Question

Dittman's Variety Store is completing the accounting process for the current year just ended, December 31. The transactions during year have been journalized and posted. The following data with respect to adjusting entries are available:

Wages earned by employees during December, unpaid and unrecorded at December 31, amounted to $2,700. The last payroll was December 28; the next payroll will be January 6.

Office supplies on hand at January 1 of the current year totaled totaled $450. Office supplies purchased and debited to Office Supplies during the year amounted to $500. The year-end count showed $275 of supplies on hand.

One-fourth of the basement space is rented to Heald’s Specialty Shop for $560 per month, payable monthly. At the end of the current year, the rent for November and December had not been collected or recorded. Collection is expected in January of the next year.

The store used delivery equipment all year that cost $60,500; $12,100 was the estimated annual depreciation.

On July 1 of the current year, a two-year insurance premium amounting to $2,400 was paid in cash and debited in full to Prepaid Insurance. Coverage began on July 1 of the current year.

The remaining basement of the store is rented for $1,600 per month to another merchant, M. Carlos, Inc. Carlos sells compatible, but not competitive, merchandise. On November 1 of the current year, the store collected six months’ rent in the amount of $9,600 in advance from Carlos; it was credited in full to Unearned Rent Revenue when collected.

Dittman’s Variety Store operates a repair shop to meet its own needs. The shop also does repairs for M. Carlos. At the end of the current year, Carlos had not paid $800 for completed repairs. This amount has not yet been recorded as Repair Shop Revenue. Collection is expected during January of next year.

Required:

For each of the transactions above, indicate the amount and direction of effects of the adjusting entry on the elements of the balance sheet and income statement. Using the table below, indicate + for increase and - for decrease.

Answer 1

Answer:

wages expense 2.700 debit (+Exp)

Decrease to net income

Decrease to equity

     Wages payable 2,700 credit (+liabilities)

Increase to liabilities

supplpies expense 675 debit (+Exp)

Decrease to net income

Decrease to equity

     Supplies 675 credit (-Assets)

Decrease to Assets

rent receivables (+Assets)  1,120 debit

Increase to Assets

      rent revenue (+Revenues) 1,120 credit

Increase to Income

Increase to Equity

depreciation expense 12,100 debit (+Exp)

Decrease to net income

Decrease to equity

     Acc-dep equipment 12,100 credit (-Assets)

Decrease to Assets (it is a contra-assets account)

insurance expense 600 debit (+Exp)

Decrease to net income

Decrease to equity

     prepaid insurance  600 credit (-Assets)

Decrease to Assets

unearned revenue (-Liabilities)  3,200 debit

Decrease to liabilities

      rent revenue (+Revenues) 3,200  credit

Increase to Income

Increase to Equity

accouns receivables  (+Assets)  800 debit

Increase to Assets

      repairs revenue (+Revenues) 800 credit

Increase to Income

Increase to Equity

Explanation:

Calculations:

Supplies

beginning supplies 450

+ purchase               500

-ending suplies        275

consumed                675

Rent

560 rent per monht x 2 months = 1,120

Insuarance

2,400 for 2 years

threfore 100 per month insurance expense

6 month July through Dec equal 600

Carlos Inc rent:

9,600 / 6 mont x 2 month (Nov adn Dec) = 3,200

Answer 2

1. The effects of the wages earned would be:

 Liabilities                Stockholder's equity           Expenses        Net income

+ $2,700                         -$2,700                             +$2,700             -$2,700

2. The office supplies for the year:

= Opening supplies + Purchases - Closing

= 450 + 500 - 275

= $675

Assets       Stockholder's equity             Expenses           Net income

-$675                  -$675                             + $675                   -$675

3. Rent revenue from Heald's Specialty shop for November and December:

= 560 + 560

= $1,120

Assets       Stockholder's equity             Revenue           Net income

+$1,120               +$1,120                             +$1,120               +$1,120

4. Effects of depreciation:

Assets       Stockholder's equity             Expenses           Net income

- $12,100            -$12,100                         +$12,100             -$12,100

5. Insurance for the year:

= Total insurance/ 24 months x 6 months in current year

= 2,400 / 24 x 6

= $600

Assets       Stockholder's equity             Expenses           Net income

-$600                  -$600                             +$600                  -$600

6. Rent revenue for the current year should be removed from unearned rent revenue in amount of:

= Rent for two months

= 1,600 + 1,600

= $3,200

Liabilities       Stockholder's equity             Revenue           Net income

-$3,200                +$3,200                             +$3,200             +$3,200

7. The repairs will be counted as revenue:

Assets       Stockholder's equity             Revenue           Net income

+$800                +$800                              +$800                 +$800

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