QUICK SUMMARY FOR ADJUSTMENTS

Product Used to
Benefit Revenue Benefit Expense
or Generate
Provided Earned Received Incurred
Service Revenues
Revenues
Expenses
(Revenue
(Matching
Recognition
Principle)
Principle)

End of
Period
Adjustments

# Adjustments for Description Record Adjustment Adjusting Entries

Cash paid prior to Dr. Exp. xx
1 Prepaid Insurance When benefit is received
receiving benefit Cr. Asset xx
Cash paid prior to Dr. Exp. xx
Deferrals

2 Supplies When benefit is received

receiving benefit Cr. Asset xx
Cash paid prior to Dr. Exp. xx
3 Depreciation When benefit is received
receiving benefit Cr. Asset xx
Cash received prior Dr. Liab. xx
4 Unearned Revenues When benefit is Provided
to providing benefit Cr. Rev. xx
Accruals

Benefit received Dr. Exp. xx

5 Accrued Expenses When benefit is received
prior to paying cash Cr. Liab. xx
Benefit provided
Dr. Asset. xx
6 Accrued Revenues prior to receiving When benefit is Provided
Cr. Rev. xx
cash

- Adjustments can also be categorized as either; Revenue adjustments (Unearned Revenues

and Accrued Revenues), or Expense Adjustments (Prepaid Expenses and Accrued
Expenses).
- Adjustments are internal transactions that occur due to the timing difference between
exchanging cash and benefits.
- We always record adjustments at the time of exchanging (providing or receiving) benefits
which is usually before or after exchanging (receiving or paying) cash.

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 Accounting Applications_Part 8

Requirement: Prepare the necessary adjusting entries as of the end of the accounting period.

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Required:
1- Prepare the necessary adjusting entries.
2- Prepare the adjusted trial balance.
3- Prepare the income statement, owners’ equity statement and the balance sheet.

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 Answers

PROBLEM (3-1) A IS TO BE SOLVED BY JOINTLY BY THE INSTRUCTOR AND THE STUDENTS

Problem (3-1) A

Adjustment (a)

Dec. 31Dr. Office Supplies Expense.......................................12,760

Cr. Office Supplies........................................ 12,760

($3,000 + $12,400 - $2,640).

Adjustment (b)
31Dr. Insurance Expense..............................................12,312
Cr. Prepaid Insurance................................... 12,312

Policy Cost per Month Months Active in 2011 2011 Cost

A $660 ($15,840/24 mo.) 12 $ 7,920
B 363 ($13,068/36 mo.) 9 3,267
C 225 ($ 2,700 /12 mo.) 5 1,125
Total $12,312

Adjustment (c)
31Dr. Salaries Expense (2 days x $2,100).....................4,200
Cr. Salaries Payable..................................... 4,200

Adjustment (d)
31Dr. Depreciation Expense—Building..........................27,000
Cr. Accumulated Depreciation—Building...... 27,000

[($855,000 -$45,000) / 30 years = $27,000].

Adjustment (e)
31Dr. Rent Receivable...................................................2,400
Cr. Rent Earned (Rent Revenue).................. 2,400

Adjustment (f)
31DR. Unearned Rent...................................................4,350
Cr. Rent Earned (Rent Revenue).................. 4,350

The amount of rent earned for November and December (2 x 2,175).

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PAROBLEM (3-3)B REQUIREMENTS 1 AND 2 ARE TO BE SOLVED BY THE STUDENTS IN THE CLASS
TO TEST THEIR UNDERSTANDING OF THE ADJUSTMENTS. HOWEVER, REQUIREMENT NO. 3 IS TO
BE SOLVED AS A HOMEWORK FOR STUDENTS.

Problem (3-3) B

REQUIREMENT (1)

Adjustment (a)

Dec. 31Dr. Insurance Expense..............................................................6,400

Cr. Prepaid Insurance.................................................. 6,400

Adjustment (b)
31Dr. Teaching Supplies Expense.................................................57,500
Cr. Teaching Supplies................................................. 57,500

The cost of supplies used ($60,000-$2,500).

Adjustment (c)
31 Dr. Depreciation Expense—Equipment....................................... 4,000
Cr. Accumulated Depreciation—Equipment................. 4,000

Adjustment (d)
31Dr. Depreciation Expense—Professional Library.......................2,000
Cr. Accumulated Depreciation—Professional Library... 2,000

Adjustment (e)
31Dr. Unearned Training Fees.......................................................9,200
Cr. Training Fees Earned............................................ 9,200

Adjustment (f)
31Dr. Accounts Receivable..............................................................5,500
Cr. Tuition Fees Earned............................................... 5,500

Tuition earned ($2,200 x 2 1/2 mo).

Adjustment (g)
31Dr. Salaries Expense...................................................................540
Cr. Salaries Payable.................................................... 540

Accrued salaries expense (3 days x $180).

Adjustment (h)
31Dr. Rent Expense .......................................................................2,600
Cr. Prepaid Rent....................................................................... 2,600

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REQUIREMENT (2)

ALCORN INSTITUTE
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash............................................................................................. $ 50,000
Accounts receivable........................................................................ 5,500
Teaching supplies........................................................................... 2,500
Prepaid insurance........................................................................... 11,600
Prepaid rent.................................................................................... 0
Professional library.......................................................................... 10,000
Accumulated depreciation—Professional library.................................. $ 3,500
Equipment..................................................................................... 30,000
Accumulated depreciation—Equipment............................................. 20,000
Accounts payable............................................................................ 12,200
Salaries payable............................................................................. 540
Unearned training fees..................................................................... 18,400
M. Alcorn, Capital............................................................................ 68,500
M. Alcorn, Withdrawals.................................................................... 20,000
Tuition fees earned.......................................................................... 110,500
Training fees earned........................................................................ 71,200
Depreciation expense—Professional library........................................ 2,000
Depreciation expense—Equipment................................................... 4,000
Salaries expense............................................................................ 43,740
Insurance expense.......................................................................... 6,400
Rent expense................................................................................. 31,200
Teaching supplies expense.............................................................. 57,500
Advertising expense........................................................................ 18,000
Utilities expense.............................................................................. 12,400 _______
Totals............................................................................................ $304,840 $304,840

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REQUIREMENT (3)

ALCORN INSTITUTE
Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned..................................................................... $110,500
Training fees earned................................................................... 71,200
Total revenues............................................................................ $181,700
Expenses
Depreciation expense—Professional library............................... 2,000
Depreciation expense—Equipment............................................ 4,000
Salaries expense........................................................................ 43,740
Insurance expense..................................................................... 6,400
Rent expense............................................................................. 31,200
Teaching supplies expense........................................................ 57,500
Advertising expense................................................................... 18,000
Utilities expense......................................................................... 12,400
Total expenses........................................................................... 175,240
Net income .............................................................................. $ 6,460

ALCORN INSTITUTE
Statement of Owner’s Equity
For Year Ended December 31, 2011

M. Alcorn, Capital, December 31, 2010............................... $68,500

Plus: Net income.................................................................. 6,460
74,960
Less: Owner withdrawals..................................................... 20,000
M. Alcorn, Capital, December 31, 2011............................... $54,960

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 ALCORN INSTITUTE
Balance Sheet
December 31, 2011

Assets
Cash .............................................................................. $50,000
Accounts receivable..................................................................... 5,500
Teaching supplies......................................................................... 2,500
Prepaid insurance......................................................................... 11,600
Professional library....................................................................... $10,000
Accumulated depreciation—Professional library........................... (3,500)
.............................................................................. 6,500
Equipment .............................................................................. 30,000
Accumulated depreciation—Equipment........................................ (20,000)
.............................................................................. 10,000
Total assets .............................................................................. $86,100

Liabilities
Accounts payable......................................................................... $12,200
Salaries payable........................................................................... 540
Unearned training fees................................................................. 18,400
Total liabilities .............................................................................. 31,140
Equity
M. Alcorn, Capital......................................................................... 54,960
Total liabilities and equity............................................................. $86,100