Introduction: Each financial transaction or economic event will affect either assets, liabilities, or owners’ equity. Thus, the basis for recording the transaction in the accounting system depends on the
Adjustments: Accrual basis accounting requires a number of adjustments at the end of the period. The adjustment is made for unearned revenue, accrued expenses, revenue received in advance and prepaid expenses.
To identify and analyze: The necessary adjustments for each of the given situation on March 31, 2017.
Explanation of Solution
a. Adjustment for Notes payable
Activity:Financing
Accounts:Interest payable. Increases
Interest expense. Increases
Statements:
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Interest payable $100 | ($100) | Interest expense $100 | ($100) |
90 days note taken for $15,000 at 8 per cent on March 1, 2017. The interest expense should be recognized for one month. The interest expense is calculated as follows:
It is assumed that the number of days in a year is 360 and the number of days in March is 30.
b. Adjustment for supplies used during the year
Activity:Operating
Accounts:Supply inventory. Decrease
Supplies expense. Increase
Statements:Balance sheet and Income statement
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Supply inventory ($660) | ($660) | Supply expenses $660 | ($660) |
Supplies consumed during the month:
Particular | Amount ($) |
Supplies in hand on March 1, 2017 | 1,280 |
Add: Supplies purchased during the month | 750 |
Less: Supplies in hand at the end of March 31, 2017 | (1,370) |
Supplies consumed | 660 |
c. Adjustment for
Activity: Operating
Accounts:
Depreciation expense − equipment. Increase
Equipment - Decrease
Statements:Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Equipment ($800) | ($800) | Depreciation Expense − equipment $800 | ($800) |
The depreciation for the year is calculated as follows:
Monthly depreciation expense is calculated as follows:
d. Adjustment for wages payable
Activity:Operating
Accounts:Wages payable. Increases
Wages expense. Increases
Statements: Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Wages payable $4,750 | ($4,750) | Wages expense $4,750 | ($4,750) |
As wages are paid every Sunday and month-end is Friday, only five days from Monday to Friday require adjustment. The wages for five days are calculated as follows:
e. Adjustments for rent collected in advance.
Activity:Operating
Accounts:Rent collected in advance. Decreases.
Revenue. Increase
Statements:Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets= | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Rent collected in advance ($2,500) | $2,500 | $2,500 | $2,500 |
Rent is received on February 1, 2017, for six months. The number of months from March 1 to March 31 is one. Therefore, the rental income will be recorded for one month. The rent revenue is calculated as follows:
f. Adjustments for customer deposit received in advance.
Activity:Operating
Accounts:Customer deposit in advance. Decreases.
Revenue. Increase
Statements:Balance sheet and Income statement.
Balance sheet | Income Statement | ||||
Assets= | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Customer deposit in advance ($1,200) | $1,200 | $1,200 | $1,200 |
Customer deposits for $4,800 received on March 1, 2017, to be used for four months.
As K Corporation, closes account every month therefore, deposits of one month from March 1 to March 31 can be used. The revenue for one month is calculated as follows:
g. Adjustment for federal income tax payable
Activity:Operating
Accounts:Income tax payable. Increases
Income tax expense. Increases
Statements:Balance sheet and Income Statement.
Balance sheet | Income Statement | ||||
Assets = | Liability + | Stockholders’ equity | Revenues - | Expenses = | Net income |
Income tax payable $3,900 | ($3,900) | Income tax expense $3,900 | ($3,900) |
The amount of federal income tax expense during March is $3,900. It will be deducted in calculating the net income of the company. It will increase the liability.
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Chapter 4 Solutions
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