Question

7 Make adjusting entries for December 31, 2019 for the following transactions. (Assume a single adjusting entry is made each of the following at year end December 31, 2019). A Ajax Company purchased a fire insurance policy for 2 years coverage on November 1, 2019 for $24,000. B Ajax Company received $24,000 from Sphere Company on January 1, 2019 in payment in advance for financial analytical services to be provided for 2 years from the inception of the contract. C Ajax purchases a bond on August 1, 2019 with a face value of $24,000 that pays 12 percent interest each year. Interest is paid on the bond semiannually. D Ajax pays wages of $10,000 each week for 5 days work (Monday through Friday). December 31 in 2018 was a Monday.

Answer 1

The adjusting entries are made in the year end to comply with the relevant accrual and matching principles of accounting. When the expenses are made in excess or advance it is transferred to prepaid expenses and when expenses are due but not paid then it is accrued at year end and transferred to the balance sheet.

Accordingly in the given cases the adjustment will be as follows for books closing on dec 31:

1. Purchased fire insurance policy for 2 years coverage on nov 1 2019 and paid $24000, since the insurance is used for only 2 monthsi.e nov and dec hence expenses will be recognised for 2 months and remaining will be trasferred to prepaid insurance.

Insurance expenses for the year = $24000 * 2/24 months = $2000 and insurance transferred to prepaid will be $22000 ( 24000 -2000).

2. on 1 january 2019 received advance of $24000 for 2 years of service , here the 1 year of service is used of 2019 and 2020 service is still unused , the advance received for $12000 will be trasferred to advance received for services.

3. Purchased bond on August 1 2019 having face value of $24000 with 12% interest and interest in paid semi annualy thus the interest for 2019 will be for 5 months i.e 24000*12%*5/12 = $1200

4. Pays wages for 5 days per week , on 31st december it was monday so that day wages is unpaid and will be paid in next year hence the wages of 1 day i.e $2000 to be accrued in current year.

It is assumed that all the entries are made to the expenses and incomes as received and paid and now it is to be adjusted at the year end. i.e for insurance paid all expenses would have debited to insurance expenses and for advance all revenue was credited for service revenue. hence it is to be reversed to the extent of following year.

The adjusting journal entries will be as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2019
Dec-31	Prepaid Insurance	22000
	To Insurance Expenses		22000
	(insurance expenses reversed to extent of prepaid)
Dec-31	Service Revenue	12000
	To Advance for services		12000
	(Receipt of service is transferred to advance)
Dec-31	Bond Interest Receivable	1200
	To Interest Income		1200
	(Interest Income booked for the current year )
Dec-31	Wages expenes	2000
	To Wages payable		2000
	(Wages expenses accrued booked)