Blue Ink, Inc has the following unadjusted account balances at year end December
ID: 2477883 • Letter: B
Question
Blue Ink, Inc has the following unadjusted account balances at year end December 31, 2017
At Year-end Blue Ink, Inc. makes adjusting journal entries to properly record revenue and expenses. The following information applies to the adjusting journal entries.
a. The prepaid insurance balance relates to an insurance policy purchased on January 1, 2017, that covers the period of 1/1/17 - 12/31/17.
b. The prepaid rent balance relates to rent paid in June,, 2017 to cover period of 7/1/17 - 6/30/18.
c. Wages for 2017 in the amount of $26,000 will be paid after year-end and have not yet been recorded.
d. Blue Ink purchased equipment Jan 1, 2017and will depreciate the equipment on an annual basis. No depreciation has been recorded. The equipment has a useful life of 15 years, no residual value and will be depreciated on a straight-line basis.
Required: Provide the appropriate adjusting entries.
Cash 430,000 Accounts Receivable 2,000 Prepaid Insurance 14,000 Prepaid Rent 22,000 Equipment 60,000 Accumulated Depreciation --- Accounts Payable 10,000 Common Stock 16,000 Sales Revenue 823,100 Wages Expense 290,400 Utilities Expense 11,200 Insurance Expense 8,500 Rent Expense 11,000 Depreciation Expense ---Explanation / Answer
We have to determine the expenses relating to the period 1/1/17 - 12/31/17 and transfer the remaining balance to relevant prepaid or outstanding accounts.
a) The prepaid insurance balance relates to the current period and is to be recognized as expense entirely.
b) The rent is paid for 12 months out of which 6 month period is relating to current year. So, Prepaid expense =
$22,000 x 6 / 12 = $11,000
c) Wages outstanding are current year expenses and are to be recorded in current year.
d) Depreciation as per straight line method = (Purchase price - Salvage value) / Number of useful life
= ($60,000 - ) / 15 = $5,000 per year.
Adjusting Entries
Sl. No. Particulars Amount Dr Amount Cr a Insurance expense 14000 Prepaid Insurance 14000 (Being relevant portion of insurance recognized as expense) b Rent Expense 11000 Prepaid Rent 11000 (Being rent relating to the period July, 2017 to December 2017 recognized as expense) c Wages expense 26000 Outstanding Wages 26000 d Depreciation expense 5000 Accumulated depreciation 5000 (Being depreciation of 2017 recognized as expense)