A review of the ledger of Napier Company at December 31. 2010. produce* these pr

Question

A review of the ledger of Napier Company at December 31. 2010. produce* these prepare adjusting entries data pertaining to the preparation of annual adjusting entries. Prepaid Insurance $ 15.200. The company has separate insurance policies on its build­ings and its motor vehicles. Policy B4564 on the building was purchased on July I. 2009. foe S9.600. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on January I. 2010. for $7.200. This policy has a term of 2 years. Unearned Subscription Revenue $29,400. The company began selling magazine sub­scriptions on October !, 2010 on an annual basis. The selling price of a subscription is $30. A review of subscription contracts reveals the following. Notes Payable. $40,000: This balance consists of a note foe 6 months at an annual interest rate of 7%. dated October I. Salaries Pay able $0: There are eight salaried employees. Salaries are paid every Friday for the current week. Five employees receive a salary of $600 each per week, and three employees cam S700 each per week. Assume December 31 is a Wednesday. Employees do not work weekends. All employees worked the last 3 days of December, Instruction Prepare the adjusting entries at December 31. 2010.

Explanation / Answer

We are asked to book adjusting entries on December 31, 2010. Paying attention to dates in these types of problems is crucial. I will use the accounting shorthand for debit (DR) and credit (CR) in my journal entries. I'll do the first one for you and help you along with the rest. 1. Policy B4564, 3-year (36 months), purchased 7/1/09 for $9,600 $9,600/36 months = $266.67 per month $266.67 x 12 months (adjustment for 2010) = $3,200 Entry: DR: Insurance Expense 3,200 CR: Prepaid Insurance 3,200 Policy A2958, 2-year (24 months), purchased 1/1/10 for $7,200 $7,200/24 months = $300 per month $300 x 12 months (adjustment for 2010) = $3,600 Entry: DR: Insurance Expense 3,600 CR: Prepaid Insurance 3,600 Prepaid Insurance balance, 12/31/10: $15,200 - $3,200 - $3,600 = $8,400 Note: The above entries could most likely be combined into one. 2. Subscription revenue is not earned until the month for which it was paid has passed. $30 per annual subscription/12 months = $2.50 per month October (3 months until year-end) 280 x $2.50 x 3 = $2,100 DR: Subscription Revenue 2,100 CR: Unearned Revenue 2,100 Repeat that logic for November and December revenues. Or you could make one big entry instead of three. Update the Unearned Subscription Revenue balance by subtracting the earned revenues from it. 3. Multiply the face value of the note by the interest rate then by 3/12 (i.e. 3 months of the year since the note originated on October 1). Use the amount in the following entry: DR: Interest Expense CR: Interest Payable 4. Compute the total amount Salaries Expense to be paid out each week by multiplying 5 by $600 and 3 by $700, then add the two products together. Next, take that total and divide it by 5, which is the number of days each week for which employees are paid. This will give you the daily Salaries Expense figure. Finally, since we are dealing with a partial week, we have to compute a partial week's worth of Salaries expense. Year End is on a Wednesday, so that is three days worth of salaries that have accrued. Multiply the daily salaries figure by 3 and that will give you your Salaries Expense adjusting figure. Plug that number into the following entry: DR: Salaries Expense CR: Salaries Payable

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