On July 1, 2019, Tim Stein established his own accounting practice. Selected tra

Question

On July 1, 2019, Tim Stein established his own accounting practice. Selected transactions for the first few days of July follow DATE TRANSACTIONS July 1 Signed a lease for an office and issued Check 101 for $14,400 to pay the rent in advance for six months. 1 Borrowed money from Second National Bank by issuing a four-month, 6 percent note for $33,600; received $32,928 because the bank deducted the interest in advance. 1 Signed an agreement with Carter Corp. to provide accounting and tax services for one year at $6,800 per month; received the entire fee of $81,600 in advance. 1 Purchased office equipment for $20,400 from Office Outfitters issued a two-month, 9 percent note in payment. The equipment is estimated to have a useful life of four years and a $2,160 salvage value. The equipment will be depreciated using the straight-line method 1 Purchased a one-year insurance policy and issued Check 102 for $1,716 to pay the entire premium. 3 Purchased office furniture for $23,200 from Furniture Warehouse; issued Check 103 for $13,400 and agreed to pay the balance in 60 days. The equipment has an estimated useful 1ife of six years and a $1,600 salvage value. The office furniture will be depreciated using the straight-line method 5 Purchased office supplies for $1,970 with Check 104. Assume $880 of supplies are on hand July 31, 2019. Required 1. Record the transactions in the general journal. Assume that the firm initially records prepaid expenses as assets and unearned income as a liability for the year 2019 2. Record the adjusting journal entries that must be made on July 31, 2019 Analyze: What balance should be reflected in Unearned Accounting Fees at July 31, 2019?

Explanation / Answer

Journal entries to record the transactions:

Journal Entries:

Date

Account Titles and Explanation

Ref. No.

Debit

Credit

1-Jul-19

Prepaid Rent

$14,400

Cash

$14,400

(To record payment of 6 months rent in advance for office space leased)

1-Jul

Cash

$32,928

Prepaid Interest

$672

Notes Payable

$33,600

(To record money borrowed from Second National Bank, and interest deducted in advance)

1-Jul-19

Cash

$81,600

Unearned Accounting Fee

$81,600

(To record accounting fee received in advance to provide services for 1 year)

1-Jul-19

Office Equipment

$20,400

Notes Payable

$20,400

(To record purchase of office equipment by issue of notes payable)

3-Jul-19

Office Furniture

$23,200

Cash

$13,400

Accounts Payable

$9,800

(To record purchase of office furniture partly by cash and balance to be paid in 60 days)

5-Jul-19

Office Supplies

$1,970

Cash

$1,970

(To record purchase of office supplies)

1 Jul, 2019

Prepaid Insurance

$1,716

Cash

$1,716

(To record purchase of one-year insurance policy)

2. Adjusting Entries as on July 31, 2019:

Date

Account Titles and Explanation

Ref. No.

Debit

Credit

31-Jul-19

Rent Expense

$2,400

Prepaid Rent

$2,400

(To recognize expired portion of prepaid rent as rent expense for July, 14,400/6 = $2,400)

31-Jul-19

Unearned Accounting Fee

$6,800

Service Revenue

$6,800

(To recognize revenue for services in July )

31-Jul-19

Depreciation Expense - Office Equipment

$380

Accumulated Depreciation - Office Equipment

$380

(To record depreciation expense on office equipment for the month of July)

31-Jul-19

Interest Expense

$918

Interest Payable

$918

(To record interest due for July on notes payable issued for purchase of office equipment)

31-Jul-19

Depreciation Expense - Office Furniture

$300

Accumulated Depreciation - Office Furniture

$300

(To record depreciation expense on office furniture for the month of July)

31 Jul, 2019

Supplies Expense

$1,090

Office Supplies

$1,090

(To record cost of supplies used for the month of July)

31 July, 2019

Insurance Expense

$143

Insurance Premium

$143

(To record insurance expense for the month of July)

31-Jul-19

Interest Expense

$504

Prepaid Interest

$504

(To record expired portion of prepaid interest)

Prepaid rent for 6 months = 14,400

Rent for 1 month = 14,400/6 = $2,400

Unearned rent revenue = $6,800 per month x 12 = $81,600

Earned portion of unearned rent revenue for July= 1 month revenue = $6,800

Straight line depreciation = (Cost – salvage value) x 1/useful life

= (20,400 – 2,160) x ¼ = $4,560

Depreciation expense for July, 1 month = 4,560 x 1/12 = $380

Straight line depreciation = (Cost – salvage value) x 1/useful life

= (23,200 – 1,600) x 1/6 = $3,600

Depreciation expense for July, 1 month = 3,600 x 1/12 = $300

Prepaid insurance , 1-year = $1,716

Insurance expense for 1 month = 1,716/12 = $143

Supplies at the beginning- supplies at the end of the month

Cost of supplies used/supplies expense = 1,970 – 880 = $1,090

Note payable = $20,400

Interest expense = 20,400 x 9% x ½ = $918

Prepaid interest on money borrowed = $33,600 - $32,928 = $672

Interest for the month of July at 6%, 4- month period = 33,600 x 6% x ¼ = $504

3. Determination of the balance to be reflected in Unearned Accounting Fee at July 31, 2019:

Unearned accounting fee received = $81,600

Accounting fee for July = $6,800

Balance in Unearned Accounting Fee = 81,600 – 6,800 = $74,800

Journal Entries:

Date

Account Titles and Explanation

Ref. No.

Debit

Credit

1-Jul-19

Prepaid Rent

$14,400

Cash

$14,400

(To record payment of 6 months rent in advance for office space leased)

1-Jul

Cash

$32,928

Prepaid Interest

$672

Notes Payable

$33,600

(To record money borrowed from Second National Bank, and interest deducted in advance)

1-Jul-19

Cash

$81,600

Unearned Accounting Fee

$81,600

(To record accounting fee received in advance to provide services for 1 year)

1-Jul-19

Office Equipment

$20,400

Notes Payable

$20,400

(To record purchase of office equipment by issue of notes payable)

3-Jul-19

Office Furniture

$23,200

Cash

$13,400

Accounts Payable

$9,800

(To record purchase of office furniture partly by cash and balance to be paid in 60 days)

5-Jul-19

Office Supplies

$1,970

Cash

$1,970

(To record purchase of office supplies)

1 Jul, 2019

Prepaid Insurance

$1,716

Cash

$1,716

(To record purchase of one-year insurance policy)

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