Question

In: Accounting

Scan House, a large campground in southern Florida, adjusts its accounts monthly. Most guests of the...

Scan House, a large campground in southern Florida, adjusts its accounts monthly. Most guests of the campground pay at the time they check out, and the amounts collected are credited to Camper Revenue. The following information is available as a source for preparing the adjusting entries at December 31:

  1. Scan House invests some of its excess cash in certificates of deposit (CDs) with its local bank. Accrued interest revenue on its CDs at December 31 is $1,400. None of the interest has yet been received.

  2. A six-month bank loan in the amount of $120,000 had been obtained on September 1. Interest is to be computed at an annual rate of 8 percent and is payable when the loan becomes due.

  3. Depreciation on buildings owned by the campground is based on a 20-year life. The original cost of the buildings was $800,000. The Accumulated Depreciation: Buildings account has a credit balance of $300,000 at December 31, prior to the adjusting entry process. The straight-line method of depreciation is used.

  4. Management signed an agreement to let 4H Troop 840 of Traverse City, Michigan, use the campground in June of next year. The agreement specifies that the 4H Troop will pay a daily rate of $50 per campsite, with a clause providing a minimum total charge of $3,500.

  5. Salaries earned by campground employees that have not yet been paid amount to $2,800.

  6. As of December 31, Scan House has earned $4,000 of revenue from current campers who will not be billed until they check out.

  7. Several lakefront campsites are currently being leased on a long-term basis by a group of senior citizens. Nine months' rent of $54,000 was collected in advance and credited to Unearned Camper Revenue on October 1 of the current year.

  8. A bus to carry campers to and from town and the airport had been rented the first week of December at a daily rate of $300. At December 31, no rental payment has been made, although the campground has had use of the bus for 25 days.

  9. Unrecorded Income Taxes Expense accrued in December amounts to $15,000. This amount will not be paid until January 15.

Required: (prepare using an excel spreadsheet, include proper heading with your name, course name and number, and problem number – Chapter 2 Excel HW (1 of 2)

  1. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation). If no adjusting entry is required, explain why.

  2. Indicate the effects that each of the adjustments in part a will have on the following sixtotal amounts in the campground's financial statements for the month of December. Organize your answer in tabular form, using the column headings shown below. Use the

letters I for increase, D for decrease, and NE for no effect. Adjusting entry 1 is provided as an example.

c. What is the amount of interest expense recognized for the entire current year on the $120,000 bank loan obtained September 1?

d. Compute the book value of the campground's buildings to be reported in the current year's December 31 balance sheet. (Refer to paragraph 3.)

Solutions

Expert Solution

Answers:

A. Adjusting entries

1) Debit to interest receivable for $1,400;

Credit to interest revenue for $1,400

(Adjustment to accrued interest income)

.

2) Debit to interest expense for $800;

Credit to interest payable for $800

(To record accrued interest expense for December month)

.

3) Debit to depreciation expense: Building for $3,333;

Credit to accumulated depreciation: Building for $3,333

(To record depreciation expense on building for December month)

.

4) No adjusting entry because entering into a contract does not result into earnings of revenue.

.

5) Debit to salaries expenses for $2,800;

Credit to salaries payable for $2,800

(To record accrued salary expenses for December month)

.

6) Debit to camper revenue receivable $4,000;

Credit to camper revenue for $4,000

(To record revenue earned from campers during December month)

.

7) Debit to unearned camper revenue for $9,000;

Credit to camper revenue for $9,000

(To record portion of unearned camper revenue earned during December month)

.

8) Debit to bus rental expense for $7,500;

Credit to accounts payable for $7,500

(To record accrued bus rental expense for December month)

.

9) Debit to income tax expenses for $15,000;

Credit to income tax payable for $15,000

(To record income taxes accrued for December month)

Working notes:

2) Interest expense = $120,000 x 0.08 x 1/12

= $800

3) Depreciation expense = ($800,000​ ÷ 20)× (1÷ 12)

= $3,333

7) Earned revenue during December = $54,000 ÷ 6​

= $9,000

8) Bus rental expense = $300×25

= $7,500

Classifications of adjusting entries:

  1. Accruing uncollected revenue.
  2. Accruing unpaid expense.
  3. Charging asset's cost to expenses.
  4. A contract does not require an adjusting entry.
  5. Accruing unpaid expense.
  6. Accruing uncollected revenue.
  7. Reducing liabilities by converting them into revenues.
  8. Accruing unpaid expense.
  9. Accruing unpaid expense.

B. Indication of effect on financial statements:

Adjusting Entriies Revenue - Expense = Net Income Asset = Liabilities + Owners' equity
1 I NE I I NE I
2 NE I D I I NE
3 NE I D D NE D
4 NE NE NE NE NE NE
5 NE I D NE I D
6 I NE I NE NE NE
7 NE NE NE I I NE
8 NE I D NE I D
9 NE I D NE I D

.

C. Computation of interest expense to be recognized for current year on loan obtained on September 1:

= Loan amount x stated rate x Months outstanding/ Number of months per year

= $120,000 x 0.08 x 4/12

= $3,200.

Note: Months outstanding = 4, i.e., September 1 to December 31.

.

D. Computation of book value of campground's building at the end of current year:

= Original costs - Accumulated depreciation till November 30 - Depreciation expense for December

= $800,000 - $300,000 - $3,333

= $496,667


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