Question

In: Accounting

Arnez Company’s annual accounting period ends on December 31, 2017. The following information concerns the adjusting...

Arnez Company’s annual accounting period ends on December 31, 2017. The following information concerns the adjusting entries to be recorded as of that date.

The Office Supplies account started the year with a $3,475 balance. During 2017, the company purchased supplies for $14,352, which was added to the Office Supplies account. The inventory of supplies available at December 31, 2017, totaled $3,058.

An analysis of the company's insurance policies provided the following facts.

Policy Date of Purchase Months of Coverage Cost
A April 1, 2015 24 $ 11,640
B April 1, 2016 36 10,440
C August 1, 2017 12 9,240

  

The total premium for each policy was paid in full (for all months) at the purchase date, and the Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries for Prepaid Insurance were properly recorded in all prior years.)

The company has 15 employees, who earn a total of $2,200 in salaries each working day. They are paid each Monday for their work in the five-day workweek ending on the previous Friday. Assume that December 31, 2017, is a Tuesday, and all 15 employees worked the first two days of that week. Because New Year’s Day is a paid holiday, they will be paid salaries for five full days on Monday, January 6, 2018.

The company purchased a building on January 1, 2017. It cost $900,000 and is expected to have a $45,000 salvage value at the end of its predicted 30-year life. Annual depreciation is $28,500.

Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at $2,400 per month, starting on November 1, 2017. The rent was paid on time on November 1, and the amount received was credited to the Rent Earned account. However, the tenant has not paid the December rent. The company has worked out an agreement with the tenant, who has promised to pay both December and January rent in full on January 15. The tenant has agreed not to fall behind again.

On November 1, the company rented space to another tenant for $2,174 per month. The tenant paid five months' rent in advance on that date. The payment was recorded with a credit to the Unearned Rent account.


Required:

1. Use the information to prepare adjusting entries as of December 31, 2017.
2. Prepare journal entries to record the first subsequent cash transaction in 2018 for parts c and e.
  

Solutions

Expert Solution

Question 1

All the entries shall be dated December 31 2017

a) Adjusting entry is required to record office supplies consumed.

Opening balance $ 3,475

Closing balance $ 3,058

Purchases during the year $ 14,352

Therefore Office Supplies consumed = 3,475 + 14,352 - 3,058 = $ 14,769

Office Supplies Consumed A/c Dr 14,769
To Inventory A/c 14,769

b) Insurance policies have been paid in full on the date of purchase and prepaid insurance expenses of earlier years have been recorded properly. Now we need to find out the amount that is directly related to the current Financial Year and put an adjusting entry.

Insurance A ----- (11,640/24) x 3 months [Jan 2017 to Mar 2017, insurance coverage ends on Mar 2017] = $ 1,455

Insurance B ----- (10,440/36) x 12 months [Jan 2017 to Dec 2017] = $ 3,480

Insurance C ----- {9,240/12) x 5 [Aug 2017 to Dec 2017] = $ 3,850

Insurance A expense A/c Dr 1,455
Insurance B expense A/c Dr 3,480
Insurance C expense A/c Dr 3,850
To Prepaid Insurance A/c 8,785

c)There are 15 employees who earn a total of $ 2,200 in every working day. We have to record salary expenses relating to Dec 30 and Dec 31 this year which amount to $ 2,200 x 2 = $ 4,400

Salary A/c Dr 4,400
To Salaries Payable A/c 4,400

d)Depreciation on building for the current year

Depreciation A/c Dr 28,500
To Building A/c 28,500

e)Rent for the month of December is yet to be received from the tenant but the same has to be recorded as current year income. So the adjusting entry shall be as follows

Rent Receivable A/c Dr 2,400
To Rental Income A/c 2,400

f)The other tenant has paid rent in advance for 5 months. Only rent relating to November and December should be taken as income this year. Since the rent for 5 months have already been credited to Unearned Rent Account, the entry shall be as follows

Unearned Rent A/c Dr 4,348
To Rental Income A/c 4,348

Question 2

Salary for 5 days will be paid on Monday, Jan 6 2018 of which 2 days salary have already been added to the expenditure related to 2017 and credited to Salaries payable. Therefore we shall now reverse the same and also show expense for the current year. That is the salary for Jan 1 to Jan 3 including New Year's paid leave

06 Jan 2018 Salary A/c Dr 6,600
Salaries Payable A/c Dr 4,400
To Cash A/c 11,000

Rent for the month of December and January from tenant paying $ 2,400 per month will be received on January 15th. The rent for the month of December have already been taken into account in the adjusting entry for 2017. Hence we need to reverse the same by crediting Rent Receivable account.

15 Jan 2018 Cash A/c Dr 4,800
To Rental Income A/c 2,400
To Rent Receivable A/c 2,400

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