Chapter 4, Problem 4.17E

(a)

To determine

Journal:

Journal is referred as one of the books of accounts that record all the financial transactions of the business in a chronological order.

Rule of Debit and Credit:

Debit- Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.

Credit -Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.

To record - The journal entry for each transaction for Company AQG.

Explanation of Solution

Record the transactions in journal for Company AQG.

Journal is referred as one of the books of accounts that record all the financial transactions of the business in a chronological order

Transaction -1

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
June 1	Prepaid Insurance		1,800
	Cash			1,800
	(To record the purchase of one year insurance policy)

Table (1)

Description:

• Prepaid insurance is an asset, and increased by $1,800. So debit prepaid insurance with $1,800.
• Cash is an asset, and it is decreased by $1,800. So credit Cash by $1,800.

Transaction-2

Date	Account Titles and Description	Debit ($)	Credit ($)
August 31	Prepaid rent	6,500
	Cash		6,500
	(To record the rent for 5 months in advance)

Table (2)

Description:

• Prepaid rent is an asset, and increased by $6,500. So debit prepaid rent with $6,500.
• Cash is an asset, and it is decreased by $6,500. So credit cash by $6,500.
• Transaction-3

Date	Account Titles and Description	Debit ($)	Credit ($)
September 4	Cash	3,600
	Unearned Service Revenue		3,600
	(To record the cash received in advance to render services for 9 months)

Table (3)

Description:

• Cash is an asset, and increased by $3,600. So debit the cash account by $3,600.
• Unearned Service Revenue is a liability, and it is increased by $3,600. So credit unearned service revenue by $3,600.

Transaction-4

Date	Account Titles and Description	Debit ($)	Credit ($)
November 30	Prepaid Cleaning (1)	2,000
	Cash		2,000
	(To record the cash paid in advance for 2 months cleaning)

Table (4)

Description:

• Prepaid cleaning is an asset, and it is increased by $2,000. So debit prepaid cleaning by $2,000.
• Cash is an asset, and it is decreased by $2,000. So credit cash by 2,000.

Working note:

Calculate the amount of prepaid cleaning:

$\begin{array}{c}\text{Prepaid}\text{Cleaning = }\left[\begin{array}{l}\text{Charge}\text{for}\text{cleaning}\text{ ×}\text{ Contract}\text{signed}\text{for}\\ \text{services per month number}\text{of}\text{month}\end{array}\right]\\ =\$1,000\times 2\\ =\$2,000\end{array}$ (1)

Transaction-5

Date	Account Titles and Description	Debit ($)	Credit ($)
December 5	Cash	1,500
	Unearned Service Revenue		1,500
	(To record the cash received in advance from a club)

Table (5)

Description:

• Cash is an asset, and it is increased by $1,500. So debit cash by $1,500.
• Unearned service revenue is a liability, and it is increased by $1,500. So credit unearned service revenue by $1,500.

(b)

To determine

Adjusting Entry:

Adjusting entries indicates those entries, which are passed in the books of accounts at the end of one accounting period. These entries are passed in the books of accounts as per the revenue recognition principle and the expenses recognition principle to adjust the revenue, and the expenses of a business in the period of their occurrence.

To record- The adjusting entries on 31^st December for company AQG.

Explanation of Solution

Solution:

Record the adjusting entries for company AQG

Adjusting entries indicates those entries, which are passed in the books of accounts at the end of one accounting period. These entries are passed in the books of accounts as per the revenue recognition principle and the expenses recognition principle to adjust the revenue, and the expenses of a business in the period of their occurrence.

Transaction -1

Date	Account Titles and Description	Debit ($)	Credit ($)
December 31	Insurance expenses (2)	1,050
	Prepaid Insurance		1,050
	(To record the expiration of 7 months of insurance)

Table (6)

Description:

• Insurance expense is stockholders’ equity, and it is decreased by $1,050. So debit insurance expenses by $1,050.
• Prepaid insurance is an asset, and it is decreased by $1,050. So credit prepaid insurance by $1.050.

Working notes:

Calculate the amount of Insurance Expired:

$\begin{array}{c}\text{Insurance}\text{Expired}\text{=}\frac{\text{Insurance}\text{Value}}{\text{PolicyPeriod}}\text{×}\left(\text{Insurance}\text{expired}\text{Period}\right)\\ \text{=}\frac{\text{\$1,800}}{\text{12}}\text{×}\left(\text{7}\right)\\ \text{=\$1,050}\end{array}$ (2)

Transaction-2

Date	Account Titles and Description	Debit ($)	Credit ($)
December 31	Rent expenses (3)	5,200
	Prepaid Rent		5,200
	(To record the expiration of 4 months of rent)

Table (7)

Description:

• Rent expense is stockholders’ equity, and it is decreased by $5,200. So debit rent expenses by $5,200.
• Prepaid rent is an asset, and it is decreased by $5,200. So credit Prepaid rent by $5,200.

Working Notes:

Calculate the amount of Rent Expenses-

$\begin{array}{c}\text{Rent}\text{Expenses}\text{=}\frac{\text{Prepaid}\text{Rent}}{\text{Payment}\text{made}\text{for}\text{5}\text{months}}\text{×}\left(\text{Number}\text{of}\text{months}\text{expired}\right)\\ \text{=}\frac{\text{\$6,500}}{\text{5}}\text{×4}\\ \text{=}\text{\$5,200}\end{array}$ (3)

Transaction-3

Date	Account Titles and Description	Debit ($)	Credit ($)
December 31	Unearned Service Revenue	1,600
	Service Revenue (4)		1,600
	(To record the service revenue for 4 month of services)

Table (8)

Description:

• Unearned Service Revenue is a liability, and it is decreased by $1,600. So debit unearned service revenue by $1,600.
• Service Revenue is an income and it increases the stockholders’ equity by $1,600.  So credit service revenue.

Working Notes:

Calculate the amount of service revenue to be recorded:

$\begin{array}{c}\text{Service}\text{Revenue}\text{=}\frac{\text{Amount}\text{received}\text{in}\text{advance}}{\text{Contract}\text{period}}\text{×}\left(\text{Number}\text{of}\text{period}\text{served}\right)\\ \text{=}\frac{\text{\$3,600}}{\text{9}}\text{×4}\\ \text{=\$1,600}\end{array}$ (4)

Transaction-4

Date	Account Titles and Description	Debit ($)	Credit ($)
December 31	Repairs and Maintenance Expenses	1,000
	Prepaid Cleaning		1,000
	(To record the expenses for the month of December )

Table (9)

Description:

• Repairs and Maintenance expense is an expense and it decreases stockholders’ equity by $1,000. So debit repairs and maintenance expense by $1,000.
• Prepaid cleaning is an asset, and it is decreased by $1,000. So credit prepaid cleaning by $1,000.

Transaction-5

Date	Account Titles and Description	Debit ($)	Credit ($)
December 31	Unearned Service Revenue	1,025
	Service Revenue (5)		1,025
	(To record the amount of services provided)

Table (10)

Description:

• Unearned service revenue is a liability, and it is decreased by $1,025. So debit unearned service revenue by $1,025.
• Service revenue is an income and it is increased by $1,025. So credit service revenue with $1,025.

Working Notes:

Calculate the amount of Service Revenue:

$\begin{array}{c}\text{Service}\text{Revenue}\text{=}\text{}\left[\begin{array}{l}\text{Cash}\text{received}\text{in}\text{advance}\text{-}\\ \text{worth}\text{of}\text{service}\text{yet}\text{to}\text{be}\text{provided}\end{array}\right]\\ \text{=\$1,500-}\text{\$475}\\ \text{=\$1,025}\end{array}$ (5)

(c)

To determine

T- Accounts:

T-account is an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded. This account is known as T-account, because this account resembles the capital letter ‘T’.

To record: The posting of journal and adjusting entries to T-accounts

Explanation of Solution

The posting of journal and adjusting entries to T-accounts

T-account is an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded. This account is known as T-account, because this account resembles the capital letter ‘T’

Prepaid Insurance

Prepaid Insurance
June 1	$1,800	December 31	$1,050
Bal.	$750

Prepaid Rent

Prepaid Rent
August 31	$6,500	December 31	$5,200
Bal.	$1,300

Unearned Service Revenue

Unearned Service Revenue
December 31	$1,800	September 4	$3,600
December 31	$1,025	September 5	$1,500
Total	$5,100	Total	$5,100
		Bal.	$2,275

Prepaid Cleaning

Prepaid Cleaning
November 30	$2,000	December 31	$1,000
Bal.	$1,000

Insurance Expenses

Insurance Expenses
December 31	$1,050
Bal.	$1,050

Rent Expenses

Insurance Expenses
December 31	$5,200
Bal.	$5,200

Service Revenue

Unearned Service Revenue
	$1,800	December 31	$1,600
	$1,025	December 31	$1,025
		Bal.	$2,625

Repairs and Maintenance Expenses

Repairs and Maintenance Expenses
December 31	$1,000
Bal.	$1,000