Make appropriate adjusting entries based on the information provided:

Question

Make appropriate adjusting entries based on the information provided:

a. At the beginning of May, Golden Gopher Company reports a balance in Supplies of $400. On May 15, Golden Gopher purchases an additional $2,300 of supplies for cash. By the end of May, only $200 of supplies remains.

 

b. Suppose Hoosiers, a specialty clothing store, rents space at a local mall for one year, paying $19,200 ($1,600/month) in advance on October 1. Record the adjusting entry on December 31.

 

c. Mountaineer purchases one year of flood insurance in advance on March 1, paying $30,000 ($2,500/month). Record the adjusting entry on December 31. d. Suppose a customer rents a vehicle for three months from Commodores Rental on November 1, paying $4,500 ($1,500/month). Record the adjusting entry on December 31.

Answer 1

You start with $400 of supplies, add $2,300 so you have $2,700 of supplies in the account but you have only $200 of supplies on hand. What can you do to the supplies account to bring it to the correct balance?

 

dr. something . . . . .2,500

cr. . . . . .supplies . . . . . . . 2,500

 

You know what is in the account. You know what should be in the account. So you debit or credit the account to make its balance correct. Obviously you have to make an opposing credit or debit in the same amount, as I show above. so you can solve 75% of the problem from the information given without knowing anything, and you get 75% credit which is a C grade. to get the A grade you only need to provide the last 25% of the solution.

 

b. this depends on how the original entry was recorded. You have two choices: Record the payment as a debit to rent expense and credit cash. Or, record the payment as a debit to Prepaid rent (an asset) and credit cash. since the problem does not give all the information, you assign a C grade to the teacher for this problem.

 

Assume you recorded rent expense. the rent expense account has a debit balance of 19,200. How much rent expense was actually incurred for three months? clearly $4,800. So what is in the expense account? What should be in the account,

 

dr. something . . . . .14,400

cr. . . . .Rent expense . . .14,400

 

But if you originally recorded Prepaid rent, then

 

dr. .Rent expense . . . .4,800

cr. . . . . .Prepaid rent . . .  . . .4,800

 

Do you get the idea? Adjusting entries pose difficulties for students but they are actually very logical. The necessary information is given and you have to use it to decide what to do. Essentially you decide what is in an account, you use the information you have to decide what should be in the account, and you debit or credit the account to bring it to the correct balance. You also have to make a matching credit or debit entry. Now if you adjusted a permanent account, the other entry has to be a temporary account, and vice versa. And the two accounts have to be related. The relationships are normal relationships that occur between a balance sheet and an income statement. Here is a list of some common related accounts:

Accounts receivable -- sales revenue
Accounts payable -- purchases or merchandise, or both
interest receivable -- interest income
interest payable -- interest expense
prepaid rent, insurance -- rent, insurance expense
Unearned revenue (a liability) -- revenue
accumulated depreciation - depreciation expense
allowance for bad debts -- bad debts expense
taxes payable - tax expense

There are three types of adjustments: accruals, deferrals, and allocations.

Accruals are the accumulation of something, such as revenue or an expense, that occurs as a result of the passage of time, but for which an entry is not normally made because the cash will be paid or received later. For example, A company may have bond investments or notes receivable that earn interest, but the interest is not recorded unless it is received. If interest has been earned by the end of the period which has accrued (accumulated) but not yet received and recorded, an adjusting entry is needed to record the interest income and debit the interest receivable. Similarly, workers may be paid weekly every Friday, but the accounting period ends on Tuesday. A certain amount of wages has accrued but not yet paid, so the adjustment is to record the wages payable as a liability and debit wage expense which has been incurred for two days.

Deferrals are somewhat more complicated because they are initially recorded, but the passage of time changes the situation so the record is no longer valid. There is more than one way to record the receipt or payment of cash for certain revenues and expenses, and the adjusting entry depends on how the original record was previously made. Buying of supplies is an example.

1. Recorded as asset.

Assets are economic resources that provide future benefits. When you buy supplies, you actually receive physical goods, put them on a shelf or in bins, and they are available to be used later when needed. So supplies are assets. They are something you have and own. For example copy paper, paper clips, printer ink cartridges, nails, paint. When you use up an asset you incur an expense, i.e. a reduction of owner's equity because the asset no longer exists. It has provided the service you needed. Let's look at an example, This month you started with $100 of supplies on hand. You bought $300 more of supplies and debited the supplies asset account. Whenever you need to use some supplies, you take them out of the bin or supply cabinet and use them. At the end of the month you look over your supplies and you find that you have only $80 of supplies left. What does that mean? Obviously, you must have used up $320 of supplies. So to prepare financial statements you have to adjust the supplies asset account. What is the balance of the account? $400. What should be the balance at the end of the month? $80. So to adjust the account, you have to credit it $320. What do you debit? Supplies expense. That's fairly easy to see when you think about it logically.

2. Supplies recorded as expenses.

Another company is constantly buying supplies and using them up as the need occurs. Let's say it has no supplies at the beginning of the month. You buy $600 of supplies and you decide that since these supplies will soon be used up, you may as well record the entire amount as an expense. You debit supplies expense $600. Later you buy some more supplies for $200 and again record them as an expense. Now at the end of the month you look at your supplies expense account and see that it has a debit of $800. But the supplies you have on hand amount to $100 dollars. What is wrong here? You have $100 of supplies, clearly an asset, and your accounting records tell you that you used up supplies of $800. So what is wrong? Nothing really. Your accounts just need adjusting to express the reality of the situation. The supplies expense account says that you used up $800 of supplies but you know that you used up less because you have $100 of supplies still on hand. How do you adjust the expense account? Clearly you have to record a credit of $100 to bring the expense account to its proper balance. What do you debit? See how simple it is to make adjustments. Every adjusting entry involves one temporary account and one permanent account. And the accounts are always related.

Finally, allocations are adjustments that must be estimated and cannot be calculated precisely. Examples are the recording of depreciation expense, and the recording of bad debts expense.