Question

Problem 3-2A Preparing adjusting and subsequent journal entries LO A1, P1 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 $3,850 balance. During 2017, the company purchased supplies for $15,901, which was added to the Office Supplies account. The inventory of supplies available at December 31, 2017, totaled $3,388. 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 $ 10,824 B April 1, 2016 36 9,576 C August 1, 2017 12 8,424 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 $1,750 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 $725,000 and is expected to have a $45,000 salvage value at the end of its predicted 30-year life. Annual depreciation is $22,667. Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at $3,200 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 $2,899 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.

Answer 1

1. Adjusting entries as of December 31, 2017

Date	Account Titles and Explanation	PR	Debit	Credit
Dec. 31, 2017	Office Supplies expense		16363
	Office Supplies ($3850 + $15901 - $3388)			16363
	(To record office supplies expense)
Dec. 31, 2017	Insurance expense		8055
	Prepaid insurance			8055
	(To record insurance expense)
Dec. 31, 2017	Salaries expense ($1750 x 2 days)		3500
	Salaries payable			3500
	(To record accrued salaries)
Dec. 31, 2017	Depreciation expense		22667
	Accumulated depreciation-Building			22667
	(To record depreciation expense)
Dec. 31, 2017	Rent receivable		3200
	Rent earned			3200
	(To record rent revenue accrued for December)
Dec. 31, 2017	Unearned rent		5798
	Rent earned ($2899 x 2)			5798
	(To record rent earned for 2 months)

2. First subsequent cash transactions in 2018

Date	Account Titles and Explanation	PR	Debit	Credit
Jan. 6, 2018	Salaries payable		3500
	Salaries expense ($1750 x 3 days)		5250
	Cash			8750
	(To record salaries paid for week ended Jan. 3)
Jan. 15, 2018	Cash ($3200 x 2 months)		6400
	Rent receivable			3200
	Rent earned			3200
	(To record rent received for Dec. and Jan.)

Workings:

Policy	Date of Purchase	Months of Coverage	Cost $	Per month $	Months in 2017	Insurance expense $
A	April 1, 2015	24	10824	451	3	1353
B	April 1, 2016	36	9576	266	12	3192
C	August 1, 2017	12	8424	702	5	3510
						8055