Year one is the first year of business renting apartments to students at the edg
ID: 2409087 • Letter: Y
Question
Year one is the first year of business renting apartments to students at the edge of USC's main campus. At the end of the year maintenance personnel had earned $400 for which they were never paid. Also at the end of year one, tenants had rented out several of the apartments but never paid the $800 rent. In year two maintenance personnel earned another $500 of wages and still did not get paid. New students moved in but never paid their $1,200 in total rent for the year. At the end of year two, no rent was ever collected nor were any wages paid since the business began. Requirement: Record the adjusting entries (if any) for each year to account for the described events. Do the year end closing entries for each of the two years. Post to the ledger for each year. Indicate with year numbers all transactions on the T accounts. Label each T account according to the proper account classification in parenthesis (ie. Asset, liability, revenue, etc.) Label adjusting journal entries (adj) and closing journal entries (cls). Required: Produce the Income statement for each year. Why do we do adjusting entries (think of how the income statement and balance sheet are off if we do not do adjusting entries)? What does this problem teach you about revenue and expense recognition relative to cash disbursement and cash receipt? What happens to your balance sheet accounts versus your income statement accounts each year?
Explanation / Answer
T-accounts:
Adjusting entries are prepared to convert the accounts from cash basis to accrual basis by recognizing all revenues that have been earned but not received and all expenses that have been incurred but not paid.
Without adjusting entries, the income statement would not give a correct picture of the net income earned during the year and the balance sheet would not reflect the correct financial position of the business. For example, in Year 1 and 2 above, there would be no net income since no revenue is received or expense paid.
Revenue and expense recognition is independent of the cash receipt and cash disbursement. Revenue is recognized when earned irrespective of when cash for the same is received. Similarly, expenses are recognized when incurred irrespective of when cash disbursement for the same is made.
The ending balance in the balance sheet accounts is carried over to the next financial period while the income statement accounts are closed at the end of every period and start with a nil balance in the next period.
Adjusting entries: Date General Journal Debit Credit Year 1 Adj. 1 Wages expense 400 Wages payable 400 (To record wages accrued but not paid) Adj. 2 Accounts receivable 800 Rent revenue 800 (To record rent accrued but not received) Year 2 Adj. 1 Wages expense 500 Wages payable 500 (To record wages accrued but not paid) Adj. 2 Accounts receivable 1200 Rent revenue 1200 (To record rent accrued but not received) Closing entries: Date General Journal Debit Credit Year 1 Cls. 1 Rent revenue 800 Income summary 800 (To close revenue account) Cls. 2 Income summary 400 Wages expense 400 (To close expense account) Cls. 3 Income summary 400 Retained earnings 400 (To close income summary) Year 2 Cls. 1 Rent revenue 1200 Income summary 1200 (To close revenue account) Cls. 2 Income summary 500 Wages expense 500 (To close expense account) Cls. 3 Income summary 700 Retained earnings 700 (To close income summary)Related Questions
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