QUICK SUMMARY FOR ADJUSTMENTS

Product Used to
Benefit Revenue Benefit Expense
or Generate
Provided Earned Received
Revenues
Incurred
Service

Revenues
Expenses
(Revenue
(Matching
Recognition
Principle)
Principle)

End of
Period
Adjustments

# Adjustments for Description Record Adjustment Adjusting Entries

Cash paid prior to Dr. Exp. xx
1 Prepaid Insurance When benefit is received
receiving benefit Cr. Asset xx
Cash paid prior to Dr. Exp. xx
Deferrals

2 Supplies When benefit is received

receiving benefit Cr. Asset xx
Cash paid prior to Dr. Exp. xx
3 Depreciation When benefit is received
receiving benefit Cr. Asset xx
Cash received prior Dr. Liab. xx
4 Unearned Revenues When benefit is Provided
to providing benefit Cr. Rev. xx
Benefit received Dr. Exp. xx
5 Accrued Expenses When benefit is received
prior to paying cash Cr. Liab. xx
Accruals

Benefit provided
Dr. Asset. xx
6 Accrued Revenues prior to receiving When benefit is Provided
Cr. Rev. xx
cash

- Adjustments can also be categorized as either; Revenue adjustments (Unearned Revenues

and Accrued Revenues), or Expense Adjustments (Prepaid Expenses and Accrued
Expenses).
- Adjustments are internal transactions that occur due to the timing difference between
exchanging cash and benefits.
- We always record adjustments at the time of exchanging (providing or receiving) benefits
which is usually before or after exchanging (receiving or paying) cash.

1
 Extra Applications_Lecture Week 7

Requirement: Prepare the necessary adjusting entries as of the end of the accounting period.

2
Required:
1- Prepare the necessary adjusting entries.
2- Prepare the adjusted trial balance.
3- Prepare the income statement, owners’ equity statement and the balance sheet.

3
 Answers

PROBLEM (3-1) A IS TO BE SOLVED BY JOINTLY BY THE INSTRUCTOR AND THE STUDENTS

Problem (3-1) A

Adjustment (a)

Dec. 31Dr. Office Supplies Expense........................................12,760

Cr. Office Supplies........................................ 12,760

($3,000 + $12,400 - $2,640).

Adjustment (b)
31Dr. Insurance Expense...............................................12,312
Cr. Prepaid Insurance................................... 12,312

Policy Cost per Month Months Active in 2011 2011 Cost

A $660 ($15,840/24 mo.) 12 $ 7,920
B 363 ($13,068/36 mo.) 9 3,267
C 225 ($ 2,700 /12 mo.) 5 1,125
Total $12,312

Adjustment (c)
31Dr. Salaries Expense (2 days x $2,100).....................4,200
Cr. Salaries Payable..................................... 4,200

Adjustment (d)
31Dr. Depreciation Expense—Building..........................27,000
Cr. Accumulated Depreciation—Building...... 27,000

[($855,000 -$45,000) / 30 years = $27,000].

Adjustment (e)
31Dr. Rent Receivable....................................................2,400
Cr. Rent Earned (Rent Revenue).................. 2,400

Adjustment (f)
31DR. Unearned Rent....................................................4,350
Cr. Rent Earned (Rent Revenue).................. 4,350

The amount of rent earned for November and December (2 x 2,175).

4
PAROBLEM (3-3)B REQUIREMENTS 1 AND 2 ARE TO BE SOLVED BY THE STUDENTS IN THE CLASS
TO TEST THEIR UNDERSTANDING OF THE ADJUSTMENTS. HOWEVER, REQUIREMENT NO. 3 IS TO
BE SOLVED AS A HOMEWORK FOR STUDENTS.

Problem (3-3) B

REQUIREMENT (1)

Adjustment (a)

Dec. 31Dr. Insurance Expense................................................................6,400

Cr. Prepaid Insurance...................................................6,400

Adjustment (b)
31Dr. Teaching Supplies Expense..................................................57,500
Cr. Teaching Supplies...................................................57,500

The cost of supplies used ($60,000-$2,500).

Adjustment (c)
31 Dr. Depreciation Expense—Equipment....................................... 4,000
Cr. Accumulated Depreciation—Equipment..................4,000

Adjustment (d)
31Dr. Depreciation Expense—Professional Library........................2,000
Cr. Accumulated Depreciation—Professional Library... 2,000

Adjustment (e)
31Dr. Unearned Training Fees.........................................................9,200
Cr. Training Fees Earned..............................................9,200

Adjustment (f)
31Dr. Accounts Receivable...............................................................5,500
Cr. Tuition Fees Earned................................................5,500

Tuition earned ($2,200 x 2 1/2 mo).

Adjustment (g)
31Dr. Salaries Expense.....................................................................540
Cr. Salaries Payable..................................................... 540

Accrued salaries expense (3 days x $180).

Adjustment (h)
31Dr. Rent Expense .........................................................................2,600
Cr. Prepaid Rent.........................................................................2,600

5
REQUIREMENT (2)

ALCORN INSTITUTE
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash............................................................................................... $ 50,000
Accounts receivable......................................................................... 5,500
Teaching supplies............................................................................ 2,500
Prepaid insurance............................................................................ 11,600
Prepaid rent..................................................................................... 0
Professional library........................................................................... 10,000
Accumulated depreciation—Professional library.................................. $ 3,500
Equipment....................................................................................... 30,000
Accumulated depreciation—Equipment.............................................. 20,000
Accounts payable............................................................................. 12,200
Salaries payable............................................................................... 540
Unearned training fees...................................................................... 18,400
M. Alcorn, Capital............................................................................. 68,500
M. Alcorn, Withdrawals..................................................................... 20,000
Tuition fees earned........................................................................... 110,500
Training fees earned......................................................................... 71,200
Depreciation expense—Professional library........................................ 2,000
Depreciation expense—Equipment.................................................... 4,000
Salaries expense.............................................................................. 43,740
Insurance expense........................................................................... 6,400
Rent expense.................................................................................. 31,200
Teaching supplies expense............................................................... 57,500
Advertising expense......................................................................... 18,000
Utilities expense............................................................................... 12,400 _______
Totals.............................................................................................. $304,840 $304,840

6
REQUIREMENT (3)

ALCORN INSTITUTE
Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned......................................................................$110,500
Training fees earned.................................................................... 71,200
Total revenues............................................................................. $181,700
Expenses
Depreciation expense—Professional library................................2,000
Depreciation expense—Equipment.............................................4,000
Salaries expense.........................................................................43,740
Insurance expense......................................................................6,400
Rent expense...............................................................................31,200
Teaching supplies expense.........................................................57,500
Advertising expense....................................................................18,000
Utilities expense........................................................................... 12,400
Total expenses............................................................................ 175,240
Net income ...............................................................................$ 6,460

ALCORN INSTITUTE
Statement of Owner’s Equity
For Year Ended December 31, 2011

M. Alcorn, Capital, December 31, 2010................................ $68,500

Plus: Net income................................................................... 6,460
74,960
Less: Owner withdrawals...................................................... 20,000
M. Alcorn, Capital, December 31, 2011................................ $54,960

7
 ALCORN INSTITUTE
Balance Sheet
December 31, 2011

Assets
Cash ............................................................................... $50,000
Accounts receivable....................................................................... 5,500
Teaching supplies.......................................................................... 2,500
Prepaid insurance.......................................................................... 11,600
Professional library........................................................................$10,000
Accumulated depreciation—Professional library........................... (3,500)
............................................................................... 6,500
Equipment ...............................................................................30,000
Accumulated depreciation—Equipment........................................(20,000)
............................................................................... 10,000
Total assets ............................................................................... $86,100

Liabilities
Accounts payable.......................................................................... $12,200
Salaries payable............................................................................ 540
Unearned training fees.................................................................. 18,400
Total liabilities ............................................................................... 31,140
Equity
M. Alcorn, Capital.......................................................................... 54,960
Total liabilities and equity.............................................................. $86,100