PROBLEM 5 Adjusting Entries (12 Points) Part A: On September 1* Lakewood Wholesa

Question

PROBLEM 5 Adjusting Entries (12 Points) Part A: On September 1* Lakewood Wholesale Company (LWC) paid S7,500 to Denver Sales Company for rental of warehouse space. The payment was for five months rent beginning September 1. The transaction was DEBITED TO THE RENT EXPENSE ACCOUNT (credit to cash) in the general ledger of LWC. No other entries were made related to this event after September 1st ased on the information provided, prepare the adjusting entry required as of December 31 Required: B 2018, for Lakewood Wholesale Company Part B: 2018. Ashley adjusts and closes its books annually on December 31 Ashley reported the following amounts on its balance sheet at the end of last year (12/31/17) The staff accountant for the Ashley Corporation has collected the following data as of December 31 Accounts receivable Less: Allowance for doubtful accounts $20,000 2,000 During the year accounts receivable of $900 were writen off as uncollectible and the ADA account was debited. The balance in Accounts receivable at year end (12/31/18) is $26.000. Based on an aging of Accounts receivable it was estimated that 10% of year-end balance in AR would be uncollectible. Required: Based on the information provided, prepare the adjusting entry required as of December 31 2018, for the Ashley Corporation.

Explanation / Answer

Part A

Answer

Total rent paid is for 5 months. This means 1 month is still to come and Rent for 1 month is paid in advance. Adjusting entry will be made so that one month’s rent paid in advance is recorded properly and Rent expense of only 4 months is recoded instead of 5 months.

Adjusting Entry

Date

General Journal

Debit

Credit

31-Dec

Advance Rent

$ 1,500.00*

                 Rent Expense

$ 1,500.00

(1 month's rent transferred to advance rent)

  *$7500/5x1

Rent expense is credited because rent expense for 5 months was recorded earlier which should have been only 4 months. Crediting Rent expense will make rent expense equal to $ 6000 which is the correct expense amount.

Part B

Working note 1

Beginning Balance of Allowance for Doubtful Accounts

$ 2,000.00

Less: Accounts Receivable written off

$     900.00

Subtotal

$ 1,100.00

Provision for Current Year (26000*10%)

$ 2,600.00

Amount of Allowance for Doubtful accounts to be credited (2600-1100)

$   1500.00

Adjusting Entry

Date

General Journal

Debit

Credit

31-Dec

Bad Debts Expense

$ 1,500.00

          Allowance for Doubtful Accounts

$ 1,500.00

(Bad debts provision recorded)

Bad debt expense is directly transferred to income statement and Allowance for doubtful account will be shown as a contra asset. Allowance for Doubtful Accounts will be reduced from Accounts Receivable account to get Accounts receivable balance.

Date

General Journal

Debit

Credit

31-Dec

Advance Rent

$ 1,500.00*

                 Rent Expense

$ 1,500.00

(1 month's rent transferred to advance rent)

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