(\begin{array}{l}\text{Climbing supplies in unadjusted trial balance}-\\ \text{Climbing supplies in hand}\end{array}\right)\\ =\$4,900-\$2,200\\ =\$2,900\end{array}$ (3)

6. To record the depreciation expense, Climbing Equipment:

• Depreciation expense is an expense account and it decreases the stockholders’ equity account. Therefore, debit depreciation expense with $1,200.
• Accumulated depreciation is a contra-account and it decreases the value of asset. Therefore, credit accumulated depreciation with $1,200.

Working note:

Calculate the amount of depreciation expense:

$\begin{array}{c}\text{Depreciation expense}=\frac{\text{Cost of the climbing equipment}}{\text{Number of months depreciated}}\\ =\frac{\$57,600}{48\text{Months}}\\ =\$1,200\end{array}$ (3)

7. To record the interest expense:

• Interest expense is an expense account and it decreases the stockholders’ equity. Therefore, debit interest expenses with $75.
• Interest payable is a liability account and it is increased. Therefore, credit interest payable with $75.

Working note:

Calculate the amount of interest expense:

$\begin{array}{c}\text{Interest expense}=\text{Note payable amount}\times \text{Interest rate}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$10,000\times 9\%\times \frac{1\left(\text{December}\right)}{12}\\ =\$75\end{array}$ (4)

8. To record the salaries expense:

• Salaries expense is an expense account and it decreases the stockholders’ equity. Therefore, debit salaries expenses with $3,100.
• Salaries payable is a liability account and it is increased. Therefore, credit salaries payable with $3,100.

9. To record the income tax expense:

• Income tax expense is an expense account and it decreases the stockholders’ equity. Therefore, debit income tax expenses with $1,250.
• Income tax payable is a liability account and it is increased. Therefore, credit salaries payable with $1,250.

b.

To determine

Determine the amount for the given accounts that will be reported in the balance sheet for the Year 1.

Explanation of Solution

Determine the amount for the given accounts that will be reported in the balance sheet:

S.No	Particulars	Amount ($)
1	Cash (No adjustments)	$13,900
2	Accounts receivable (unadjusted)	$78,000
	Add: Adjusting entry (1)	$6,400
	Accounts receivable at December, Year 1	$84,400
3	Unexpired insurance (unadjusted)	$18,000
	Less: Adjusting entry (3)	$3,000
	Unexpired insurance at December, Year 1	$15,000
4	Prepaid advertising (unadjusted)	$2,200
	Less: Adjusting entry (4)	$1,100
	Prepaid rent at December, Year 1	$1,100
5	Climbing supplies (unadjusted)	$4,900
	Less: Adjusting entry (5)	$2,900
	Climbing supplies at December, Year 1	$2,000
6	Climbing equipment (No adjustments)	$57,600
7	Accumulated depreciation: Climbing equipment (unadjusted)	$38,400
	Add: Adjusting entry (6)	$1,200
	Accumulated depreciation at December, Year 1	$39,600
8	Salaries payable (unadjusted)	0
	Add: Adjusting entry (8)	$3,100
	Salaries payable at December 31, Year 1	$3,100
9	Notes payable (No adjustments)	$10,000
10	Interest payable (unadjusted)	$150
	Add: Adjusting entry (7)	$75
	Income taxes payable at December 31, Year 1	$225
11	Income taxes payable (unadjusted)	$1,200
	Add: Adjusting entry (9)	$1,250
	Income taxes payable at December 31, Year 1	$2,450
12	Unearned client revenue (unadjusted)	$9,600
	Less: Adjusting entry (2)	$6,600
	Unearned client revenue at December 31, Year 1	$3,000

Table (2)

1. Amount of cash that is to be reported in the balance sheet is $13,900.

2. Amount of accounts receivable that is to be reported in the balance sheet is $84,400.

3. Amount of unexpired insurance that is to be reported in the balance sheet is $15,000.

4. Amount of prepaid advertising that is to be reported in the balance sheet is $1,100.

5. Amount of climbing supplies that is to be reported in the balance sheet is $2,000.

6. Amount of climbing equipment that is to be reported in the balance sheet is $57,600.

7. Amount of accumulated depreciation, climbing equipment that is to be reported in the balance sheet is $39,600.

8. Amount of salaries payable that is to be reported in the balance sheet is $3,100.

9. Amount of notes payable that is to be reported in the balance sheet is $10,000.

10. Amount of interest payable that is to be reported in the balance sheet is $225.

11. Amount of income tax payable that is to be reported in the balance sheet is $2,450.

12. Amount of unearned client revenue that is to be reported in the balance sheet is $3,000.

c.

To determine

Identify and explain the accounts listed in part b that represents deferred expenses.

Explanation of Solution

Deferred expenses: Advance payment for future expenses is called as prepaid expenses. These prepaid expenses are considered as assets until they are expensed or used. For the portion of used assets, expenses would be recognized by way of passing an adjusting entry. Prepaid expenses are also known as deferred expenses, because at the time of making payment, expenses are not recognized but deferred until they are used up.

Following are the deferred expenses that are listed in part b:

• Unexpired insurance
• Prepaid advertising
• Climbing supplies
• Climbing equipment