Question

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 $4,000 balance. During 2017, the company purchased supplies for $13,400, which was added to the Office Supplies account. The inventory of supplies available at December 31, 2017, totaled $2,554.

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	$	14,400
B	April 1, 2016	36		12,960
C	August 1, 2017	12		2,400

  

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 $1,960 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 $960,000 and is expected to have a $45,000 salvage value at the end of its predicted 30-year life. Annual depreciation is $30,500.

Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at $3,000 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 $2,800 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

No.	Account Titles and Explanation	Debit	Credit
a.	Office Supplies expense	14846
	Office Supplies ($4000 + $13400 - $2554)		14846
	(To record office supplies expense)
b.	Insurance expense	7120
	Prepaid insurance		7120
	(To record insurance expense)
c.	Salaries expense ($1960 x 2 days)	3920
	Salaries payable		3920
	(To record accrued salaries)
d.	Depreciation expense	30500
	Accumulated depreciation-Building		30500
	(To record depreciation expense)
e.	Rent receivable	3000
	Rent earned		3000
	(To record rent revenue accrued for December)
f.	Unearned rent	5600
	Rent earned ($2800 x 2)		5600
	(To record rent earned for 2 months)

Workings:

Policy	Date of Purchase	Months of Coverage	Cost $	Per month $	Months in 2017	Insurance expense $
A	April 1, 2015	24	14400	600	3	1800
B	April 1, 2016	36	12960	360	12	4320
C	August 1, 2017	12	2400	200	5	1000
						7120

2.  First subsequent cash transaction in 2018

No.	Account Titles and Explanation	Debit	Credit
c.	Salaries payable	3920
	Salaries expense ($1960 x 3 days)	5880
	Cash		9800
	(To record salaries paid for week ended Jan. 3)
e.	Cash ($3000 x 2 months)	6000
	Rent receivable (Dec.)		3000
	Rent earned (Jan.)		3000
	(To record rent received for Dec. and Jan.)