A.
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Accrual basis of accounting:
Accrual basis of accounting refers to recognizing the financial transactions during the period in which the event occurs, even if the cash is not exchanged.
Income statement:
This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.
Balance sheet:
This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (
To prepare: The adjusting entries in the books of Company AC at the end of the year.
A.
Explanation of Solution
An adjusting entry for accrued fees:
In this case, the Company AC recognized the fees at the end of the year. So, the necessary adjusting entry that the business should record for the accrued at end of the year is as follows:
Date | Description |
Post. Ref |
Debit ($) |
Credit ($) |
|
July | 31 | 11,150 | |||
Fees earned | 11,150 | ||||
(To record the fees earned at end of the year) | |||||
Table (1)
- Account receivable is an asset, and it increased the value of asset by $11,150, hence debit the accounts receivable for $11,150.
- Fees earned increased the value of stockholders’ equity by $11,150; hence credit the fees earned for $11,150.
An adjusting entry for Supplies expenses:
In this case, Company AC recognized the supplies expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the supplies expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Supplies expenses (1) | 2,450 | ||
Supplies | 2,450 | ||||
(To record the supplies expenses incurred at the end of the year) | |||||
Table (2)
Working note:
Calculate the value of supplies expense
- Supplies expense decreased the value of stockholders’ equity by $2,450; hence debit the supplies expenses for $2,450.
- Supplies are an asset, and it decreased the value of asset by $2,450, hence credit the supplies for $2,450.
An adjusting entry for rent expenses:
In this case, Company AC recognized the rent expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the prepaid expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Rent expenses | 6,000 | ||
Prepaid rent | 6,000 | ||||
(To record the rent expenses incurred at the end of the year) | |||||
Table (3)
- Rent expense decreased the value of stockholders’ equity by $6,000; hence debit the rent expenses for $6,000.
- Prepaid rent is an asset, and it decreased the value of asset by $6,000, hence credit the prepaid rent for $6,000.
An adjusting entry for
In this case, Company AC recognized the depreciation expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the accrued expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Depreciation expenses | 8,950 | ||
|
8,950 | ||||
(To record the depreciation expenses incurred at the end of the year) | |||||
Table (4)
- Depreciation expense decreased the value of stockholders’ equity by $8,950; hence debit the depreciation expenses for $8,950.
- Accumulated depreciation is a contra-asset account, and it decreased the value of asset by $8,950, hence credit the accumulated depreciation for $8,950.
An adjusting entry for unearned fees revenue:
In this case, Company AC received cash in advance before the service provided to customer. So, the necessary adjusting entry that the Company AC should record for the unearned fees revenue at the end of the year is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Unearned fees revenue | 10,000 | ||
Fees earned (2) | 10,000 | ||||
(To record the unearned fees revenue at the end of the year) | |||||
Table (5)
Working note:
Calculate the value of accrued wages at end of the October
- Unearned fees revenue is a liability, and it decreased the value of liability by $10,000, hence debit the unearned fees revenue for $10,000.
- Fees earned increased stockholders’ equity by $10,000; hence credit the fees earned for $10,000.
An adjusting entry for wages expenses:
In this case, Company AC recognized the wages expenses at the end of the year. So, the necessary adjusting entry that the Company AC should record to recognize the accrued expense is as follows:
Date | Description |
Post Ref. |
Debit ($) | Credit ($) | |
July | 31 | Wages expenses | 4,840 | ||
Wages payable | 4,840 | ||||
(To record the wages expenses incurred at the end of the year) | |||||
Table (6)
- Wages expense decreased the value of stockholders’ equity by $4,840; hence debit the wages expenses for $4,840.
- Wages payable is a liability, and it increased the value of liability by $4,840, hence credit the wages payable for $4,840.
B.
The effects on the income statement, if adjusting entries are not recorded.
B.
Answer to Problem 3.2APR
The effects on the income statement, if the adjusting entries are not recorded are as follows:
Adjustment Not Recorded | Income Statement | ||
Revenue | Expenses | Net income | |
Unbilled fees | Understated by $11,150 | Understated by $11,150 | |
Accrued wages | Understated by $4,840 | Overstated by $4,840 |
Table (7)
Explanation of Solution
Accrued fees (unbilled fees)
Given entry would increase the fees earned account, and increase the accounts receivable account, if adjusting entry for accrued fees is not recorded, and it will affect two accounts such as fees earned (revenue), and accounts receivable (asset). Hence the fees of $11,150 has been understated the value of total revenue of the Company AC, and it understated the value of net income by $11,150.
Accrued wages
Given entry would increase the wages expense account, and increase the wages payable account, if adjusting entry for accrued wages is not recorded, and it will affect two accounts such as wages expense (expense), and wages payable (liability). Hence the wages expense of $4,840 has been understated the value of total expense of the Company AC, and it overstated the value of net income by $4,840.
Hence, the revenues of the Company AC were understated by $11,150, and the expenses were understated by $4,840. Thus, the net income of Company AC was understated by $6,310
C.
The effects on the balance sheet, if adjusting entries are not recorded.
C.
Answer to Problem 3.2APR
The effects on the balance sheet, if the adjusting entries are not recorded are as follows:
Adjustment Not Recorded | Balance Sheet | ||
Assets | Liabilities | Stockholders’ Equity | |
Unbilled fees | Understated by $11,150 | Understated by $11,150 | |
Accrued wages | Understated by $4,840 | Overstated by $4,840 |
Table (8)
Explanation of Solution
Accrued fees (unbilled fees)
Given entry would increase the fees earned account, and increase the accounts receivable account, if adjusting entry for accrued fees is not recorded, and it will affect two accounts such as fees earned (revenue), and accounts receivable (asset). Hence the fees earned of $11,150 has been understated the value of assets of the Company AC, and understated accrued fees understates the stockholders’ equity by $11,150.
Accrued wages
Given entry would increase the wages expense account, and increase the wages payable account, if adjusting entry for accrued wages is not recorded, and it will affect two accounts such as wages expense (expense), and wages payable (liability). Hence the wages expense of $4,840 has been understated the value of liabilities of the Company AC, and understated accrued wages overstates the stockholders’ equity by $4,840.
Hence, the assets of the Company AC were understated by $11,150, and the liabilities were understated by $4,840. Thus, the total liabilities ($4,840) and owner’s equity ($6,310) of Company AC was understated by $11,150
D.
The effects on the “net increase or decrease in cash” on the statement of cash flow , if adjusting entries are not recorded.
D.
Explanation of Solution
There is no effect on the “net increase or decrease in cash” on the statement of cash flow because, the adjusting entries are prepared in accordance with the accrual basis of accounting. Hence, adjusting entries do not effect the cash flow statement of the company.
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Chapter 3 Solutions
Corporate Financial Accounting
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