Question

Prepare adjusted journal entries and an income statement:

Problem 4-6A

Roadside Travel Court was organized on July 1, 2016, by Betty Johnson. Betty is a good manager but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Betty prepared the following income statement for her fourth quarter, which ended June 30, 2017.

ROADSIDE TRAVEL COURT Income Statement For the Quarter Ended June 30, 2017
Revenues
Rent revenue				Total revenues: $219,500
Operating expenses
Advertising expense		$ 4,395
Salaries and wages expense		83,195
Utilities expense		940
Depreciation expense		2,935
Maintenance and repairs expense		4,155
Total operating expenses				95,620
Net income				$123,880

Betty suspected that something was wrong with the statement because net income had never exceeded $30,000 in any one quarter. Knowing that you are an experienced accountant, she asks you to review the income statement and other data.

You first look at the trial balance. In addition to the account balances reported above in the income statement, the trial balance contains the following additional selected balances at June 30, 2017.

Supplies		$ 9,185
Prepaid Insurance		14,400
Notes Payable		14,000

You then make inquiries and discover the following.

1.		Roadside rentals revenues include advanced rental payments received for summer occupancy, in the amount of $57,180.
2.		There were $1,995 of supplies on hand at June 30.
3.		Prepaid insurance resulted from the payment of a one-year policy on April 1, 2017.
4.		The mail in July 2017 brought the following bills: advertising for the week of June 24, $115; repairs made June 18, $4,570; and utilities for the month of June, $245.
5.		Wages expense is $325 per day. At June 30, four days’ wages have been incurred but not paid.
6.		The note payable is a 6% note dated May 1, 2017, and due on July 31, 2017.
7.		Income tax of $14,035 for the quarter is due in July but has not yet been recorded.

Answer 1

The following are the adjusting entries to be passed:

1. Supplies expense is the difference between the trial balance amount and the amount on the physical count. ($ 9,185 - $ 1,995)

2. Prepaid Insurance is for 12 months while only 3 months are over in the current year. Therefore, Insurance expense is to be recognized for the 3 months ($ 14,400 x {3months/12months})

3. Wages expense is arrived at multiplying the amount of per day wage with no. of days it was not paid though it incurred. ($ 325 x 4 days)

4. Interest expense on Notes Payable is to be calculated for 2 months that is May and June. ($ 14,000x6%x{2/12} )

5. Remaining amounts are taken from the information directly.

Income Statement at the end of June 30, 2017 is as follows:

Rental Income would be decreased as the advance received would be deducted.

Therefore, the Net Income is $60,470.

Hope it is helpful!!