Question

Record the adjusting entries as of 12/31 for the following transactions. Assume the original transactions were journalized correctly and no adjusting entries have been made yet this year. Supplies of $800 were purchased on account 3/1. At year end just $210 of supplies remain. Received $16800 in advance from Client Co. on 9/1 for work we'll perform evenly from Oct 1 Paid $3360 on 8/1 for 12 months insurance in advance. Purchased $42400 of equipment on 5/31. The equipment has a 5 year life and salvage value Borrowed $7000 on 6/30 and signed a 9 month 7% note with interest and principal due at Paid 6 months rent in advance of $25200 on 10/1. General Journal Date Account/Explanation PR Debit Credit Dec 31 (Adjust for money borrowed) Dec 31 (Adjust for rent consumed) Dec 31 (Adjust for insurance consumed) Dec 31 (Adjust for equipment expired) Dec 31 (Adjust for supplies consumed) Dec 31 (Adjust for work performed Client Co)

Answer 1

Adjusting entries are those journal entries that are required to be recorded at the end of respective reporting period in order to update firm's accounting records the actual revenue and expenditures for the period on accrual basis. For example, prepaid rent is a rent paid in advance by a firm for future period. It is recorded as an asset when it was paid initially. At the end of reporting period, expired portion of rent for the period shall be recorded as an expense by decreasing the prepaid rent balance to the same extent. Service revenue received in advance is 'advance received from customer(s)' by a firm for future period. It is recorded as liability (Unearned revenue) when it was received initially paid. At the end of reporting period, earned portion of service revenue for the period shall be recorded as an revenue by decreasing the advance received balance to the same extent. Accrued service revenue refers to service completed by by a firm during current period but payment for the same may be collected in future date as per terms agreed on the service contract entered into with the customers. It is recorded as an asset when it was accrued by recognizing revenue for the same as at the end of reporting period. If these adjusting entries are omitted or not recorded properly, net income (loss) reported by income statement along with financial position of the firm reported on balance sheet would be misleading the users as they do not reflect firm's correct profits for the perio as well as exact financial osition at last day of the reporting concerned. That is, if earned portion of unearned revenue is not recorded through adjusting entry at the end of reporting period, 'Liability will be overstated' on balance sheet and 'Revenue will be understated' on income statement for the period. If accrued revenue is not recorded through adjusting entry at the end of reporting period, 'Asset will be understated' (Accounts receivable) on balance sheet and 'Revenue will be understated' on income statement for the period.

Date Dec. 31 Credit [$7000 x 7% x 6/12] $245 [Interest accrued for 6 months from 7/1 thru 12/31] Dec. 31 [$25200 x 3/6] $12,600 [Rent consumed for 3 months from 10/1 thru 12/31] Dec. 31 Account / Explanation Debit Interest Expense $245 Interest Payable (To adjust for money borrowed) Rent Expense $12,600 Prepaid Rent (To adjust for rent consumed) Insurance Expense $1,400 Prepaid Insurance (To adjust for insurance consumed) Supplies Expense $590 Supplies (To adjust for supplies consumed) Unearned Service Revenue $8,400 Service Revenue (To adjust for work performed for Client Co.) ($3360 x 5/12] $1,400 [Insurance consumed for 5 months from 8/1 thru 12/31] Dec. 31 ($800 - $210] $590 Dec. 31 ($16800 x 3/6] $8,400 [Serivice revenue earned for 3 months from 10/1 thru 12/31] (Assuming that advance received for 6 months)