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Chapter 5: Adjustments and the Worksheet
Chapter Opener: Thinking Critically
Students should suggest that accountants estimate the amount of wear and tear on the equipment. This
expense should be charged against the income earned during that same period. The concept of adjustments
and depreciation can be introduced at this time.
Fast Facts
• William Boeing founded Pacific Aero Products Company in 1916; the name was changed to Boeing in
1917.
• In 1917 the company employed 28 people. In 2004 Boeing employed more than 159,000 people in
48 U.S. states and 67 foreign countries.
• Boeing is the largest contractor working for NASA.
• Along with the ISS, the Boeing Company manufactures and services commercial airplanes, military
aircraft, helicopters, a variety of electronic defense systems, and advanced communication systems.
• Boeing’s newest division, Connexion, equips aircraft with a broadband connection that provides highspeed access to the Internet, entertainment and television—all in real-time.
• Boeing’s 2004 sales were $52.5 billion from customers in 145 countries. International sales accounted for
nearly 30 percent of total sales.
Computers in Accounting: Thinking Critically
Answers will vary, but students should demonstrate an understanding of the word “integrated” as it applies to
computerized accounting systems. Each accounting module (accounts payable, accounts receivable,
general ledger, fixed asset, etc.) communicates with the others, transferring data, keeping the entire system
in balance.
Computers in Accounting: Internet Application
Students can find information at www.accubooks.com. Reports will vary. The Accu-Books general ledger
module provides the following features: produces financial reports, offers customizable chart of accounts,
and provides easy-to-use forms for journal entries.
Managerial Implications: Thinking Critically
Adjustments ensure that the financial statements reflect the true condition and performance of the business.
Discussion Questions
These questions are designed to check students’ understanding of new terms, concepts, and procedures
presented in the chapter.
1. Debit Depreciation Expense – Machine, $125; Credit Accum. Depr. – Machine, $125
2. Debit Insurance Expense; credit Prepaid Insurance.
3. Expense items that are acquired and paid for in advance of their use. Supplies, prepaid rent, prepaid
insurance, and advertising.
4. Update supplies accounts at the end of a period to reflect amounts used.
5. b, d, f, g, and i are depreciated.
6. a. none b. none c. none d. decrease
7. a. decrease b. none c. none d. decrease
8. To create a permanent record of any changes in account balances that are shown on the worksheet.
9. Asset cost, accumulated depreciation, book value.
10. Contra asset accounts have a credit balance. Asset accounts have a debit balance.
11. Cost of asset less accumulated depreciation.
12. To keep a record of total depreciation taken; to reduce the book value of asset.
13. Charges off an equal amount of cost of asset during each accounting period in asset’s useful life.
14. Equipment, buildings, and automobiles.
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Exercises
Exercise 5.1
1. Rent Expense, $1,500 Dr.
Prepaid Rent, $1,500 Cr.
($9,000 ⫼ 6 months = $1,500 per month)
2. Supplies Expense, $1,475 Dr.
Supplies, $1,475 Cr.
($2,375 – $900 = $1,475)
3. Depreciation Expense—Equipment, $225 Dr.
Accumulated Depreciation—Equipment, $225 Cr.
($27,000 ⫼ 120 months = $225)
Exercise 5.2
1. Insurance Expense, $250 Dr.
Prepaid Insurance, $250 Cr.
($6,000 ⫼ 24 months = $250 month)
2. Advertising Expense, $450 Dr.
Prepaid Advertising, $450 Cr.
($5,400 ⫼ 12 months = $450)
Exercise 5.3
Mason Company
Worksheet (Partial)
Month Ended January 31, 2007
Trial Balance
Account Name
Debit
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depr.—Equipment
Accounts Payable
Jerry Mason, Capital
Fees Income
Rent Expense
Salaries Expense
Supplies Expense
Insurance Expense
Depreciation Expense—Equipment
62,000
21,500
8,000
7,200
90,500
Totals
Credit
Adjustments
Debit
Credit
(a) 5,200
(b) 1,800
Adjusted
Trial Balance
Debit
62,000
21,500
2,800
5,400
90,500
(c) 1,575
1,575
15,700
80,950
112,000
15,700
80,950
112,000
9,600
9,850
9,600
9,850
5,200
1,800
1,575
(a) 5,200
(b) 1,800
(c) 1,575
208,650
208,650
8,575
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Credit
8,575
210,225
210,225
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Exercise 5.4
Net Income Before Adjustments . . . . . . . . . .
Less Adjustments:
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . $3,000
Depreciation Expense . . . . . . . . . . . . . . . . . . 3,600
Supplies Expense . . . . . . . . . . . . . . . . . . . . . 1,300
$40,000
Total Adjustments for Expenses Not Made . .
7,900
Corrected Net Income . . . . . . . . . . . . . . . . . .
$32,100
If the adjusting entries are not made, total expenses will be understated by $7,900 and net income will be
overstated by $7,900.
Exercise 5.5
GENERAL JOURNAL
PAGE 3
Description
Post.
Ref.
Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation Expense—Equipment . . . . . . . . . . . . . . . .
Accumulated Depreciation—Equipment . . . . . . . . . . .
523
121
521
131
517
142
Date
Debit
Credit
Adjusting Entries
2007
Dec. 31
31
31
72 䡲 Chapter 5
2,500
2,500
1,800
1,800
1,200
1,200
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GENERAL LEDGER
ACCOUNT
Date
2007
Dec. 1
31
Description
Adjusting
ACCOUNT
Date
2007
Dec. 1
31
Adjusting
Date
Adjusting
Date
2007
Dec. 31
Adjusting
Date
2007
Dec. 31
Date
2007
Dec. 31
J1
J3
4,000
2,500
Adjusting
Debit
J1
J3
Post.
Ref.
10,800
1,800
J3
Post.
Ref.
J3
Adjusting
10,800
9,000
ACCOUNT NO.
Debit
1,200
ACCOUNT NO.
Credit
1,200
J3
Debit
1,200
Credit
1,800
J3
Debit
521
Balance
Debit
Credit
1,800
ACCOUNT NO.
Post.
Ref.
517
Balance
Debit
Credit
ACCOUNT NO.
Post.
Ref.
142
Balance
Debit
Credit
Credit
1,200
Debit
131
Balance
Debit
Credit
Credit
Supplies Expense
Description
4,000
1,500
ACCOUNT NO.
Post.
Ref.
121
Balance
Debit
Credit
Credit
Insurance Expense
Description
ACCOUNT
Debit
Depreciation Expense—Equipment
Description
ACCOUNT
Post.
Ref.
Accumulated Depreciation—Equipment
Description
ACCOUNT
ACCOUNT NO.
Prepaid Insurance
Description
ACCOUNT
2007
Dec. 31
Supplies
Credit
2,500
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523
Balance
Debit
Credit
2,500
Chapter 5 䡲 73
74 䡲 Chapter 5
95,000
95,000
25,800
6,200
63,000
11,050
(a) 8,000
(c) 550
(b) 2,500
Debit
550
11,050
(c)
(a) 8,000
(b) 2,500
Credit
Analyze: The adjustment to Prepaid Insurance decreased the account balance.
Totals
Net Income
800
7,800
3,600
26,000
5,200
9,600
15,000
27,000
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Dep.—Equipment
Accounts Payable
Julie Denton, Capital
Julie Denton, Drawing
Fees Income
Depreciation Expense—Equipment
Insurance Expense
Salaries Expense
Supplies Expense
Utilities Expense
Credit
Adjustments
95,550
550
2,500
7,800
8,000
800
3,600
26,000
5,200
1,600
12,500
27,000
Debit
95,550
25,800
550
6,200
63,000
Credit
Adjusted
Trial Balance
25,800
25,800
25,800
25,800
Credit
19,650
6,150
550
2,500
7,800
8,000
800
Debit
Income
Statement
75,900
75,900
3,600
26,000
5,200
1,600
12,500
27,000
Debit
75,900
69,750
6,150
550
6,200
63,000
Credit
Balance Sheet
2:40 PM
Debit
Trial Balance
DENTON COMPANY
Worksheet
Month Ended January 31,2007
10/26/05
Account Name
Problem 5.1A
Problems
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90,837
450
7,500
90,837
42,000
8,000
40,837
Credit
6,100
(a) 2,400
(c) 700
(b) 3,000
Debit
6,100
(c) 700
(a) 2,400
(b) 3,000
Credit
91,537
700
3,000
7,500
2,400
450
3,000
22,575
3,312
3,600
18,000
27,000
Debit
91,537
42,000
700
8,000
40,837
Credit
Adjusted
Trial Balance
Credit
Income
Statement
Debit
Analyze: The balance of the Prepaid Rent account prior to the adjusting entry for expired rent is $21,000.
Totals
22,575
3,312
6,000
21,000
27,000
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accumulated Depreciation—Equip.
Accounts Payable
Chuck Keen, Capital
Chuck Keen, Capital, Drawing
Fees Income
Depreciation Expense—Equip.
Rent Expense
Salaries Expense
Supplies Expense
Utilities Expense
3,000
Debit
Adjustments
Debit
Credit
Balance Sheet
2:40 PM
Trial Balance
CAMPUS BOOK STORE
Worksheet
Month Ended November 30, 2007
10/26/05
Account Name
Problem 5.2A
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Problem 5.3A
OXNARD CORPORATION
Income Statement
Month Ended December 31, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Salaries Expense . . . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . .
Supplies Expense . . . . . . . . . . . . . . . . . .
Advertising Expense . . . . . . . . . . . . . . . .
Depreciation Expense—Equipment . . . .
39,750
8,400
900
3,000
1,200
600
Total Expenses . . . . . . . . . . . . . . . . . .
14,100
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
25,650
OXNARD CORPORATION
Statement of Owner’s Equity
Month Ended December 31, 2007
Derrick Wells, Capital, December 1, 2007 .
Net Income for December . . . . . . . . . . . . .
Less Withdrawals for December . . . . . . . . .
54,000
25,650
3,600
Increase in Capital . . . . . . . . . . . . . . . . . . .
22,050
Derrick Wells, Capital, December 31, 2007
76,050
OXNARD CORPORATION
Balance Sheet
December 31, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Advertising . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Less Accumulated Depreciation . . . . . . . . .
38,600
6,000
2,050
6,000
30,000
600
Total Assets . . . . . . . . . . . . . . . . . . . . . . . .
29,400
82,050
Liabilities & Owner’s Equity
Liabilities
Accounts Payable . . . . . . . . . . . . . . . . . .
Owner’s Equity
Derrick Wells, Capital . . . . . . . . . . . . . . .
76,050
Total Liabilities & Owner’s Equity . . . . . . . .
82,050
6,000
Analyze: Net income would be $24,450.
76 䡲 Chapter 5
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Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Net Income
Totals
61,575
700
4,850
3,500
17,750
6,300
3,875
4,200
9,600
10,800
Cash
Accounts Receivable
Supplies
Prepaid Advertising
Prepaid Rent
Equipment
Accumulated Depreciation—Equip.
Accounts Payable
Carlos Ramon, Capital
Carlos Ramon, Drawing
Fees Income
Advertising Expense
Depreciation Expense—Equipment
Rent Expense
Salaries Expense
Supplies Expense
Utilities Expense
61,575
23,800
7,775
30,000
Credit
5,265
(a) 3,325
(b) 1,050
(d)
90
(c) 800
Debit
(d)
5,265
90
(a) 3,325
(b) 1,050
(c) 800
Credit
Adjustments
61,665
1,050
90
800
4,850
3,325
700
3,500
17,750
6,300
550
3,150
8,800
10,800
Debit
61,665
23,800
90
7,775
30,000
Credit
Adjusted
Trial Balance
50,850
50,850
23,800
37,865
90
7,775
30,000
Credit
23,800
50,850
3,500
17,750
6,300
550
3,150
8,800
10,800
Debit
12,985
23,800
23,800
Credit
Balance Sheet
12,985
10,815
1,050
90
800
4,850
3,325
700
Debit
Income
Statement
2:40 PM
Debit
Trial Balance
RAMON CREATIVE DESIGNS
Worksheet
Month Ended January 31, 2007
10/26/05
Account Name
Problem 5.4A
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RAMON CREATIVE DESIGNS
Income Statement
Month Ended January 31, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Salaries Expense . . . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . .
Supplies Expense . . . . . . . . . . . . . . . . . .
Advertising Expense . . . . . . . . . . . . . . . .
Rent Expense . . . . . . . . . . . . . . . . . . . . .
Depreciation Expense—Equipment . . . .
23,800
4,850
700
3,325
1,050
800
90
Total Expenses . . . . . . . . . . . . . . . . . .
10,815
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
12,985
RAMON CREATIVE DESIGNS
Statement of Owner’s Equity
Month Ended January 31, 2007
Carlos Ramon, Capital, January 1, 2007 . .
Net Income for January . . . . . . . . . . . . . . .
Less Withdrawals for January . . . . . . . . . .
30,000
12,985
3,500
Increase in Capital . . . . . . . . . . . . . . . . . . .
9,485
Carlos Ramon, Capital, January 31, 2007 .
39,485
RAMON CREATIVE DESIGNS
Balance Sheet
January 31, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Advertising . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Accumulated Depreciation—Equipment . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,750
6,300
550
3,150
8,800
10,800
90
10,710
47,260
Liabilities and Owner’s Equity
Liabilities
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . .
Owner’s Equity
Carlos Ramon, Capital . . . . . . . . . . . . . . . . . . . . .
39,485
Total Liabilities and Owner’s Equity . . . . . . . . . . . . .
47,260
78 䡲 Chapter 5
7,775
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GENERAL JOURNAL
Date
PAGE 3
Post.
Ref.
Description
Adjusting Entries
2007
Jan. 31 Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31 Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Advertising . . . . . . . . . . . . . . . . . . . . . . . . . .
31 Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31 Depreciation Expense—Equipment . . . . . . . . . . . . . . . .
Accumulated Depreciation—Equipment . . . . . . . . . . .
517
121
519
130
520
131
523
142
Debit
Credit
3,325
3,325
1,050
1,050
800
800
90
90
GENERAL LEDGER
ACCOUNT
Date
2007
Jan. 1
31
Description
Adjusting
ACCOUNT
Date
2007
Jan. 1
31
Adjusting
Date
Date
2007
Jan. 31
Post.
Ref.
Debit
J1
J3
3,875
3,325
Adjusting
Debit
J1
J3
4,200
1,050
Adjusting
4,200
3,150
ACCOUNT NO.
Post.
Ref.
Debit
J1
J3
Post.
Ref.
800
9,600
8,800
ACCOUNT NO.
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142
Balance
Debit
Credit
Credit
J3
131
Balance
Debit
Credit
Credit
9,600
Debit
130
Balance
Debit
Credit
Credit
Accumulated Depreciation—Equipment
Description
3,875
550
ACCOUNT NO.
Post.
Ref.
121
Balance
Debit
Credit
Credit
Prepaid Rent
Description
ACCOUNT
ACCOUNT NO.
Prepaid Advertising
Description
ACCOUNT
2007
Jan. 1
31
Supplies
90
90
Chapter 5 䡲 79
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ACCOUNT
10/26/05
Description
Adjusting
ACCOUNT
Description
Adjusting
ACCOUNT
Description
Adjusting
ACCOUNT
J3
Debit
Credit
3,325
Description
Adjusting
Balance
Debit
Credit
ACCOUNT NO.
Post.
Ref.
J3
Debit
Credit
1,050
J3
Debit
Post.
Ref.
1,050
Credit
J3
520
Balance
Debit
Credit
800
800
ACCOUNT NO.
Debit
519
Balance
Debit
Credit
ACCOUNT NO.
Post.
Ref.
517
3,325
Depreciation Expense—Equipment
Date
2007
Jan. 31
Post.
Ref.
Rent Expense
Date
2007
Jan. 31
ACCOUNT NO.
Advertising Expense
Date
2007
Jan. 31
Page 80
Supplies Expense
Date
2007
Jan. 31
2:40 PM
Credit
523
Balance
Debit
Credit
90
90
Analyze: If adjusting entries had not been made, net income would be overstated.
80 䡲 Chapter 5
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Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
164,500
164,500
54,000
12,000
98,500
5,000
(a) 2,000
(b) 2,000
(c) 1,000
Debit
5,000
(c) 1,000
(a) 2,000
(b) 2,000
Credit
165,500
6,300
1,600
2,000
2,000
1,000
3,000
73,000
6,400
2,200
22,000
46,000
Debit
165,500
54,000
1,000
12,000
98,500
Credit
Adjusted
Trial Balance
Analyze: No depreciation has been recorded for the fiscal period, or any previous fiscal period.
Net Income
Totals
6,300
1,600
3,000
73,000
6,400
4,200
24,000
46,000
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accumulated Depreciation—Equip.
Accounts Payable
Deloros Argo, Capital
Deloros Argo, Drawing
Fees Income
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depreciation Expense—Equip.
Credit
Adjustments
152,600
152,600
54,000
111,500
1,000
12,000
98,500
Credit
54,000
152,600
3,000
73,000
6,400
2,200
22,000
46,000
Debit
41,100
54,000
54,000
Credit
Balance Sheet
41,100
12,900
6,300
1,600
2,000
2,000
1,000
Debit
Income
Statement
2:40 PM
Debit
Trial Balance
ARGO COMPANY
Worksheet
Month Ended February 28, 2007
10/26/05
Account Name
Problem 5.1B
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Chapter 5 䡲 81
82 䡲 Chapter 5
91,350
5,400
875
Analyze: Accumulated Depreciation—Equipment
Totals
17,525
4,250
5,200
22,100
33,000
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accum. Deprec.—Equip
Accounts Payable
Denise De La Rosa, Capital
Denise De La Rosa, Drawing
Fees Income
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Deprec. Exp.—Equip.
3,000
Debit
91,350
42,850
8,500
40,000
Credit
3,775
(a) 1,800
(b) 1,700
(c) 275
Debit
(c)
3,775
275
(a) 1,800
(b) 1,700
Credit
Adjustments
91,625
5,400
875
1,800
1,700
275
3,000
17,525
4,250
3,400
20,400
33,000
Debit
91,625
42,850
275
8,500
40,000
Credit
Adjusted
Trial Balance
Debit
Credit
Income
Statement
Debit
Credit
Balance Sheet
2:40 PM
Trial Balance
DENISE DE LA ROSA, ATTORNEY-AT-LAW
Worksheet (Partial)
Month Ended November 30, 2007
10/26/05
Account Name
Problem 5.2B
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Problem 5.3B
ARROW ACCOUNTING SERVICES
Income Statement
Month Ended December 31, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Salaries Expense . . . . . . . . . . . . . . . . . .
18,600
Supplies Expense . . . . . . . . . . . . . . . . . .
600
Utilities Expense . . . . . . . . . . . . . . . . . . .
1,080
Rent Expense . . . . . . . . . . . . . . . . . . . . .
3,500
Advertising Expense . . . . . . . . . . . . . . . .
800
Depreciation Expense—Fixtures . . . . . .
300
31,330
Total Expenses . . . . . . . . . . . . . . . . . .
24,880
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
6,450
ARROW ACCOUNTING SERVICES
Statement of Owner’s Equity
Month Ended December 31, 2007
John Arrow, Capital, December 1, 2007 . . .
Net Income for Year . . . . . . . . . . . . . . . . . .
Less Withdrawals for Year . . . . . . . . . . . . .
30,000
6,450
3,000
Increase in Capital . . . . . . . . . . . . . . . . . . .
3,450
John Arrow, Capital, December 31, 2007 . .
33,450
ARROW ACCOUNTING SERVICES
Balance Sheet
December 31, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Advertising . . . . . . . . . . . . . . . . . . .
Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Accumulated Depreciation . . . . . . . . .
16,950
2,200
900
3,200
18,000
300
Total Assets . . . . . . . . . . . . . . . . . . . . . . . .
17,700
40,950
Liabilities & Owner’s Equity
Liabilities
Accounts Payable . . . . . . . . . . . . . . . . . .
Owner’s Equity
John Arrow, Capital . . . . . . . . . . . . . . . . .
33,450
Total Liabilities & Owner’s Equity . . . . . . . .
40,950
7,500
Analyze: Adjusting entries decreased the assets of the company by $1,700.
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Chapter 5 䡲 83
84 䡲 Chapter 5
Net Income
Totals
Cash
Accounts Receivable
Supplies
Prepaid Advertising
Prepaid Rent
Equipment
Accumulated Depreciation—Equip.
Accounts Payable
Paul Torres, Capital
Paul Torres, Drawing
Fees Income
Advertising Expense
Depreciation Expense—Equipment
Rent Expense
Salaries Expense
Supplies Expense
Utilities Expense
72,350
650
3,800
2,000
9,850
3,050
3,800
7,200
18,000
24,000
72,350
36,900
5,400
30,050
Credit
6,000
(a) 2,300
(b) 1,800
(d) 400
(c) 1,500
Debit
(d)
6,000
400
(a) 2,300
(b) 1,800
(c) 1,500
Credit
Adjustments
72,750
1,800
400
1,500
3,800
2,300
650
2,000
9,850
3,050
1,500
5,400
16,500
24,000
Debit
72,750
36,900
400
5,400
30,050
Credit
Adjusted
Trial Balance
62,300
62,300
36,900
35,850
400
5,400
30,050
Credit
36,900
62,300
2,000
9,850
3,050
1,500
5,400
16,500
24,000
Debit
26,450
36,900
36,900
Credit
Balance Sheet
26,450
10,450
1,800
400
1,500
3,800
2,300
650
Debit
Income
Statement
2:40 PM
Debit
Trial Balance
TORRES ESTATE PLANNING AND INVESTMENTS
Worksheet
Month Ended June 30, 2007
10/26/05
Account Name
Problem 5.4B
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TORRES ESTATE PLANNING AND INVESTMENTS
Income Statement
Month Ended June 30, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
36,900
Expenses
Salaries Expense . . . . . . . . . . . . . . . . . .
3,800
Utilities Expense . . . . . . . . . . . . . . . . . . .
650
Supplies Expense . . . . . . . . . . . . . . . . . .
2,300
Advertising Expense . . . . . . . . . . . . . . . .
1,800
Rent Expense . . . . . . . . . . . . . . . . . . . . .
1,500
Depreciation Expense—Equipment . . . .
400
Total Expenses . . . . . . . . . . . . . . . . . .
10,450
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
26,450
TORRES ESTATE PLANNING AND INVESTMENTS
Statement of Owner’s Equity
Month Ended June 30, 2007
Paul Torres, Capital, June 1, 2007 . . . . . . .
Net Income for June . . . . . . . . . . . . . . . . . .
Less Withdrawals for June . . . . . . . . . . . . .
30,050
26,450
2,000
Increase in Capital . . . . . . . . . . . . . . . . . . .
24,450
Paul Torres, Capital, June 30, 2007 . . . . . .
54,500
TORRES ESTATE PLANNING AND INVESTMENTS
Balance Sheet
June 30, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Advertising . . . . . . . . . . . . . . . . . . . . . .
Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Accumulated Depreciation—Equipment . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,850
3,050
1,500
5,400
16,500
24,000
400
23,600
59,900
Liabilities & Owners Equity
Liabilities
Accounts Payable . . . . . . . . . . . . . . . . . . . . .
Owner’s Equity
Paul Torres, Capital . . . . . . . . . . . . . . . . . . . .
54,500
Total Liabilities & Owner’s Equity . . . . . . . . . . .
59,900
5,400
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GENERAL JOURNAL
PAGE 3
Description
Post.
Ref.
Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Advertising . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation Expense—Equipment . . . . . . . . . . . . . . . .
Accumulated Depreciation—Equipment . . . . . . . . . . .
517
121
519
130
520
131
523
142
Date
Debit
Credit
Adjusting Entries
2007
Jun. 30
30
30
30
2,300
2,300
1,800
1,800
1,500
1,500
400
400
GENERAL LEDGER
ACCOUNT
Supplies
Date
2007
Jun. 1
30
Description
Adjusting
ACCOUNT
Description
Adjusting
ACCOUNT
Description
Adjusting
ACCOUNT
J1
J3
3,800
2,300
Description
Adjusting
86 䡲 Chapter 5
3,800
1,500
ACCOUNT NO.
Post.
Ref.
Debit
J1
J3
7,200
1,800
Debit
J1
J3
Post.
Ref.
7,200
5,400
J3
131
Balance
Debit
Credit
Credit
18,000
1,500
Debit
130
Balance
Debit
Credit
Credit
ACCOUNT NO.
Post.
Ref.
121
Balance
Debit
Credit
Credit
Accumulated Depreciation—Equipment
Date
2007
Jun. 30
Debit
Prepaid Rent
Date
2007
Jun. 1
30
Post.
Ref.
Prepaid Advertising
Date
2007
Jun. 1
30
ACCOUNT NO.
18,000
16,500
ACCOUNT NO.
Credit
400
142
Balance
Debit
Credit
400
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ACCOUNT
Date
2007
Jun. 30
Adjusting
Date
Adjusting
Date
Date
2007
Jun. 30
Post.
Ref.
J3
Debit
Credit
2,300
Adjusting
J3
Debit
Credit
1,800
Adjusting
Balance
Debit
Credit
ACCOUNT NO.
Post.
Ref.
J3
Debit
Post.
Ref.
Credit
1,500
J3
520
Balance
Debit
Credit
1,500
ACCOUNT NO.
Debit
519
1,800
Depreciation Expense—Equipment
Description
Balance
Debit
Credit
ACCOUNT NO.
Post.
Ref.
517
2,300
Rent Expense
Description
ACCOUNT
ACCOUNT NO.
Advertising Expense
Description
ACCOUNT
2007
Jun. 30
Supplies Expense
Description
ACCOUNT
2007
Jun. 30
Page 87
Credit
400
523
Balance
Debit
Credit
400
Analyze: Generally accepted accounting principles require that the original cost of the asset appear in the
asset account until the asset has been used up or disposed. A contra asset account is used to record
depreciation costs.
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Chapter 5 䡲 87
88 䡲 Chapter 5
Net Income
Totals
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation—
Equipment
Accounts Payable
Wilson Mandela, Capital
Wilson Mandela, Drawing
Fees Income
Advertising Expense
Rent Expense
Salaries Expense
Supplies Expense
Insurance Expense
Telephone Expense
Utilities Expense
Depreciation Expense
76,925
350
850
1,500
2,500
6,700
2,000
18,475
3,400
2,150
15,000
24,000
76,925
30,925
6,000
40,000
Credit
(c)
3,750
200
(a) 1,050
(b) 2,500
Debit
(c)
3,750
200
(a) 1,050
(b) 2,500
Credit
Adjustments
77,125
1,500
2,500
6,700
1,050
2,500
350
850
200
2,000
18,475
3,400
1,100
12,500
24,000
Debit
77,125
30,925
200
6,000
40,000
Credit
Adjusted
Trial Balance
61,475
61,475
30,925
46,200
200
6,000
40,000
Credit
30,925
61,475
2,000
18,475
3,400
1,100
12,500
24,000
Debit
15 275
30,925
30,925
Credit
Balance Sheet
15 275
15,650
1,500
2,500
6,700
1,050
2,500
350
850
200
Debit
Income
Statement
2:40 PM
Debit
Trial Balance
MANDELA INTERNATIONAL COMPANY
Worksheet
Month Ended January 31, 2007
10/26/05
Account Name
Challenge Problem
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Page 89
MANDELA INTERNATIONAL COMPANY
Income Statement
Month Ended January 31, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Advertising Expense . . . . . . . . . . . . . . . .
Rent Expense . . . . . . . . . . . . . . . . . . . . .
Salaries Expense . . . . . . . . . . . . . . . . . .
Supplies Expense . . . . . . . . . . . . . . . . . .
Insurance Expense . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . .
Depreciation Expense . . . . . . . . . . . . . . .
30,925
1,500
2,500
6,700
1,050
2,500
350
850
200
Total Expenses . . . . . . . . . . . . . . . . . .
15,650
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
15,275
MANDELA INTERNATIONAL COMPANY
Statement of Owner’s Equity
Month Ended January 31, 2007
Wilson Mandela, Capital, January 1, 2007 .
Net Income for January . . . . . . . . . . . . . . .
Less Withdrawals for January . . . . . . . . . .
40,000
15,275
2,000
Increase in Capital . . . . . . . . . . . . . . . . . . .
13,275
Wilson Mandela, Capital, January 31, 2007
53,275
MANDELA INTERNATIONAL COMPANY
Balance Sheet
January 31, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Accumulated Depreciation—Equipment . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,475
3,400
1,100
12,500
24,000
200
23,800
59,275
Liabilities and Owner’s Equity
Liabilities
Accounts Payable . . . . . . . . . . . . . . . . . . . . .
Owner’s Equity
Wilson Mandela, Capital . . . . . . . . . . . . . . . .
53,275
Total Liabilities and Owners Equity . . . . . . . . . .
59,275
6,000
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GENERAL JOURNAL
PAGE 3
Description
Post.
Ref.
Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation Expense—Equipment . . . . . . . . . . . . . . . .
Accumulated Depreciation—Equipment . . . . . . . . . . .
518
121
519
131
524
142
Date
Debit
Credit
Adjusting Entries
2007
Jan. 31
31
31
1,050
1,050
2,500
2,500
200
200
GENERAL LEDGER
ACCOUNT
Supplies
Date
2007
Jan. 1
31
Description
Balance
Adjusting
ACCOUNT
Description
Balance
Adjusting
ACCOUNT
Description
Adjusting
ACCOUNT
✓
J3
2,150
1,050
Description
Adjusting
90 䡲 Chapter 5
2,150
1,100
ACCOUNT NO.
Post.
Ref.
Debit
✓
J3
Post.
Ref.
2,500
15,000
12,500
ACCOUNT NO.
J3
200
J3
Debit
1,050
Credit
142
Balance
Debit
Credit
Credit
200
ACCOUNT NO.
Post.
Ref.
131
Balance
Debit
Credit
Credit
15,000
Debit
121
Balance
Debit
Credit
Credit
Supplies Expense
Date
2007
Jan. 31
Debit
Accumulated Depreciation—Equipment
Date
2007
Jan. 31
Post.
Ref.
Prepaid Insurance
Date
2007
Jan. 1
31
ACCOUNT NO.
518
Balance
Debit
Credit
1,050
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ACCOUNT
Date
2007
Jan. 31
2007
Jan. 31
Insurance Expense
Description
Adjusting
ACCOUNT
Date
Page 91
ACCOUNT NO.
Post.
Ref.
J3
Debit
Credit
2,500
Adjusting
Post.
Ref.
J3
Balance
Debit
Credit
2,500
Depreciation Expense-Equipment
Description
ACCOUNT NO.
Debit
519
Credit
200
524
Balance
Debit
Credit
200
Analyze: If the useful life of the equipment had been 12 years instead of 10 years, depreciation would have
been $167 rather than $200. Net income would have been $33 greater.
Critical Thinking Problem
TO:
FROM:
DATE:
SUBJECT:
Ellis Coppell, President
Student’s Name
Current Date
Effect on Financial Statements of Omitting Adjusting Entries
Adjusting entries are recorded to update the accounts at the end of the accounting period for previously
unrecorded items that belong to that period. If these entries are omitted, the net income will not be an
accurate measure of the operation of the company for the year and certain accounts on the balance sheet
will not report correct end-of-year balances.
In particular, Coppell Enterprise’s net income for the year will be overstated by $52,300; net income should
be $112,700 instead of $165,000. This amount represents a 32% decrease in net income over the amount
that would be reported if the adjusting entries were not made. ($52,300 ⫼ $165,000 = 0.32).
This decrease in net income results from not making adjusting entries for the following unrecorded
expenses:
1. Expense of rent for the year
($42,000 x 6/12 = $21,000 for 6 months)
2. Expense of supplies used during the year
(Total supplies of $18,000 – Ending Inventory of $3,500 = $14,500 supplies used)
3. Depreciation expense for the year
($420,000 ⫼ 25 = $16,800 depreciation per year)
Total increase in expenses
$21,000
14,500
16,800
$52,300
In addition to overstating the net income, the balances of Prepaid Rent and Supplies on the Balance Sheet
would be overstated and the book value of the Building would also be overstated.
Preparation of the adjusting entries would permit the financial statements to present a more accurate
measure of the company’s operations for the year and its financial condition at the end of the year.
Therefore, it is important and the time is well spent to prepare adjusting entries so that the financial
statements are up to date and present an accurate picture of the business.
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Business Connections
Managerial Focus
1. Accounting records generally reflect an asset’s historical or original cost, less accumulated depreciation
(not market value).
2. Depreciation Expense will offset income. Accumulated Depreciation will decrease the value of the asset.
3. Are necessary to present an accurate financial position of the firm.
4. Provides end-of-period adjusting entries and contains income statement and balance sheet accounts.
Ethical Dilemma
If the company wanted to donate to a nonprofit organization they would write a check and get a tax
deduction. It is unethical to record higher costs than are actually incurred.
Streetwise
1. Answers will vary. Accruals for interest expense, interest income, adjustments for depreciation, salaries,
deferral of income taxes, and accrual of sales tax payable.
2. $1,180 million. Current year depreciation expense increases the accumulated depreciation account.
Financial Statement Analysis
1. 4.7% ($1,124 ⫼ $23,978)
2. 57.4% ($13,754 ⫼ $23,978)
3. 9.1 years ($10,224 ⫼ $1,124)
Extending the Thought
Students’ responses will vary. This situation extends the topic of adjusting entries to potentially uncollectible
accounts. Students may believe that the customer’s account receivable should be reduced to zero since the
likelihood of payment is low. Other students may suggest that the account be left intact until a determination
is made that the customer will not make the payment.
Business Communication
Answers will vary, but students’ notes should reflect a diplomatic introduction of the topic when phoning the
owner. The accountant should recommend more frequent depreciation adjustments in order to provide upto-date records of the assets and expenses of the company.
Team Work
Mr. Mincks has expenses that will appear on the income statement. He needs to match these expenses with
revenue. He can record the revenue as a receivable, other than accounts receivable, for the amount that he
has completed. In this case he can record $15,000 or 15% of the price of the job.
Internet Connection
Professional liability, surety bonds, umbrella policies, errors and omissions, product liability, fire, auto, dental,
workmen’s compensation, sexual harassment.
Practice Test Answer Key
Part A True-False
1. T
2. F
3. T
4. T
5. T
6. T
7. T
8. T
9. F
10. T
92 䡲 Chapter 5
Part B Matching
1. a
2. e
3. f
4. c
5. b
6. d
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