Transcript Document

1. Accrual of Expenses - Example 1
Raider Company borrowed $10,000 on October
1, 2008. The note included a 5 percent annual
interest rate, payable each September 30,
starting Sept. 30, 2009. How much interest must
Raider accrue at Dec. 31, 2008 before financial
statements are prepared?
Calc: Principal x rate x time
P
x R x T
10,000 x .05 x 3/12 of a year = $125
AJE:
Interest Expense 125
Interest Payable
125
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2. Accrual of Revenues - Example 2
Raider Company leases out part of its
office building to Tu Company for $2,000
per month. At the end of the year, Tu
owes Raider for December’s rent.
Prepare the AJE for Raider Company:
Rent Receivable 2,000
Rent Revenue
2,000
2
3.Prepaid Expenses - Example 3
Raider Company purchased a 1-year insurance
policy on April 1, 2008 at a cost of $2,400
General JE at time of purchase:
Prepaid Insurance
2,400
Cash
2,400
Calculation for AJE at December 31 to
recognize the portion that has been used up:
2,400 /12 = 200 per month x 9 months= $1,800
AJE: Insurance Expense 1,800
Prepaid Insurance
1,800
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3.Prepaid Expenses - Example 4
Raider Company purchased equipment in 2006
at a cost of $30,000. The equipment has a
useful life of 10 years and no salvage value.
Calculation for AJE at December 31, 2008 for
the current year’s depreciation.
30,000/10 = 3,000 per year
AJE: Depreciation Expense 3,000
Accumulated Depr.
3,000
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4.Unearned Revenues - Example 5
Raider Company received $6,000 on November
30, 2008 for subscriptions to be delivered over
the next 12 months, starting in December of
2008.
General JE at time cash received:
Cash
6,000
Unearned Revenues
6,000
AJE at end of the period (for portion earned):
6,000 / 12 = 500 per month, so 1 month earned.
Unearned Revenues
500
Subscription Revenues
500
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Class Problem – Prepare Adjusting Entries
The trial balance of Mega Company, Inc. at the end of its
annual accounting period is as follows:
Mega Company
Trial Balance
December 31, 2008
Cash
$ 3,000
Prepaid Insurance
1,600
Supplies
2,100
Equipment
20,000
Accumulated depreciation
$ 2,000
Common Stock
10,000
Retained Earnings
7,000
Dividends
1,000
Revenue
33,000
Salaries Expense
18,300
Rent Expense
6,000
______
Totals
$52,000
$52,000
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Adjusting Entries
1. Unexpired insurance at December 31 was
$1,000.
(So expired insurance is $600)
AJE:
Insurance Expense
600
Prepaid Insurance
600
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Adjusting Entries
2. Unused supplies, per inventory, $800 at
December 31.
So used supplies = 2,100 - 800 = 1,300
Supplies Expense 1,300
Supplies
1,300
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Adjusting Entries
3. Estimated Depreciation for 2008 is $1,000
Depreciation Expense 1,000
Accumulated Depr.
1,000
9
Adjusting Entries
4. Earned but unpaid salaries at December
31, $700.
Salaries Expense 700
Salaries Payable
700
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Closing Journal Entries (CJEs) - Example
Refer to Mega Company Adjusted Trial Balance.
Close revenues and expense to retained earnings:
Revenue
Salaries Expense
Rent Expense
Insurance Expense
Supplies Expense
Depreciation Expense
Retained Earnings
33,000
19,000
6,000
600
1,300
1,000
5,100
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Closing Journal Entries (CJEs) - Example
Refer to Mega Company. Now close the
balance in the Dividends account to
Retained Earnings.
Retained Earnings
Dividends
1,000
1,000
12
Closing Journal entries
Now post the effects of retained earnings to
the RE general ledger account.
Retained Earnings
Dividends 1,000
7,000 Beginning
5,100 Net Income
11,100 Ending
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Exercise 4-29
7/1 Cash
50,000
Notes Payable
50,000
7/31 Calc: 50,000 x .12 x 1/12 = $500
AJE Int. Expense
500
Int. Payable
500
8/31 Owe?
50,000 + 50,000 x .12 x 2/12 = $51,000
Notes Pay.
50,000
Int. Payable
500
Int. Expense
500
Cash
51,000
Problem 4-3
a. Calc: (15,000 - 250)/5 = 2,950 per yr.
Depreciation Exp.
2,950
Accum. Depr.
2,950
b. Calc.: Begin.
3,600
+ Purch
17,600
- Unused (1,850)
=Used
19,350
Supplies Expense
Office Supplies
19,350
19,350
Problem 4-3
c. Earned? 24,000/6 =
4,000 per mo. x 5 mos. = $20,000
Customer Deposits
Revenue
20,000
20,000
d. Calc: 2,700 per mo.
x 2 mos = 5,400 used
Rent Expense
Prepaid Rent
5,400
5,400
Problem 4-3
e. Calc: 200,000 x .09 x 2/12 = $3,000
(use months unless otherwise instructed)
Interest Expense
Interest Payable
3,000
3,000
f. If paid on the last day of work week:
Owes for Fri., Mon., Tues., and Wed.
4 days x $500 per day = $2,000 owed.
Salaries Expense
Salaries Payable
2,000
2,000
Problem 4-3
Part 2: effect on I/S if not recorded?
Depr. Exp. not recorded
+ 2,950
Supplies Exp. not recorded +19,350
Revenues not recorded
-20,000
Rent Exp. not recorded
+5,400
Interest Exp. not recorded +3,000
Salaries Exp. not recorded +2,000
Net effect: Net Inc. Over by 12,700
Exercise 4-20
For CengageNOW, you must use Income
Summary, like your text:
Close revenues:
Ad. Fee Earned
58,500
Int. Revenue
2,700
Inc. Summary
61,200
Close expenses:
Inc. Summary
56,250
Wage & Sal. Exp.
14,300
Util. Exp.
12,500
Ins. Exp.
7,300
Depr. Exp.
16,250
Int. Exp.
2,600
Inc. Tax Exp.
3,300
Exercise 4-20
Close Income Summary to Retained Earn.:
61,200 CR - 56,250 DR
= 4,950 CR Balance in Inc. Summary
(this the net income that will appear on Income
Statement)
Inc. Summary
4,950
Retained Earnings
4,950
Now close Dividends to Retained Earn.:
Retained Earnings
Dividends
2,000
2,000
Exercise 4-15
Ignore AJE? Effect on Net Income?
O =Overstate U=Understate NE=no effect
1. no depr. exp.?
O
2. no revenues?
U
3. no ins. exp?
O
4. no int. exp?
O
5. no commission exp.?
O
6. no rent revenue?
U