Concept explainers
(a)
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
To prepare: The adjusting
(a)
Explanation of Solution
The adjusting journal entries in the book of Hotel M at the end of the May month are as follows:
1. An adjusting entry for insurance expense:
In this case, Hotel M recognized the insurance expenses at the end of the May month. So, the necessary adjusting entry that the Hotel M should record to recognize the insurance expense is as follows:
Date | Account Titles and Description | Debit ($) | Credit ($) |
May 31, 2017 | Insurance expense | 450 | |
Prepaid insurance | 450 | ||
(To record the insurance expenses incurred at the end of the May) |
Table (1)
Description:
- Insurance expense decreases the value of
stockholders’ equity by $450; hence debit the insurance expense for $450. - Prepaid insurance is an asset, and it decreases the value of asset by $450, hence credit the prepaid insurance for $450.
2. An adjusting entry for Supplies expenses:
In this case, Hotel M recognized the supplies expenses at the end of the May month. So, the necessary adjusting entry that the Hotel M should record to recognize the supplies expense is as follows:
Date | Account Titles and Description | Debit ($) | Credit ($) |
May 31, 2017 | Supplies expenses (1) | 1,550 | |
Supplies | 1,550 | ||
(To record the supplies expenses incurred at the end of the May) |
Table (2)
Working note:
Calculate the value of supplies expense at end of the May month
Hence, the value of supplies expenses at the end of the May month is $1,550.
Description:
- Supplies expense decreases the value of stockholders’ equity by $1,550; hence debit the supplies expenses for $1,550.
- Supplies are an asset, and it decreases the value of asset by $1,550, hence credit the supplies for $1,550.
3. An adjusting entry for
In this case, Hotel M recognized the depreciation expense at end of the May month. So, the necessary adjusting entry that the Hotel M should make to record the depreciation expense at end of the month is as follows:
On the building:
Date | Account Titles and Description | Debit ($) | Credit ($) |
May 31, 2017 | Depreciation expense (2) | 300 | |
| 300 | ||
(To record the depreciation expenses allocated at end of the month) |
Table (3)
Working note:
Calculate the value of depreciation expense at the end of the May month
Description:
- Depreciation expense decreases the value of stockholders’ equity by $300; hence debit the depreciation expense for $300.
- Accumulated depreciation is a contra asset account, and it decreases the value of asset by $300 hence, credit the accumulated depreciation for $300.
On the equipment:
Date | Account Titles and Description | Debit ($) | Credit ($) |
May 31, 2017 | Depreciation expense (3) | 250 | |
Accumulated depreciation-Equipment | 250 | ||
(To record the depreciation expenses allocated at end of the month) |
Table (4)
Working note:
Calculate the value of depreciation expense at the end of the May month
Description:
- Depreciation expense decreases the value of stockholders’ equity by $250; hence debit the depreciation expense for $250.
- Accumulated depreciation is a contra asset account, and it decreases the value of asset by $250 hence, credit the accumulated depreciation for $250.
4. An adjusting entry for interest payable:
In this case, Hotel M incurred the interest expenses but cash is not yet paid. So, the necessary adjusting entry that the Hotel M should record to recognize the accrued expense is as follows:
Date | Account Title and Description |
Debit ($) |
Credit ($) |
May 31, 2017 | Interest expense (4) | 180 | |
Interest payable | 180 | ||
(To record the interest expense incurred at the end of the month) |
Table (5)
Working note:
Calculate the value of interest expense at the end of the May month
Description:
- Interest expense decreases the value of stockholders’ equity by $180; hence debit the interest expense for $180.
- Interest payable is a liability, and it increases the value of liability by $180, hence credit the interest payable for $180.
5. An adjusting entry for unearned rent revenue:
In this case, Hotel M has been earned unearned rent revenue of $2,500 at end of the May month. Hence, Hotel M should record $2,500 as rent revenue to be adjusted from unearned rent revenue is as follows:
Date | Account Title and Description |
Debit ($) |
Credit ($) |
May 31, 2017 | Unearned rent revenue | 2,500 | |
Rent revenue | 2,500 | ||
(To record the unearned rent revenue at end of the month) |
Table (6)
Description:
- Unearned rent revenue is a liability, and it decreases the value of liability by $2,500, hence debit the unearned rent revenue for $2,500.
- Rent revenue increases the value of stockholders’ equity by $2,500; hence credit the rent revenue for $2,500.
6. An adjusting entry for salaries and wages payable:
In this case, Hotel M incurred the salaries and wages expense but cash is not yet paid. So, the necessary adjusting entry that the Hotel M should record to recognize the accrued expense is as follows:
Date | Account Title and Description |
Debit ($) |
Credit ($) |
May 31, 2017 | Salaries and wages expense | 900 | |
Salaries and wages payable | 900 | ||
(To record the salaries and wages expense incurred at the end of the May month) |
Table (7)
Description:
- Salaries and wages expense decreases the value of stockholders’ equity by $900; hence debit the salaries and wages expense for $900.
- Salaries and wages payable is a liability, and it increases the value of liability by $900, hence credit the salaries and wages payable for $900.
(b)
T-account:
T-account refers to 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 referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
To post: the transaction to T-accounts of Hotel M on May 31, 2017.
(b)
Explanation of Solution
Cash account | |||
May, 31 Bal. | $2,500 | ||
Bal. | $2,500 |
Supplies account | |||
May, 31 Bal. | $2,600 | May, 31 | $1,550 |
Total | $2,600 | Total | $1,550 |
Bal. | $1,050 |
Prepaid insurance | |||
May, 31 Bal. | $1,800 | May, 31 | $450 |
Total | $1,800 | Total | $450 |
Bal. | $1,350 |
Land | |||
May, 31 Bal. | $15,000 | ||
Bal. | $15,000 |
Building | |||
May, 31 Bal. | $70,000 | ||
Bal. | $70,000 | ||
Accumulated depreciation-Building | |||
May, 31 | $300 | ||
Bal. | $300 |
Equipment | |||
May, 31 Bal. | $16,800 | ||
Bal. | $16,800 |
Accumulated depreciation - Equipment | |||
May, 31 | $250 | ||
Bal. | $250 |
Accounts payable | |||
May, 31 Bal. | $4,700 | ||
Bal. | $4,700 |
Unearned rent revenue | |||
May, 31. | $2,500 | May, 31 Bal. | $3,300 |
Total | $2,500 | Total | $3,300 |
Bal. | $ 800 |
Salaries and wages payable | |||
May, 31 Bal. | $900 | ||
Bal. | $900 |
Interest payable | |||
May, 31 Bal. | $180 | ||
Bal. | $180 |
Mortgage payable | |||
May, 31 Bal. | $36,000 | ||
Bal. | $36,000 |
Closing stock | |||
May, 31 Bal. | $60,000 | ||
Bal. | $60,000 |
Rent revenue | |||
May, 31 Bal. May, 31 |
$9,000 $2,500 | ||
Bal. | $11,500 |
Salaries and wages expense | |||
May, 31 Bal. May, 31 |
$3,000 $900 | ||
Bal. | $3,900 |
Utilities expense | |||
May, 31 Bal. | $800 | ||
Bal. | $800 |
Advertising expense | |||
May, 31 Bal. | $500 | ||
Bal. | $500 |
Interest expense | |||
May, 31 Bal. | $180 | ||
Bal. | $180 |
Insurance expense | |||
May, 31 Bal. | $450 | ||
Bal. | $450 | ||
Supplies expense | |||
May, 31 | $1,550 | ||
Bal. | $1,550 |
Depreciation expense | |||
May, 31. | $300 | ||
May, 31 | $250 | ||
Bal. | $550 |
(c)
Adjusted
Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.
To prepare: The adjusted trial balance of Hotel M on May 31, 2017.
(c)
Explanation of Solution
Adjusted trial balance of Hotel M on May 31, 2017 is as follows:
Hotel M | ||
Adjusted Trial balance | ||
May 31, 2017 | ||
Particulars | Debit $ | Credit $ |
Cash | 2,500 | |
Supplies | 1,050 | |
Prepaid insurance | 1,350 | |
Land | 15,000 | |
Building | 70,000 | |
Accumulated depreciation - Building | 300 | |
Equipment | 16,800 | |
Accumulated depreciation-Equipment | 250 | |
Accounts payable | 4,700 | |
Unearned rent revenue | 800 | |
Salaries and wages payable | 900 | |
Interest payable | 180 | |
Mortgage payable | 36,000 | |
Common stock | 60,000 | |
Rent revenue | 11,500 | |
Salaries and wages expense | 3,900 | |
Utilities expense | 800 | |
Advertising expense | 500 | |
Interest expense | 180 | |
Insurance expense | 450 | |
Supplies expense | 1,550 | |
Depreciation expense | 550 | |
114,630 | 114,630 |
Table (8)
Thus, the total of debit, and credit columns of a trial balance is $114,630 and agreed.
(d)
Income statement:
This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.
Statement of retained earnings:
This is an equity statement which shows the changes in the stockholders’ equity over a period of time.
Classified balance sheet:
This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.
To prepare: The income statement, statement of retained earnings, and classified balance sheet of Hotel M.
(d)
Explanation of Solution
The income statement of Hotel M for the month ended May 31, 2017 is as follows:
Hotel M | ||
Income Statement | ||
For the month ended May 31, 2017 | ||
Particulars | $ | $ |
Revenue: | ||
Service revenue | 11,500 | |
Total revenue (A) | 11,500 | |
Less: Expenses | ||
Salaries and wages expenses | 3,900 | |
Supplies expense | 1,550 | |
Utilities expense | 800 | |
Depreciation expense | 550 | |
Advertising expense | 500 | |
Interest expense | 180 | |
Insurance expenses | 450 | |
Total Expenses (B) | 7,930 | |
Net income
| 3,570 |
Table (9)
Hence, the net income of Hotel M for the month ended May 31, 2017 is $3,570.
The retained earnings statement of Hotel M for the month ended May 31, 2017 is as follows:
Hotel M | |
Retained earnings statement | |
For the month ended May 31, 2017 | |
Particulars | $ |
Retained earnings at May, 1 | - |
Add: Net income | 3,570 |
3,570 | |
Less: Dividends paid | - |
Retained earnings at May, 31 | 3,570 |
Table (10)
Hence, retained earnings of Hotel M for the month ended May 31, 2017 are $3,570.
The classified balance sheet at May 31, 2017 is as follows:
Hotel M | |||
Classified Balance sheet Statement | |||
As at May 31, 2017 | |||
Assets | $ | $ | $ |
Current assets: | |||
Cash | 2,500 | ||
Supplies | 1,050 | ||
Prepaid insurance | 1,350 | ||
Total of current assets (X) | 4,900 | ||
Other assets: | |||
Land | 15,000 | ||
Building | 70,000 | ||
Less: Accumulated depreciation-Building | 300 | 69,700 | |
Equipment | 16,800 | ||
Less: Accumulated depreciation-Equipment | 250 | 16,550 | |
Total of other assets (Y) | 101,250 | ||
Total assets
| 106,150 | ||
Liabilities and Stockholders' equity | $ | $ | $ |
Current liabilities: | |||
Accounts payable | 4,700 | ||
Salaries and wages payable | 900 | ||
Unearned rent revenue | 800 | ||
Interest payable | 180 | ||
Total current liabilities | 6,580 | ||
Long-term liabilities: | |||
Mortgage payable | 36,000 | ||
Total liabilities (A) | 42,580 | ||
Stockholders' equity: | |||
Common stock | 60,000 | ||
Retained earnings | 3,570 | ||
Total stockholders' equity (B) | 63,570 | ||
Total liabilities and stockholders' equity
| 106,150 |
Table (11)
Hence, the total assets of Hotel M are $106,150, and the total liabilities and stockholders’ equity are $106,150.
(e)
To identify: The accounts would be closed at the end of the May month.
(e)
Answer to Problem 4.3AP
All revenue and expense accounts must be closed at end of the May, 2017.
Explanation of Solution
Rent revenue, salaries and wages expense, utilities expense, advertising expense, interest expense, insurance expense, supplies expense, and depreciation expense (temporary accounts) are closed by transferring the amount of all revenue and expenses to the income summary account in order to bring the all revenue and expense accounts balance to zero.
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