Question

2. The Sandcastle Motel adjusts and closes its accounts at the end of each year on 30 June. Most guests pay at the time they check out but a few guests pay in advance and these amounts are posted to Unearned Rental Revenue account at the time of receipt. The following transactions are being considered for adjustment:

(i) A one-year bank loan of $80,000 was obtained on 1 May. No interest has yet been paid. The interest accrued at 30 June is $1,000.

(ii) On 16 June, a suite of rooms was rented to a company for six months at a monthly rental of $3,200. The entire amount of $19,200 was collected in advance and posted to Unearned Rental Revenue account.

(iii) At 30 June, the motel has earned $18,090 rental revenue from current guests who will not be invoiced until they are ready to check out in July.

(iv) Salaries earned by employees at 30 June, but not yet paid, amount to $4,000.

v) On 30 June, the motel entered into an agreement to host the National Bodybuilders Convention in August. The motel expects to earn rental revenue of at least $90,000 from the convention.

(vi) On 1 June, a payment of $3,000 was made for six months cleaning services. The payment was entered into the Prepaid Cleaning account.

Question:

(a) Prepare the adjusting journal entries for the year ended 30 June. Ignore GST. (Explanations not required)

(b) The owner of the Sandcastle Motel is anxious to know the results for the year and wants to ignore the above adjustments in the interests of speedier reporting. Advise the owner why adjusting journal entries are important.

Answer 1

(a)

	Account Titles	Debit	Credit
i	Interest Expense	$         1,000
	Interest Payable		$             1,000
ii	Unearned Rental Revenue	$         1,600
	Rental Revenue		$             1,600
iii	Accounts Receivable	$       18,090
	Rental Revenue		$          18,090
iv	Salaries Expense	$         4,000
	Salaries Payable		$             4,000
v	No entry
vi	Cleaning Expense	$            500
	Prepaid Cleaning Account		$                500

(b)
It is important to make adjusting entries to comply with accounting policies of accrual accounting. By making adjusting entries, true net income is reported by reporting true revenues and expenses that relate to the period.