Question

In each of the following transactions (a) through (c) for Romney's Marketing Company, use the three-step process illustrated in the chapter to record the adjusting entry at the end of the current year. Indicate the amounts and direction of effects of the adjusting entry on the elements of the balance sheet and income statement. Indicate + for increase, − for decrease.

Estimated electricity usage at $450 for December; to be paid in January of next year.

On September 1 of the current year, loaned $6,000 to an officer who will repay the loan principal and interest in one year at an annual interest rate of 14 percent.

Owed wages to 10 employees who worked four days at $200 each per day at the end of the current year. The company will pay employees at the end of the first week of next year.

	Balance Sheet Income Statement Transaction Assets Liabilities Stockholders’ Equity Revenues Expenses Net Income a. b. c.

Answer 1

Romney's Marketing Company
	Balance sheet			Income statement
Transaction	Assets	Liabilities	Stockholders’ Equity	Revenues	Expenses	Net Income
a.		$ 450 (+)	$ 450 (-)		$ 450 (+)	$ 450(-)
b.	$ 280 (+)		$ 280 (+)	$ 280 (+)		$ 280 (+)
c.		$ 8000 (+)	$ 8000 (-)		$ 8000 (+)	$ 8000 (-)

Additional statement for better understanding

Romney's Marketing Company
	Balance sheet			Income statement
Transaction	Assets	Liabilities	Stockholders’ Equity	Revenues	Expenses	Net Income
a.		$   450.00	$    (450.00)		$   450.00	$    (450.00)
b.	$ 280.00		$     280.00	$ 280.00		$     280.00
c.		$8,000.00	$ (8,000.00)		$8,000.00	$ (8,000.00)

Amount in brackets indicate negative figures.

Explanation

1. Electricity payable is recorded as liability and expense for electricity is recorded which in turn decreases net income and shareholder’s equity
2. Accrues Interest revenue increases interest receivable asset and interest revenue hence shareholder’s equity and net income too.
3. Recoding Accrues wages payable increases liability for paying wages and increases expense on income statement for wages of current period. Wages expenses decreases net income and shareholder’s equity.