Question

Arnez Co. follows the practice of recording prepaid expenses and unearned revenues in balance sheet accounts. The company's annual accounting period ends on December 31, 2015. The following information concerns the adjusting entries to be recorded as of that date. a. The Office Supplies account started the year with a $4,000 balance. During 2015, the company purchased supplies for $13,400, which was added to the Office Supplies account. The inventory of supplies available at December 31, 2015, totaled $2,554. b. An analysis of the company's insurance policies provided the following facts. Policy Date of Purchase Months of Coverage Cost A April 1, 2013 24 $ 14,400 B April 1, 2014 36 12,960 C August 1, 2015 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.) c. 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, 2015, 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, 2016. d. The company purchased a building on January 1, 2015. 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. e. 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, 2015. 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. f. 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, 2015. 2. Prepare journal entries to record the first subsequent cash transaction in 2016 for parts c and e. Record the receipt of two months rent.

Answer 1

Part 1 - Journal Entry Worksheet of Arnez co.

Transaction	Accounts Title	Debit	Credit
a	Office supplies expenses	$14846
	Office supplies		$14846
	(Office supply expenses debited since it is consumed during the period) Office supplies consumed amount = Opening Supply + Purchases - Closing supply = $4000 + $13400 - $2554
b	Insurance expenses	$7120
	Prepaid Expenses		$7120
	(Insurance expenses belonging to year 2015 are transferred from prepaid expenses account) Policy A - $14400/24*3 Month (From January 2105 to March 2015 since after March 2015, policy is expiring = $1800 Policy B - $12960/36*12 Month= $4320 Policy C = $2400/12*5 Month = $1000 Total = ($1800+$4320*$1000) = $7120
c	Salary expenses	$3920
	Salary exenses payable		$3920
	(Salary of two days is due as on the last day of accounting year. Hence it will be outstanding as on 31st december 2015) Salary of two days = $1960*2 days = $3920
d	Depreciation expenses - Building	$30500
	Accumulated Depreciation - Building		$30500
	(Depreciation amount is debited as expenses and accumulated depreciation is credited which will be reduced from cost of building) Depreciation = (cost - salvage value)/Estimated life = ($960000 - $45000)/30 = $30500
e	Rent Receivable	$3000
	Rent Earned		$3000
	(Rent of december month of $3000 is receivable. It is earned but not received)
f	Unearned rent ($2800*2)	$5600
	Rent Earned ($2800*2)		$5600
	(Rent of 5 month is received in advance of which rent of 2 month is transferred to rent unearned account since it is advance)

Part 2 - First Cash Transaction entries of year 2016

Date	Accounts Title	Debit	Credit
January 6	Salary Payable ($1960*2 days of year December 2015)	$3920
	Salary expenses ($1960*3 days of year Janauary 2016)	$5880
	Cash ($1960 * 5 days)		$9800
	(Salary paid from cash)
January 15	Cash	$6000
	Rent Earned (January)		$3000
	Rent receivable (December)		$3000
	(Rent received of 2 months for december and january).