Test 1.

Adjusting entries and adjusted trial balances

Dickens Company is a small editorial services company owned and operated by Monica Baker. On October 31,
2014, the end of the current year, Dickens Company’s accounting clerk prepared the unadjusted trial balance
shown below.

The data needed to determine year-end adjustments are as follows:

a. Unexpired insurance at October 31, $5,400.
b. Supplies on hand at October 31, $375.
c. Depreciation of building for the year, $6,000.
d. Depreciation of equipment for the year, $3,000.
e. Rent unearned at October 31, $1,350.
f. Accrued salaries and wages at October 31, $2,900.
g. Fees earned but unbilled on October 31, $18,600.

1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Rent
Revenue; Insurance Expense; Depreciation Expense—Building; Depreciation Expense—Equipment; and
Supplies Expense.

Post.
Date Description Ref. Debit Credit

2014
October 31 Insurance Expense 57 1,800  
Prepaid Insurance 13   1,800
Insurance expired ($7,200-$5,400)

   
31 Supplies Expense 58 1,605  
Supplies 14   1,605
Supplies used ($1,980-$375)

   
31 Depreciation Expense-Building 55 6,000  
Accumulated Depreciation-Building 17   6,000
Building depreciation

   
31 Depreciation Expense-Equipment 56 3,000  
Accumulated Depreciation-Equipment 19   3,000
Equipment depreciation

   
31 Unearned Rent 23 5,400  
Rent Revenue 42   5,400
Rent revenue earned ($6,750-$1,350)

   
31 Salaries and Wages Expense 51 2,900  
Salaries and Wages Payable 22   2,900
Accrued salaries and wages    
 31 Accounts Receivable 12 18,600  
Fees Earned 41   18,600
Accrued fees earned    

2. Determine the balances of the accounts affected by the adjusting entries, and prepare an adjusted trial
balance.

Dickens Company
Adjusted Trial Balance
October 31, 2014
Debit Credit
Balances Balances
Cash 7,500
Accounts Receivable 57,000
Prepaid Insurance 5,400
Supplies 375
Land 112,500
Building 150,250
Accumulated Depreciation—Building 93,550
Equipment 135,300
Accumulated Depreciation—Equipment 100,950
Accounts Payable 12,150
Salaries and Wages Payable 2,900
Unearned Rent 1,350
Monica Baker, Capital 221,000
Monica Baker, Drawing 15,000
Fees Earned 343,200
Rent Revenue 5,400
Salaries and Wages Expense 196,270
Utilities Expense 42,375
Advertising Expense 22,800
Repairs Expense 17,250
Depreciation Expense—Building 6,000
Depreciation Expense—Equipment 3,000
Insurance Expense 1,800
Supplies Expense 1,605
Miscellaneous Expense 6,075
780,500 780,500

(The balances affected are the following: prepaid insurance, supplies, accumulated depreciation-building,
unearned rent, salary and wages expense, and accounts receivables.)
Cash 11 Rent Revenue 42
Accounts Receivable 12 Salaries and Wages Expense 51
Prepaid Insurance 13 Utilities Expense 52
Supplies 14 Advertising Expense 53
Land 15 Repairs Expense 54
 Building 16 Depreciation Expense—Building 55
Accumulated Depreciation—Building 17 Depreciation Expense—Equipment 56
Equipment 18 Insurance Expense 57
Accumulated Depreciation—Equipment 19 Supplies Expense 58
Accounts Payable 21 Miscellaneous Expense 59
Unearned Rent 22
Salaries and Wages Payable 23
Monica Baker, Capital 31
Monica Baker, Drawing 32
Fees Earned 41

CHAPTER 4: Accounting Cycle of Service Business, The Business

Process
EX 4 – 5 Effect of omitting adjusting entry
(a) In the income statement, since the expiration of prepaid insurance is an expense, the net income is
overstated, whilst as aforementioned, the insurance expense will be understated. (b) Consequently, the asset
prepaid insurance will be overstated since again, it was not stated early on. Hence, there would be an
overstatement of owner’s equity.
EX 4 – 7 Adjusting entries for prepaid insurance

Insurance Expense 16,400  

Prepaid Insurance   16,400
Insurance expired ($12,000 + $18,000 - $13,600)

   
Insurance Expense 16,400  
Prepaid Insurance   16,400
Insurance expired
EX 4 – 8 Adjusting entries for unearned fees

Unearned Fees 25,200  

Rent Revenue   25,200
Rent revenue earned ($37,500-$12,300)

   
EX 4 – 10 Adjusting entries for accrued fees

a. Accounts Receivable 8,450  

Fees Earned   8,450
Accrued fees earned    
b. The short answer is no. Earned but unbilled revenues aren’t recognized in the accounts if the cash basis of
accounting is used. Consequently, an adjusting entry would be unnecessary.
EX 4 – 13 Adjusting entries for accrued salaries

Salaries and Wages Expense 7,050  

Salaries and Wages Payable   7,050
 Accrued salaries and wages ($11, 750 * 3 days/ 5 days)    

Salaries and Wages Expense 9,400  

Salaries and Wages Payable   9,400
Accrued salaries and wages ($11, 750 * 4 days/ 5 days)    
EX 4 – 19 Determining fixed asset’s book value
a. $1,375,000 – $725,000 = $650,000
b. Depreciation, in its utmost sense, is calculated through the cost in these periods of time where the business
entity is benefitting from its utilization. Though relevant, it doesn’t necessarily mean a loss at value.

PR 4 – 1A Adjusting Entries

2014
July 31 Supplies Expense 4,680  
Supplies   4,680
Supplies Used ($6,880-$2,200)

31 Unearned Rent 2,300  

Rent Revenue   2,300
Rent revenue earned ($9,200 / 5 months)

31 Wages Expense 1,850

Wages Payable 1,850
Accrued wages

31 Accounts Receivable 11,700

Fees Earned 11,700
Accrued fees earned

31 Depreciation Expense 3,500

Accumulated Depreciation-Office Equipment 3,500 
Depreciation expense  
2. Adjusting entries are formulated whence updating accounts is necessary whilst, on the other hand, correcting
entries are only done whence there are errors which needs to be corrected in the adjusting entries.

PR 4-2A Adjusting entries

2014
July 31 Accounts Receivable 9,150
Fees Earned 9,150
Accrued fees earned

31 Supplies Expense 2,325

 Supplies 2,325
Supplies Used ($3,000-$675)

31 Rent Expense 5,000

Prepaid Rent
Prepaid rent expired

31 Depreciation Expense 3,300

Accumulated Depreciation-Office Equipment 3,300
Depreciation expense

31 Unearned Fees 7,500

Fees Earned 7,500
Fees earned ($10,000-$3,000)

31 Wages Expense 3,100

Wages Payable 3,100
Accrued wages

2. Since (a) unbilled fees should be stated under the fees earned, the same element, the fees earned, is
understated by $9,150 if ever will be omitted. On the other hand, the (f) unpaid wages accrued is also be
understated by $3,100. Since net income equates to the difference between the revenue and expenses, the net
income is consequently understated by $6,050 since: $9,150 (unbilled fees) - $3,100 (unpaid wages).
3. Since Accounts Receivable is an asset, both accounts will be understated by $9,150. On the other hand, since
Wages Payable is a liability, both accounts will be understated by $3,100. Thus, consequently, the owner’s
capital would be understated by $6,050 since: $9,150 (unbilled fees) - $3,100 (unpaid wages). And the total
liabilities and owner’s equity would also be understated by $9,150 since: $3,100 (unpaid wages) + $6,050 (net
income).
4. Adjusting entries does not affect the statement of cash flows. Thus, there is no meaningful “Net increase nor
net decrease” in cash.

PR 4 – 3A Adjusting Entries

2014
June 30 Accounts Receivable 12,700
Fees Earned 12,700
Accrued fees earned

3 Supplies Expense 17,425

Supplies 17,425
Supplies Used ($3,000-$675)

30 Depreciation Expense 7,400

Accumulated Depreciation-Equipment 7,400
Depreciation expense

30 Unearned Fees 14,200

Fees Earned 14,200
Fees earned ($10,000-$3,000)
 3 Wages Expense 1,100
Wages Payable 1,100
Accrued wages

Before the adjusting entries:

Electro Repairs and Services
Income Statement
For the Year Ended June 30, 2014
Fees $393,000
Earned…………………………………………………………………...
Expenses:
Wages Expense…………………………………………………………... $126,000
Rent 96,000
Expense……………………………………………………………....
Utilities 69,000
Expense…………………………………………………………...
Miscellaneous 10,800
Expense…………………………………………………….
Total 301,800
Expenses………………………………………………………...
Net $91,200
Income………………………………………………………………...

After the adjusting entries:

Electro Repairs and Services
Income Statement
For the Year Ended June 30, 2014
Fees $419,000
Earned…………………………………………………………………...
Expenses:
Wages Expense…………………………………………………………... $301,000
Rent 17,425
Expense……………………………………………………………....
Utilities 7,400
Expense…………………………………………………………...
Miscellaneous 1,100
Expense…………………………………………………….
Total 327,725
Expenses………………………………………………………...
Net $92,175
Income………………………………………………………………...

4. The amount of change between the net income before and after the adjusting entries is $975 ($92,175-
$91,200)— this is the increment to the account of Amy Wolf, Capital.
PR 4 – 4A Adjusting Entries

Post
Date .
Description Ref. Debit Credit
2014
Nov. 30 Supplies Expense 53 8,850
Supplies 13 8,850
Supplies used ($11,250 - $2,400).

30 Insurance Expense 58 10,400

Prepaid Insurance 14 10,400
Insurance expired ($14,250 - $3,850).

30 Depreciation Expense-Equipment 54 11,600

Accumulated Depreciation-Equipment 16 11,600
Equipment depreciation ($106,100 - $94,500).

30 Depreciation Expense-Automobiles 55 7,300

Accumulated Depreciation-Automobiles 18 7,300
Automobile depreciation ($62,050 - $54,750).

30 Utilities Expense 56 1,200

Accounts Payable 21 1,200
Accrued utilities expense ($26,130 - $24,930, or $14,100 - $12,900).

30 Salary Expense 51 8,100

Salaries Payable 22 8,100
Accrued salary ($525,000 - $516,900).

30 Unearned Service Fees 23 9,000

Service Fees Earned 41 9,000
Service fees earned ($18,000 - $9,000, or $742,800 - $733,800).
CHAPTER 5: Completing the Accounting Cycle of Service Businesses
EX 5 – 3 Financial Statements from the end-of-period spreadsheet

Holism Consulting
Income Statement
For the Year Ended May 31, 2014
Fees earned $175,200
Expenses:
Salary expense $70,500
Supplies expense 6,000
Depreciation expense 4,800
Miscellaneous expense 7,400
Total expenses 88,700
Net Income $86,500

Holism Consulting
Statement of Owner’s Equity
For the Year Ended May 31, 2014
Scott Cutler, capital, June 1, 2013 $ 90,400
Net income $86,500
Less withdrawals 12,000
Increase in owner's equity 74,500
Scott Cutler, capital, May 31, 2014 $164,900
Holism Consulting
Balance Sheet
May 31, 2014
Assets Liabilities
Cash $38,000 Accounts Payable $24,400
Accounts receivable 90,000 Salaries Payable 1,500
Supplies 3,600 Total liabilities $25,900
Total current assets $131,600
Property, plant, and
equipment:
Office equipment $74,000
Less accum. depr. 14,800
Owner’s Equity
Total property, plant,
Scott Cutler, capital 164,900
and equipment 59,200
Total liabilities and
Total assets $190,800
Owner’s equity $190,800
Learning Gains (Quarter 4: Week 1-3)
1. Why are adjusting entries needed at the end of an accounting period?
Adjusting entries are absolutely necessary for updating unrecorded
transactions: transactions which are commonly passed through the
passage of time or caused minimal changes in account balances. Any
unrecognized income and expenses for an accounting period is recorded
through adjusting entries; this will make sure that all transactions are
recorded. Thus, giving appropriate, valid, accurate, up-to-date, and
present income statement, balance sheet, and the likes. Every adjusting
entry, as the names suggests, adjust the amount of net income for an
accounting period. This is because of the apparent changes and
alternations to certain accounting elements.

2. Does every adjusting entry have an effect of determining the amount of net
income for a period? Explain?
Every adjusting entry, as the names suggests, adjusts the amount of
net income for an accounting period. This is because of the apparent
changes and alternations to certain accounting elements. For example,
supposedly, a company has a $1,000,000 debit balance in its supplies
account at the end of the business year, but a count of supplies on hand
finds only $300,000 of them remaining. Since supplies worth $700,000
have been used up, the supplies account requires a $700,000 adjustment
so assets are not overstated, and the supplies expense account requires a
$700,000 adjustment so expenses are not overstated.

Learning Gains (Quarter 4: Week 4-5)

1. Differentiate fiscal year from natural business year

A fiscal year is a year-long accounting period where businesses use
for tax reporting and financial objectives. It’s also known the financial
year. A fiscal year is very different to a natural business year which is
also and commonly a calendar year; it doesn't necessarily start on
January 1 and end on December 31. However, this doesn’t seem to be
always the case. A natural business year can also be referred to the
period of twelve months of a company preparing its accounts based on
its typical operations, starting and ending when activity is low.
PR 5 – 4A Ledger accounts, adjusting entries, financial statements, and closing entries; optional spreadsheet
Account: Cash                                                                                Account No..--- 11

Post.
Ref.
Date Item !Debit Cred
2014          
Mar. 31 Balance ..J    
Account :
    Supplies                                                           Account No. 13

Post
Ref.
Date Item !Debit Cred
2014          
Mar. 31 Balance ..J    
  31 Adjusting 26   22,5
Account: Prepaid insurance                                                         Account No..--- 14

Post.
Ref.
Date Item !Debit Cred
2014          
Mar. 31 Balance ..J    
  31 Adjusting 26   1,80
Account: Equipment                                                                    Account No.--- 16

Post.
Ref.
Date Item !Debit Cred
2014          
Mar. 31 Balance ..J    
Account :
    Accumulated Depreciation - Equipment                       Account No.---17

Post
Ref.
Date Item !Debit Cred
2014          
Mar. 31 Balance ..J    
  31 Adjusting 26   8,35

Account: Trucks                                                                               Account No.---18

Post
Ref.
Date Item !Debit Cred
2014          
Mar. 31 Balance ..J    

Account:         Accumulated Depreciation-Trucks                             Account No.           19
Post.
Date Item Ref. Debit Cr
2014          
Mar. 31 Balance .J    
  31 Adjusting 26   6,2
Account:          Accounts Payable                                                        Account No.               21
Date Post. Ref.
 
  Item Debit Cr
2014          
Mar. 31 Balance .J    
Account:           Wages Payable                                                                 Account No.             22
Post. Ref.
Date Item Debit Cr
2014          
Mar. 31 Adjusting 26   60
Account: Kaya Tarango, Capital                                              Account No.--- 31 -

Post. Ref.
Date Item Debit Cr
2014          
Mar. 31 Balance .J    
  31 Closing 27   51
  31 Closing 27 15,000  
Account:
Kaya Tarango, Drawing Account No. 32
Post. Ref.
Date Item Debit Cr
2014          
Mar. 31 Balance .J    
  31 Closing 27   15

Account:           Income Summary                                                               Account No.      33
Post. Ref.
Date Item Debit Cr
2014          
Mar. 31 Closing 27   16
  31 Closing 27 108,850  
  31 Closing 27 51,150  
Account: Service Revenue                                                                   Account No.---
41 -
Post
Date Item Ref. Debit Cr
2014          
Mar. 31 Balance ..J    
  31 Closing 27 160,000  
Account: Wages Expense                                                      Account No.---
51 -
Post. Ref.
Date Item Debit Cr
2014          
Mar. 31 Balance ..J    
  31 Adjusting 26 600  
  31 Closing 27   45
Account: Supplies Expense                                                    Account No.---
52 -
Post.
Date Item Ref. Debit Cr
2014          
Mar. 31 Adjusting 26 22,500  
  31 Closing 27   22
Account: Rent Expense                                                                 Account No.---
53 -
Post.
Date Item Ref. Debit Cr
2014          
Mar. 31 Balance ..J    
  31 Closing 27   10

Account:           Truck Expense                                                                 Account No.       54
Post. Ref.
Date Item Debit Cr
2014          
Mar. 31 Balance .J    
  31 Closing 27   9,0
Account:           Depreciation Expense-Equipment                              Account No.            55
Date Item Post. Ref. Debit Cr
2014          
Mar. 31 Adjusting 26 8,350  
  31 Closing 27   8,3
Account:          Depreciation Expense-Trucks                                     Account No. 56
Post Ref.
Date Item Debit Cr
2014          
Mar. 31 Adjusting 26 6,200  
  31 Closing 27   6,2
Account; Insurance Expense                                                Account No. 57
Post Ref.
Date Item Debit Cr
2014          
Mar. 31 Adjusting 26 1,800  
  31 Closing 27   1,8
Account:
    Miscellaneous Expense                                     Account No.            59  
Post.
Date Item Ref. Debit Cr
2014          
Mar. 31 Balance ..J    
  31 Closing 27   4,8
 LAKOTA FREIGHT CO.
End-of-period Spreadsheet (Work Sheet)
For the Year Ended March 31,2014
Unadjusted Trial Adjustments Adjustment Trial Income
Balance Balance
Account Title Debit Credit Debit Credit Debit Credit Debit
Cash 12,000 12,000
Supplies 30,000 (a) 22,500 7,500
Prepaid insurance 3,600 (b) 1,800 1,800
Equipment 110,000 110,00
Accumulated Dep. – 25,000 (c) 8,350 33,350
Equipment
Trucks 60,000 60,000
Accumulated Dep. – Trucks 15,000 (d) 6,200 21,200
Accounts Payable 4,000 4,000
Wages Payable (e) 600 600
Kaya Tarango, Capital 96,000 96,000
Kaya Tarango, Drawing 15,000 15,000
Service Revenue 160,000 160,000
Wages Expense 45,000 (e) 600 45,600 45,600
Supplies Expense (a) 22,500 22,500 22,500
Rent Expense 10,600 10,600 10,600
Trucks Expense 9,000 9,000 9,000
Depreciation Exp. - Equipment (c) 8,350 8,350 8,350
Depreciation Expenses – (d) 6,200 6,200 6,200
Trucks
Insurance Expense (b) 1,800 1,800 1,800
Miscellaneous Expense 4,800 4,800 4,800
300,000 300,000 39,450 39,450 315,150 315,150 108,850
Net Income 51,150
160,000

JOURNAL Page 26

Date Post Ref.

2014   Adjusting Entries  
 March 31 Supplies Expense 52
    Supplies 13
    Supplies used ($30,000 - $7,500).
     
  31 Insurance Expense 57
    Prepaid Insurance 14
    Insurance expired.
     
  31 Depreciation Expense- Equipment 55
    Accumulated Depr.- Equipment 17
    Equipment depreciation.
     
  31 Depreciation Expense-Trucks 56
    Accumulated Depr.-Trucks 19
    Truck depreciation.
     
  31 Wages Expense 51
    Wages Payable 22
    Accrued wages.

LAKOTA FREIGHT CO.

Adjusted Trial Balance
 March 31, 2014
  Deb
Cash
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation-Equipment
Trucks
Accumulated Depreciation-Trucks
Accounts Payable
Wages Payable
Kaya Tarango, Capital
Kaya Tarango, Drawing
Service Revenue
Wages Expense
Supplies Expense
Rent Expense
Truck Expense
Depreciation Expense-Equipment
Depreciation Expense-Trucks
Insurance Expense
Miscellaneous Expense
 

LAKOTA FREIGHT CO.

Income Statement
For the Year Ended March 31,2014
Service Revenue
Wages Expense $4
Supplies Expense 2
Rent Expense 1
Trucks Expense
Depreciation Exp. - Equipment
Depreciation Expenses – Trucks
Insurance Expense
Miscellaneous Expense

Net Income

LAKOTA FREIGHT CO.

Balance Sheet
March 31,2014

Assets Liabili
Cash   $12,000   Accounts Payable
Supplies   7,500   Wages Payable
Prepaid insurance   1,800   Total Liabilities
Total current assets     $ 21,300
Property, plant, and equipment:      
Equipment $110,000     Owner’s Eq
Less accum depreciation 33,350 $76,650   Kaya Tarango, Capital
Trucks $ 60,000    
Less accum depreciation 21,200 38,800  
Total property plant and      
equipment     115,450 Total liabilities and owner’s
Total assets     $136,750 equity

LAKOTA FREIGHT CO.

Statement of Owner's Equity
For the Year Ended March 31,2014
Kaya Tarango, capital, April1,2013
Net Income for the year
Less withdrawals
Increase In owner's equity
Kaya Tarango, capital, March 31 ,2014

Journal

 
Date Post Ref.
2014 Closing Entries
Mar. 31 Service Revenue 41
Income Summary 33
 
31 Income Summary 33
Wages Expense 51
Supplies Expense 52
Rent Expense 53
Truck Expense 54
Depreciation Expense-Equipment 55
Depreciation Expense-Trucks 56
Insurance Expense 57
Miscellaneous Expense 59
 
 31 Income Summary 33
Kaya Tarango, Capital 31
 
31 Kaya Tarango, Capital 31
Kaya Tarango, Drawing 32

LAKOTA FREIGHT CO.

Post-Closing Trial Balance
March 31, 2014
  D
Cash
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation-Equipment
Trucks
Accumulated Depreciation-Trucks
Accounts Payable
Wages Payable
Kaya Tarango, Capital