Concept explainers
Adjusting the Accounting Records
Assume it is now December 31, 2015, and Nicole has just completed her first year of operations at Nicole’s Getaway Spa. After looking through her
- a. Nicole’s Getaway Spa is renting its space at a cost of $600 per month. On September 1, 2015, Nicole paid eight months’ rent in advance using cash. This prepayment was recorded in the account Prepaid Rent back in September.
- b. The building, purchased at the beginning of the year for $47,000 cash, has estimated depreciation of $2,000 for 2015, but none has been recorded yet.
- c. Salaries and wages to the support staff at Nicole’s Getaway Spa have been paid up to December 26, 2015. The support staff worked both December 27 and 28 and will be paid on January 5, 2016. Salaries and wages amount to $ 1,000 per day. The spa was closed December 29-31.
- d. The insurance policy, purchased on June 1 for $3,000 cash, provides coverage for 12 months. The insurance coverage since June has now been used up.
- e. The unadjusted amount in the Spa Supplies account was $2,000 at December 31. 2015. for supplies purchased on account. A year-end count showed $700 of supplies remain on hand.
- f. On the last day of December, a customer obtained spa services by using a $90 gift certificate that was purchased earlier in the month. Use of the gift certificate to pay for these services had not yet been recorded.
Required:
- 1. For each of the items listed above, identify whether an accrual adjustment, a deferral adjustment or no adjustment is required.
- 2. For each of the deferral adjustments, prepare the initial
journal entry that would have been recorded. - 3. Prepare the
adjusting journal entries that should be recorded for Nicole’s Getaway Spa at December 31, 2015, assuming that the items have not been adjusted prior to December 31, 2015.
1.
To identify: From the list of items whether it is an accrual adjustment, deferral adjustment or no adjustment is required.
Answer to Problem 4.1CC
List of items show whether it is an accrual adjustment, deferral adjustment or no adjustment is required:
List of items | Type of adjustment |
a) | Deferral adjustment |
b) | Deferral adjustment |
c) | Accrual adjustment |
d) | Deferral adjustment |
e) | Deferral adjustment |
f) | Deferral adjustment |
Table (1)
Explanation of Solution
Deferral adjustments:
These are the adjustments which are used to increase the income statement accounts and to decrease the corresponding balance sheet. The deferral adjustments include liability and revenue account or asset and expense account.
- Revenues: The liabilities that are recorded previously need to be adjusted at the end of the period to replicate the earned revenues. Example: The revenue that is unearned should be adjusted for the portion of sales revenue that is earned during the period.
- Expenses: The assets that are recorded previously need to be adjusted at the end of the period to replicate the incurred expenses. Example: The prepaid insurance should be adjusted for the portion of insurance expense that is incurred during the period.
Accrual adjustments:
These are the adjustments that are used to record the revenues or expenses when they occur previously while paying or receiving the cash and to adjust the corresponding accounts in the balance sheet. These accrual adjustments involve liability and revenue or asset and expense account.
- Revenues: The revenues that are earned at the end of the accounting period are the revenues will be collected in the future accounting period. Example: Recording the interest receivable for the interest that is earned but not yet collected during the period.
- Expenses: The expenses that are incurred at the end of the accounting period, and the payment for those expenses will be paid in the future period. Example: Recording the accounts payable for the utilities that are used during the current period and the payment is not made in the current period.
a)
In this transaction rent has been paid in advancethe prepaid rent should be adjusted for the portion of rent expense that is incurred during the period.
b)
In this transaction building has been purchased in the beginning of the year the assets that are recorded previously need to be adjusted at the end of the period to replicate the incurred expenses
c)
In this transaction salaries and wages has been paid in the future where the services has been rendered at the end of the accounting period.
d)
In this transaction insurance policy has been purchased before for the period of 12 months for cash and the insurance coverage is being used in the current year. Which is considered as a earned revenue.
e)
In this transaction gift certificate was purchased in the previous month and those services is being used in the current year but that transaction had not been recorded.
2.
To prepare: Initial journal entry for each of the deferral adjustment.
Answer to Problem 4.1CC
The initial journal entry for deferral adjustment is as follows:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a) | Prepaid rent (+A)(1) | 4,800 | ||
Cash (-A) | 4,800 | |||
(To record prepaid rent) | ||||
b) | Building (+A) | 47,000 | ||
Cash (-A) | 47,000 | |||
(To record purchase of building) | ||||
c) | This transaction requires an accrual adjustment | |||
d) | Prepaid insurance(+A) | 3,000 | ||
Cash (-A) | 3,000 | |||
(To record prepaid insurance) | ||||
e) | Supplies (+A) | 2,000 | ||
Cash (-A) | 2,000 | |||
(To record supplies purchased on account) | ||||
f) | Cash (+A) | 90 | ||
Unearned revenue (+L) | 90 | |||
(To record unearned revenue) |
Table (2)
Explanation of Solution
- a. Calculation of prepaid rent:
- Prepaid rent is an asset and it increases. Hence debit the prepaid rent account by $4,800.
- Cash is an asset and it decreases. Hence credit the cash account by $4,800.
b.
- Building is an asset and it increases. Hence debit the building account by $47,000.
- Cash is an asset and it decreases. Hence credit the cash account by $47,000.
d.
- Prepaid insurance is an asset and it increases. Hence debit the prepaid insurance account by $3,000.
- Cash is an asset and it decreases. Hence credit the cash account by $3,000.
e.
- Supplies are an asset and it increases. Hence debit the supplies account by b$2,000.
- Accounts payable is a liability and it increases. Hence credit the accounts payable account by $ 2,000.
f.
- Cash is an asset and it increases. Hence debit the cash account by $90.
- Unearned revenue is a liability and it increases. Hence credit the unearned revenue account by $90.
3.
To prepare: The adjusting journal entries that should be recorded for Company NGS at December 31, 2015, by assuming that the items have not been adjusted prior to December 31, 2015.
Answer to Problem 4.1CC
Prepare adjusting entries for each item at December 31, 2015:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
a. | Rent expense (+E, -SE)(2) | 2,400 | ||
Prepaid rent (-A) | 2,400 | |||
(To record adjusting entry for prepaid rent) | ||||
b. | Depreciation expense (+E, -SE) | 2,000 | ||
Accumulated Depreciation-Equipment(+xA, -A) | 2,000 | |||
(To record adjusting entry for depreciation expense) | ||||
c. | Salaries and wages expense (+E, -SE)(3) | 2,000 | ||
Salaries and wages payable (+L) | 2,000 | |||
(To record adjusting entry for salaries and wages expense) | ||||
d. | Insurance expense (+E, -SE)(4) | 1,750 | ||
Prepaid insurance (-A) | 1,750 | |||
(To record the adjusting entry for insurance expense) | ||||
e. | Supplies expense (+E, -SE)(5) | 1,300 | ||
Supplies (-A) | 1,300 | |||
(To record the use of supplies) | ||||
f. | Unearned revenue (-L) | 90 | ||
Service revenue (+R, +SE) | 90 | |||
(To record adjusting entry for unearned revenue) |
Table (3)
Explanation of Solution
- a) Calculation of rent expense:
c) Calculation of salaries and wages expense:
d) Calculation of insurance expense:
e) Calculation of supplies expense:
Want to see more full solutions like this?
Chapter 4 Solutions
Fundamentals of Financial Accounting
- Flood Relief Inc. prepares monthly financial statements and therefore adjusts its accounts at the end of every month. The following information is available for June 2016: a. Flood received a $10,000, 4%, two-year note receivable from a customer for services rendered. The principal and interest are due on June 1, 2018. Flood expects to be able to collect the note and interest in full at that time. b. Office supplies totaling $5,600 were purchased during the month. The asset account Supplies is debited whenever a purchase is made. A count in the storeroom on June 30, 2016, indicates that supplies on hand amount to $507. The supplies on hand at the beginning of the month total $475. c. The company purchased machines last year for $170,000. The machines are expected to be used for four years and have an estimated salvage value of $2,000. d. On June 1, the company paid $4,650 for rent for June, July, and August. The asset Prepaid Rent was debited; it did not have a balance on…arrow_forwardOn march 4 she spent $20 on a lottery ticket, on mrach 7 she won $ 265000 in the lottery. on march 10 she deposited $80000 in a business chequing account, on march 14 she made a down payment of $150000 from her personal funds plus a home mortgage of $240000. on march 15 she signed a rental agreement for her office for $2000 per month starting march 15, she paid 1st month rent and rest on 15th of every month. on march 19, she hired a receptionist for $725 a week starting march 24, she bought office equipement for $8000. on march 21, she purchased $225 of supplies on account. on march 24 she purchased $6700 of equipment for $3000 plus a $3700 note payable due in 6 months. On march 31 she performed $3700 of legal services on account . On march 31 she received $2500 cash for legal services to be provided in april. On march 31 she paid her receptionist $725 for the week , On march 31 she paid $225 for the supplies purchased on march 21. prepare a tabular analysis of the effects of above…arrow_forwardCraig has decided to start snow plowing during the winter months. He purchased a heavy-duty dump truck with plow and salter from Power Equipment for $40,000 on October 1st, 2026. He paid $1,000 as a down payment and the remaining balance on a 5% -7 year note to Power Equipment. You will be completing several accounting activities in regards to this purchase. What would the journal entry be for the check 1. Use the write check function in QB Online to record the entire purchase (down payment and capitalization of the truck and related liability). Use check number 171. Create accounts as needed in QB Online. You may find it helpful to write out the journal entry first before completing it in QB Online.arrow_forward
- Kimberly has a revolving credit account at an annual percentage rate of 15%. Her previous monthly balance is $724.19. Find the new balance if Kimberly's account showed the following activity. (Use the unpaid balance method.)arrow_forwardA new employee charged $6740 on his credit card to relocate for his first job. After noticing that the interest rate for his balance was 15% compounded monthly, he stopped charging on that account. He wishes to pay off his balance in 3 years using automatic payments sent at the end of each month. a. What monthly payment must he make to pay off the account at the end of 3 years? b. How much total interest will he have paid? a. What monthly payment must he make to pay off the account at the end of 3 years? $ (Round to the nearest cent as needed.)arrow_forwardOn the last day of the fiscal year, a co-worker asks you to cut a check for $2,000 as a miscellaneous expense for supplies in order to completea project for a VIP customer today. You notice the invoice looks a little different from other invoices that are usually processed. You know that by preparing the closing entries tomorrow, the miscellaneous expense will be set to zero for the beginning of the year. Should you write this check today and record the expense or write the check tomorrow? How would the company be affected if the check is written and the invoice ends up being erroneous?arrow_forward
- Belle, a consultant, employs one college student every summer to help her in herresearch work. As researcher, the student works five weekdays (Monday to Friday) for P450 per day and is paid every Saturday. The last three days of May will be paid on June 3. The calendar from May 21 to June 3 is reproduced below. Belle uses the fiscal period ending May 31. Sun Mon Tues Wed Thurs Fri Sat 21 22 23 24 25 26 27 28 29 30 31 1 2 3 Required: Prepare the adjustment for accrued salary on May 31.arrow_forwardUse the appropriate formula located on Illustration 10-1 on page 209 to solve the problem. At the end of every 3 months, Teresa deposits $1500 into an account that pays 6% compounded quarterly for 4 years. A) When this certificate matures, how much will Teresa have accumulated B) How much interest did Teresa earn? Show the use of the appropriate formulas for each part by indicating the evaluation of the formula with the information and provide the answer. Be sure to label the parts using the provided letters and organize your work neatly.arrow_forwardFlower opened a credit card account. During the first month she purchased new cloths that totaled $1,550.00 and then put the card in a desk drawer and didn’t use it again. The structure of the minimum monthly payment is the interest charge plus an additional 3.0% of the remaining balance. If Flow only makes the minimum monthly payment, how long will it take for the remaining balance to be half the amount of her original purchases?arrow_forward
- In early December, Alice and Bob decided to open the Sample Cafe with $15,000 of their own money and $20,000 borrowed from a friend. They have spent $12,000 on equipment and furniture, and purchased $3,000 worth of inventory. Having put down a $2,500 deposit for a location on Main St., they will pay the first month's rent when they open their doors on January 1st. HINT: Consider the change in each asset account, given the transactions above. Total Assets has been included as a second hint. Create a balance sheet showing the financial position of the Sample Cafe as of December 31st Use the data above. Remember, Assets must equal Total Liabilities + Equityarrow_forwardLike New Steam Cleaning performs services on account. When a customer account becomes four months old, Like New converts the account to a note receivable. During 2018,the company completed the following transactions: Record the transactions in Like New's journal. Round to the nearest dollar. (Use a 365-day year for computations. Record debits first, then credits. Select the explanation on the last line of the journal entry table.)arrow_forwardYesenia purchased a car for $16,789.23. She obtained a term loan at an interest rate of 3.74%. Her monthly payment is $260.69. Enter in the correct amounts in the following amortization schedule for the 1st month. Round your answers to the nearest penny. Input the dollar sign followed by the number. Do not put a space between the dollar sign and the number. Do not use a comma. Example: $2634.57 Balance After Balance Owed Interest Charge Payment Paymentarrow_forward