University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

328

Pages:

3
Author:

stud_ice13

Adjusting Entries for Prepaid Expenses Adjusting entries for prepaid expenses involve converting assets that were paid for in advance into expenses as they are used up over time. These adjustments increase expenses on the income statement and reduce assets on the balance sheet. 1. Prepaid Insurance Adjustment • • • Step 1: The Prepaid Insurance account has a balance of $5,000 at the beginning of the year. No additional insurance payments were made throughout the year. Step 2: A review shows that only $1,000 of unexpired insurance remains as of December 31. Step 3: The adjusting entry reduces the Prepaid Insurance asset by the expired portion of $4,000 ($5,000 − $1,000) and increases Insurance Expense by the same amount. Adjusting Entry: markdown Insurance Expense .................. 4,000 Prepaid Insurance ....................... 4,000 Explanation: After the adjustment, the Prepaid Insurance account shows the remaining $1,000, and the Insurance Expense account reflects the $4,000 expense for the expired portion. 2. Prepaid Rent Adjustment • • • Step 1: On October 1, the company prepaid $12,000 for one year of rent (12 months). This amount was debited to Prepaid Rent and credited to Cash. Step 2: By December 31, three months of the prepaid rent have expired. Therefore, the unexpired portion of Prepaid Rent is $9,000 (9 months). Step 3: The adjusting entry reduces Prepaid Rent by the expired portion of $3,000 (3 months) and increases Rent Expense. Adjusting Entry: markdown Rent Expense ........................... 3,000 Prepaid Rent ................................ 3,000 Explanation: After the adjustment, Prepaid Rent shows the unexpired $9,000, and Rent Expense reflects the $3,000 for the three months that have expired. 3. Supplies Adjustment • • • Step 1: The Supplies account had an initial balance of $1,000 at the start of the year. During the year, the company purchased an additional $2,000 in supplies, bringing the total to $3,000. Step 2: A physical count at year-end reveals only $500 of supplies remaining, meaning that $2,500 worth of supplies have been used up. Step 3: The adjusting entry reduces the Supplies asset account by the $2,500 of supplies used and increases Supplies Expense by the same amount. Adjusting Entry: markdown Supplies Expense .................... 2,500 Supplies ...................................... 2,500 Explanation: After the adjustment, the Supplies account shows the remaining $500, and the Supplies Expense account reflects the $2,500 used during the period. 4. Depreciation Adjustment • • • Step 1: The company purchased equipment at the start of the year for $38,000, with a useful life of 10 years and a salvage value of $8,000. Step 2: Using straight-line depreciation, the depreciable cost is $30,000 ($38,000 − $8,000), and annual depreciation is $3,000 ($30,000 ÷ 10 years). Since this is the first year, the accumulated depreciation at December 31 should be $3,000. Step 3: The adjusting entry records the $3,000 depreciation for the year and increases Accumulated Depreciation, a contra asset account. Adjusting Entry: markdown Depreciation Expense ........... 3,000 Accumulated Depreciation ........ 3,000 Explanation: After the adjustment, the Equipment account remains at $38,000, and Accumulated Depreciation shows $3,000, reducing the book value of the equipment to $35,000 ($38,000 − $3,000).