Chapter 4: Problem Set A

Problem 3-1A: Identifying Adjusting Entries with Explanations For each journal entry, match it to the explanation that most closely describes it: 1. To record receipt of unearned revenue: When a company receives cash before earning it (e.g., advance payment). 2. To record this period’s earning of prior unearned revenue: When a company recognizes revenue that was previously recorded as a liability because the service or product has now been delivered. 3. To record payment of an accrued expense: When a company settles an expense that was recorded as a liability in a prior period. 4. To record receipt of an accrued revenue: When a company receives payment for revenue earned in a prior period. 5. To record an accrued expense: When a company records an expense that has been incurred but not yet paid. 6. To record an accrued revenue: When a company recognizes revenue that has been earned but not yet received. 7. To record this period’s use of a prepaid expense: When a company recognizes the portion of a prepaid expense that has been used up. 8. To record payment of a prepaid expense: When a company pays in advance for an expense that will benefit future periods. 9. To record this period’s depreciation expense: When a company allocates the cost of a fixed asset over its useful life. Problem 3-2A: Preparing Adjusting and Subsequent Journal Entries Scenario Analysis: 1. Office Supplies Adjustment: o Initial balance: $4,000 + $13,400 purchased = $17,400. o Remaining supplies at year-end: $2,554. o Supplies used: $17,400 - $2,554 = $14,846. o Adjusting Entry: bash Debit: Office Supplies Expense $14,846 Credit: Office Supplies $14,846 2. Prepaid Insurance Adjustment: o Initial balance: $20,000. o Unexpired amount: $12,880. o Insurance expired: $20,000 - $12,880 = $7,120. o Adjusting Entry: bash Debit: Insurance Expense $7,120 Credit: Prepaid Insurance $7,120 3. Accrued Salaries Adjustment: o Employees earn $1,960/day; they worked 2 days (December 30 & 31). o Accrued salaries: $1,960 × 2 days = $3,920. o Adjusting Entry: bash Debit: Salaries Expense $3,920 Credit: Salaries Payable $3,920 4. Depreciation on Building: o Cost: $960,000; Salvage value: $45,000; Useful life: 30 years. o Depreciation expense: ($960,000 - $45,000) / 30 = $30,500/year. o Adjusting Entry: bash Debit: Depreciation Expense—Building $30,500 Credit: Accumulated Depreciation—Building $30,500 5. Accrued Rent Revenue Adjustment (December Rent): o Rent per month: $3,000. o Adjusting Entry for unpaid December rent: bash Debit: Accounts Receivable $3,000 Credit: Rent Revenue $3,000 6. Unearned Revenue Adjustment: o Rent received in advance: $2,800/month × 5 months = $14,000 (initially credited to Unearned Revenue). o As of December 31, two months of rent have been earned (November & December). o Adjusting Entry: bash Debit: Unearned Revenue $5,600 Credit: Rent Revenue $5,600 Subsequent Cash Transactions (January): • Payment of Salaries (January 6): o Total salaries for 5 days (including New Year’s Day): $1,960 × 5 = $9,800. o Salaries Payable from December: $3,920. o Journal Entry: bash Debit: Salaries Payable $3,920 Debit: Salaries Expense $5,880 Credit: Cash $9,800 • Receipt of Rent (January 31): o December & January rent: $3,000 + $3,000 = $6,000. o Journal Entry: bash Debit: Cash $6,000 Credit: Accounts Receivable $3,000 Credit: Rent Revenue $3,000 Problem 3-3A: Preparing Adjusting Entries, Adjusted Trial Balance, and Financial Statements Steps to Prepare Adjusting Entries: 1. T-Accounts Setup: o Prepare T-accounts for all relevant accounts, using the unadjusted balances as starting points. 2. Adjusting Entries: o a. Insurance Expired: bash Debit: Insurance Expense $2,400 Credit: Prepaid Insurance $2,400 o b. Supplies Used: bash Debit: Teaching Supplies Expense $2,800 Credit: Teaching Supplies $2,800 o c. Depreciation—Equipment: bash Debit: Depreciation Expense—Equipment $13,200 Credit: Accumulated Depreciation—Equipment $13,200 o d. Depreciation—Professional Library: bash Debit: Depreciation Expense—Library $7,200 Credit: Accumulated Depreciation—Library $7,200 o e. Unearned Revenue Earned:  Client paid $12,500; two courses completed: $2,500 × 2 = $5,000. bash Debit: Unearned Revenue $5,000 Credit: Training Revenue $5,000 o f. Accrued Tuition Revenue: bash Debit: Accounts Receivable $7,500 Credit: Tuition Revenue $7,500 o g. Accrued Salaries:  2 days × 2 employees × $100/day = $400. bash Debit: Salaries Expense $400 Credit: Salaries Payable $400 o h. Rent Expense (December): bash Debit: Rent Expense $1,000 Credit: Prepaid Rent $1,000 3. Update T-Accounts: Post the adjusting entries to the T-accounts to reflect adjusted balances. 4. Prepare Adjusted Trial Balance: Sum up the balances in the T-accounts to ensure that debits equal credits. 5. Prepare Financial Statements: o Income Statement: Summarize revenues and expenses to determine net income. o Statement of Retained Earnings: Begin with prior year’s retained earnings, add net income, and subtract dividends (if any). o Balance Sheet: List all assets, liabilities, and equity as of December 31.