Question

Exercise 2-10 Making year-end adjusting entries (LO2-1, LO2-2, LO2-3, LO2-12)

Hentzel Landscaping commenced its business on January 1, 20X1.

1. During its first year of operations, Hentzel purchased supplies in the amount of $12,000 (debited to Supplies inventory), and of this amount, $3,000 were unused as of December 31, 20X1.
2. On March 1, 20X1, Hentzel received $18,000 for landscaping services to be rendered for 18 months (beginning July 1, 20X1). This amount was credited to a liability called Deferred landscaping revenue.
3. The company’s gasoline bill for $2,500 for the month of December 20X1 was not received until January 15, 20X2. No entry was made.
4. The company borrowed $50,000 from HomeTown Financing on April 1, 20X1, at a 5% interest rate per annum. It credited a liability for notes payable. The principal, along with all the interest, is due on April 1, 20X2.
5. On January 1, 20X1, the company purchased 10 lawnmowers at $3,000 each. It debited fixed assets. The lawnmowers are expected to last for three years with no salvage value.

On December 31, 20X1, Hentzel did not record any adjusting entries with respect to these transactions.

Required:

Prepare all adjusting entries necessary into a journal to prepare financial statements for 20X1 in accordance with U.S. GAAP. Ignore income taxes. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Comments on the transactions -

1. Expense need to be recognised at the year end for the supplies consumed.

2. Revenue to be recognised for the current period and rest to be deferred over the life of service.

3. Expense of the year should be recognized even if the bill has not been received, we need to recognize it as out liability to pay. In future when we receive the bill the accrual will be reversed or adjusted.

4. Interest to be recognized for the current period though it will be due in the next year for payment.

5. Depriciation to be recognized for the year on the fixed asset according to the useful life of assets.

	Journal
Date	Account Title and Explanations	Amount ($)
		Debit	Credit
1	Hentzel purchased supplies in the amount of $12,000 (debited to Supplies inventory), and of this amount, $3,000 were unused as of December 31, 20X1.
December 31, 20X1	Supplies Expense	9,000.00
	To Supplies Inventory		9,000.00
	(Being inventory consumed during the year $12,000 - $3,000, expense recognized for the year)
2	On March 1, 20X1, Hentzel received $18,000 for landscaping services to be rendered for 18 months (beginning July 1, 20X1). This amount was credited to a liability called Deferred landscaping revenue.
December 31, 20X1	Deferred landscaping revenue	6,000.00
	To Landscaping revenue		6,000.00
	(Being revenue recognized for the period of service rendered i.e july to december. $18,000/18*6 = $6,000.)
3	The company’s gasoline bill for $2,500 for the month of December 20X1 was not received until January 15, 20X2. No entry was made.
December 31, 20X1	Gasoline Expense	2,500.00
	To Gasoline Expense Accrued		2,500.00
	(Being amount of expense accrued for the month of december)
4	The company borrowed $50,000 from HomeTown Financing on April 1, 20X1, at a 5% interest rate per annum. It credited a liability for notes payable. The principal, along with all the interest, is due on April 1, 20X2
December 31, 20X1	Interest Expense	1,875.00
	To Interest Payable		1,875.00
	(Being interst accrued from april to december i.e $50,000 * 5% *9/12)
December 31, 20X1	No Journal Entry Required for principal as on 31, December 20X1.
5	On January 1, 20X1, the company purchased 10 lawnmowers at $3,000 each. It debited fixed assets. The lawnmowers are expected to last for three years with no salvage value
December 31, 20X1	Depriciation	10,000.00
	To Fixed Assets (Lawnmowers)		10,000.00
	(Being depriciation charged on lawnmowers as per the straight line method i.e ($3,000*10)/3)
Total	29,375.00	29,375.00