Adjusting Entries

1.   The office supplies account had a balance of $1,450 on December 31st.  The company counted office supplies at the end of the year and determined that they had $920 of office supplies on hand.

Identify the accounts affected – office supplies, before adjustment has $1,450
When office supplies are used you record office supplies expense, which has a current balance = $0

What should the balance be?  

Office supplies is an asset – the balance should be what you have
The balance should be $920

Current balance       1,450
Balance should be      920
Adjustment needed   530 reduce office supplies

Using up an asset is also an expense that must be recorded

Make the adjusting entry to get the balances correct

Office supplies expense                  $530
       Office supplies                                    $530

 

2.  On September 1st, the company signed a six-month lease to rent office space.  The company paid for the entire 6 months for the amount of $12,000 on September 1st and recorded the entire payment to prepaid rent.  

Identify the accounts affected – prepaid rent – current balance is $12,000
Rent expense occurs when it is used up, current balance = $0

What should the balance be?

Paid $12,000 for 6 months = $2,000 per month.  

On December 31st, there is 2 months left ($4,000) and 4 months ($8000) have been used up

Prepaid that is a future benefit	($4,000)	2 months left = asset now
Adjustment to be made	$8,000	used up = expense

4 months of prepaid rent has been used up and must be decreased and recorded as rent expense

Make the adjusting entry to get the balances correct

Rent Expense                                $8,000
       Prepaid Rent                                   $8,000

 

3.  On January 1st of last year, the company purchased a tractor for $100,000.  The tractor is expected to be used for 7 years.  

Identify the accounts affected – Using a long-term asset – “depreciation expense”
Accumulated Depreciation goes with this account

What should the balance be?

Cost $100,000 / 7-year life = $14,286 each year

Since this is not paid in cash, it has not yet been recorded

The asset must stay at cost and cannot be reduced, so we use the account “accumulated depreciation”

Make the adjusting entry to get the balances correct

Depreciation Expense               $14,286
       Accumulated Depreciation         $14,286

 

4.  On April 1st, the company purchased a 24-month liability insurance policy and paid $72,000 for the entire term of the policy.  The payment was recorded to prepaid insurance.

Identify the accounts affected – Prepaid insurance & Insurance Expense
Current balances:  $72,000 and $0

What should the balance be?

Cost of $72,000 / 24 months = $3,000 per month

From April 1st to December 1st is 9 months used up

Using up an asset is an expense and an expense must be recorded:    
9 months x $3,000 = $27,000 used up

Since no expense has been recorded yet, record the $27,000 used up as insurance expense

Current prepaid balance	$72,000
Amount used up	($27,000)	must be an expense
Asset balance left unused	$45,000	must be ending balance

Make the adjusting entry to get the balances correct

Record the asset used up and the expense from using the asset

Insurance Expense                    $27,000
       Prepaid Insurance                       $27,000

 

5.  On June 1st, the company loaned $60,000 to another company that needed cash.  The other company agreed to repay the full amount in 2 years and pay interest of 8% annually each June 1st.  

Identify the accounts affected – Interest Revenue ($0) & Interest Receivable ($0)

Loaning money and agreeing to receive interest requires interest revenue to be recorded when earned. 

Do not record this to notes receivable, notes receivable represents the principle only

What should the balance be?

Principle x rate x time  = $60,000 x .08 x 7/12 = $2,800

June 1 to December 31st is 7 months incurred this year 
Nothing has been recorded yet

Nothing has been received yet, so they owe you for it all – “interest receivable”

Make the adjusting entry to get the balances correct

Interest Receivable                      $2,800
       Interest Revenue                            $2,800

 

6.  On March 1st, the company borrowed $250,000 from the bank to be repaid in 3 years.  The bank is charging interest at a rate of 6% annually. Interest must be paid every February 28th. 

Identify the accounts affected – Interest Expense & Interest Payable
Has not yet been recorded, not yet paid

Borrowing money and agreeing to pay interest requires interest expense to be recorded when incurred.  Do not record to notes payable, this account represents the principle only

What should the balance be?

Principle x rate x time = $250,000 x .06 x 10/12 = $12,500

March 1st to December 31st is 10 months incurred this year
Nothing has been recorded yet

Make the adjusting entry to get the balances correct

Interest Expense                         $12,500
       Interest Payable                            $12,500

 

7.  On August 1st, the company received payment from a customer in the amount of $7,200 for services to be provided equally over the next 6 months.  The service was provided as agreed beginning on August 1st.  The payment was recorded to unearned revenue.

Identify the accounts affected –  
Unearned Revenue   current balance of $7,200
Rent Revenue – when it is earned, currently $0

What should the balance be?

$7,200 / 6 month = $1,200 per month 

August 1st to December 31st is 5 months earned

5 months x $1,200 = $6,000 earned 

$6,000 earned must be in the revenue account
Currently, there is 0 in the revenue account, so all earned must be recorded

If it is earned, it is not unearned anymore.   Reduce the unearned account.             

Make the adjusting entry to get the balance correct

Unearned Revenue                      $6,000
       Service Revenue                             $6,000

 

8.  During the month of December the company provided services to a customer totaling $7,000 that the accounting department forgot to invoice them for.  

Identify the accounts affected –  
Service Revenue, not yet recorded
Accounts receivable, not yet recorded

The company has provided a service so revenue must be recorded
The customer has not been billed so they have not paid yet either

What should be recorded?   the amount of the services $7,000

Make the adjusting entry to get the balance correct

Accounts Receivable                    $7,000
       Service Revenue                             $7,000

Answer to Practice Problem 2 – Making Adjusting Journal Entries

1) The “rent expense” account contains a balance of $6,000, representing payment made on October 1st this year for six months rent for a warehouse.  

Accounts effected:  
Rent expense – use up the time for rent, current balance $6,000
Prepaid rent – paid ahead of time, current balance $0

Balance should be:   Rent expense should only be the amount that has been  used up

$6,000 / 6 months = $1,000 per month x 3 months used (Oct – Dec) 

Rent expense should be $3,000.  It is $6,000, so you must take away $3,000 to get it to $3,000.  When you take back an expense, it is an asset, paid ahead of time, “prepaid rent”

You have paid ahead for 3 more months, prepaid = $3,000

Adjustment required:

Prepaid Rent                                 $3,000
       Rent Expense                                  $3,000

Notice:  You are reducing an expense which you only do when you have previously put too much expense into the account.

2)  The company borrowed $50,000, at a 6% interest rate on August 1st.  No interest was paid during this year.

Accounts effected:  Interest expense for using the money and interest payable since you owe since nothing has been paid yet

Balance should be:   Principle x rate x time (time is Aug – Dec = 5 months)
$50,000 x .06 x 5/12 = $1,250

Adjustment required:

Interest Expense                           $1,250
       Interest Payable                               $1,250

3) The company received $12,000 on August 1st this year for allowing a neighboring business to use its parking lot for one year and recorded it all to “rent revenue”.  

Accounts effected:  
Rent revenue – current balance of $12,000
Unearned rent revenue – if not yet earned, currently $0
       It can’t be a receivable since the company has paid

Balance should be:
$12,000 / 12 months = $1,000 per month is earned
    5 months have been earned (Aug – Dec) = $5,000 earned 

The account says $12,000, so you must take $7,000 back out of revenue since it has not been earned – (7 months of next year)

Adjustment required:

Rent Revenue                             $7,000
       Unearned Revenue                        $7,000

Notice:  You are reducing a revenue which you can only do when you have previously recorded too much revenue and have to take some back.

4)  Services provided to clients during December, in the amount of $3,000 were recorded as accounts receivable and revenue.

Accounts effected: Receivable and accounts receivable

Balance should be:   $3,000 because that is what was provide

Adjustment required:  The amount provided has been recorded – therefore no adjustment is required.

5)   Supplies purchased during the year, recorded to the “supplies expense” account totaled $2,400.   Supplies costing $1,500 remained on hand at year-end

Accounts effected:  
Supplies expense – for supplies used, current balance $2,400
Supplies for what is left – current balance = $0

Balance should be:  Supplies is the asset account, and you have $1,500, so the supplies account should have a balance of $1,500.  

There is no information on what has been used up, so you do not know what the balance in supplies expense should be

“Supplies” is now $0 and needs to be $1,500 so you must add $1,500

Adjustment required:

Supplies                                     $1,500
       Supplies expense                             $1,500

Notice:  You put too much in the expense account and have not used that much, so you must take some of the expense back

6)  On March 1st, the company purchased an automobile for its salesman for $28,000.  The automobile is expected to be used for 5 years.

Accounts effected:  
Depreciation expense – used a long-term asset
Accumulated depreciation – used to show the reduction of asset

Balance should be:   
$28,000 / 5 years = $5,600 each year for expense x 10/12 = $4,667

Adjustment required:

Depreciation expense                   $4,667
       Accumulated depreciation            $4,667

7)   Supplies purchased during the year, recorded to the “supplies expense” account totaled $2,400.  Supplies costing $1,500 remained on hand at year-end. The beginning balance of the “supplies” account was $1,600.  Supplied purchased during the year and recorded to the “supplies” account was $1,200.

Accounts effected:  
Supplies, asset, what you have, current balance $2,800
(Beginning $1,600 + purchases added $1,200 = $2,800)

Supplies expense – amount used, current balance of $2,400

Balance should be:  The supplies account should be what you have on hand now, $1,500.  You do not know the total used because it is not given to you.

Current supplies balance is	$2,800
Supplies you have on hand	($1,500)
Adjust to reduce the account	$1,300

If you do not have it on hand, you have used it up, and it is also a supplies expense – add to the expense account also

Adjustment required:

Supplies expense                      $1,300
       Supplies                                           $1,300

8)  Employees worked for the company and the company paid them $340,000 this year.
At the end of the year, the company owed employees $10,950 for wages that had not yet been recorded.

Accounts effected:  
Wages expense, current balance – $340,000 since this was paid
Wages payable, not yet recorded, so the balance is $0

Wages payable should be what has not been paid and is owed which is $10,950

Record what you owe and add to the expense because you were provided a service that has not been recorded

Adjustment required:

Wage expense                             $10,950
       Wage payable                                $10,950

9)  The company expects that $12,400 related to sales this period will not be collected.  Nothing has been recorded yet for this situation.

Accounts effected:  
Bad debt expense, current balance = $0
Allowance for uncollectible accounts, current balance unknown

Balance should be:  The bad debt expense for the period should be the amount not expected to be collected for this period, $12,400.  Since nothing has been recorded – record the full amount.

Adjustment required:

Bad debt expense                      $12,400
    Allowance for uncollectible accounts      $12,400

10)  The company estimates that it will have to pay $23,000 for taxes.  Nothing has been recorded yet for this situation.

Accounts effected:
Tax payable, current balance is $0, not yet recorded
Tax expense, current balance is $0, not yet recorded

Balance should be:     
Taxes payable should be what is owed, $23,000
Tax expense is also this amount since this is the value of the service that was provided and you owe.

Adjustment required:

Tax expense                             $23,000
       Tax payable                                   $23,000