The trial balance of Active Fitness shows the following balances for selected ac
ID: 2498205 • Letter: T
Question
The trial balance of Active Fitness shows the following balances for selected accounts on November 30, 2014:
Prepaid Insurance $10,000 Unearned Fitness Revenue $ 22,800
Equipment 68,400 Note Payable 32,000
Accumulated Depreciation 11,700 Rent Receivable 500
Instructions: Using the additional information given below, prepare the appropriate monthly adjusting entries at November 30. Show computations. Additionally, in answer 6 in sentence form.
1. Revenue earned for fitness center fees, but not yet billed, totaled $2,700 on November 30.
2. The note payable is a 9%, 1-year note issued October 1, 2014.
3. The equipment was purchased on January 2, 2012. It has an estimated life of 8 years and an estimated salvage value of $6,000. Active Fitness uses the straight-line depreciation method.
4. An insurance policy was acquired on June 30, 2014; the premium paid for 1 year had a cost of $15,000.
5. Active Fitness received $22,800 in advance on November 1, 2014, from customers who paid for 3 months of prepaid fitness fees.
6. In a couple sentences explain in your own words why adjusting entries are needed.
Explanation / Answer
1. Revenue earned for fitness center fees, but not yet billed, totaled $2,700 on November 30.
Dr Accounts Receivable 2,700
Cr Service Revenue 2,700
2. The note payable is a 9%, 1-year note issued October 1, 2014.
Dr Interest Expense 2,400 (32,000 x 9% x 1/12)
Cr Interest Payable 2,400
3. The equipment was purchased on January 2, 2012. It has an estimated life of 8 years and an estimated salvage value of $6,000. Active Fitness uses the straight-line depreciation method.
Dr Depreciation Expense--Equipment 650
Cr Accumulated Depreciation--Equipment 650
4. An insurance policy was acquired on June 30, 2014; the premium paid for 1 year had a cost of $15,000.
Dr Insurance Expense 625 (15,000 / 24)
Cr Prepaid Insurance 625
5. Active Fitness received $22,800 in advance on November 1, 2014, from customers who paid for 3 months of prepaid fitness fees.
Dr Unearned Revenue 15,200 ($22,800 x 2/3)
Cr Service Revenue 15,200
6. In a couple sentences explain in your own words why adjusting entries are needed.
Adjustment entries are journal entries made at the end of accounting period to allocate revenue & expense to the period in which they are actually applicable. Adjustment entries are required because normal journal entries are based on actual transaction, and the date on which actual transactions occur may not be date required to fulfill the matching principle of accrual accounting.
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