Dittman?s Variety Store is completing the accounting process for the year just e
ID: 2644567 • Letter: D
Question
Dittman?s Variety Store is completing the accounting process for the year just ended, December 31, 2014. The transactions during 2014 have been journalized and posted. The following data with respect to adjusting entries are available:
Wages earned by employees during December 2014, unpaid and unrecorded at December 31, 2014, amounted to $2,700. The last payroll was December 28; the next payroll will be January 6, 2015.
Office supplies on hand at January 1, 2014, totaled $450. Office supplies purchased and debited to Office Supplies during the year amounted to $500. The year-end count showed $275 of supplies on hand.
One-fourth of the basement space is rented to Heald?s Specialty Shop for $560 per month, payable monthly. On December 31, 2014, the rent for November and December 2014 had not been collected or recorded. Collection is expected January 10, 2015.
The store used delivery equipment that cost $60,500; $12,100 was the estimated depreciation for 2014.
On July 1, 2014, a two-year insurance premium amounting to $2,400 was paid in cash and debited in full to Prepaid Insurance. Coverage began on July 1, 2014.
The remaining basement of the store is rented for $1,600 per month to another merchant, M. Carlos, Inc. Carlos sells compatible, but not competitive, merchandise. On November 1, 2014, the store collected six months? rent in the amount of $9,600 in advance from Carlos; it was credited in full to Unearned Rent Revenue when collected.
Dittman?s Variety Store operates a repair shop to meet its own needs. The shop also does repairs for M. Carlos. At the end of December 31, 2014, Carlos had not paid $800 for completed repairs. This amount has not yet been recorded as Repair Shop Revenue. Collection is expected during January 2015.
a.Wages earned by employees during December 2014, unpaid and unrecorded at December 31, 2014, amounted to $2,700. The last payroll was December 28; the next payroll will be January 6, 2015.
b.Office supplies on hand at January 1, 2014, totaled $450. Office supplies purchased and debited to Office Supplies during the year amounted to $500. The year-end count showed $275 of supplies on hand.
c.One-fourth of the basement space is rented to Heald?s Specialty Shop for $560 per month, payable monthly. On December 31, 2014, the rent for November and December 2014 had not been collected or recorded. Collection is expected January 10, 2015.
d.The store used delivery equipment that cost $60,500; $12,100 was the estimated depreciation for 2014.
e.On July 1, 2014, a two-year insurance premium amounting to $2,400 was paid in cash and debited in full to Prepaid Insurance. Coverage began on July 1, 2014.
f.The remaining basement of the store is rented for $1,600 per month to another merchant, M. Carlos, Inc. Carlos sells compatible, but not competitive, merchandise. On November 1, 2014, the store collected six months? rent in the amount of $9,600 in advance from Carlos; it was credited in full to Unearned Rent Revenue when collected.
g.Dittman?s Variety Store operates a repair shop to meet its own needs. The shop also does repairs for M. Carlos. At the end of December 31, 2014, Carlos had not paid $800 for completed repairs. This amount has not yet been recorded as Repair Shop Revenue. Collection is expected during January 2015.
Income Statement Balance Sheet Stockholders Revenues Stockholders' Equity Liabillt!os Revenues Expenses Net Income Transaction AssetsLiabilitiesExplanation / Answer
Important Information:
Transaction a)
Wages unpaid at the end of the year will result in an increase in outstading expenses towards wages payable and a corresponding increase in "Accrued Wages" which is a liability. An increase in expenses would result in a decrease in net income and a resulting decrease in stockholder's equity (as lesser income would get transferred to retained earnings.
________
Transaction b)
The total amount of office supplies that would be adjusted at year end = Opening + Purchases - Closing = 450 + 500 - 275 = $675. The amount of office supplies used ($675) during the year will result in a decrease in assets. It would also be reported as an expense resulting in a decrease in the net income with a corresponding decrease in stockholder's equity.
________
Transaction c)
2 months rent (560*2 = $1120) will be reported as an increase in revenue resulting in a corresponding increase in net income and stockholder's equity. Total value of assets will also increase.
________
Transaction d)
The total amount of depreciation will result in an increase in total expenses resulting in a decrease in net income with a corresponding decrease in stockholder's equity. The balance of accumulated depreciation as reported in the balance sheet will also increase, resulting in decrease in the balance of total assets.
________
Transaction e)
Since, the insurance premium has been paid for 2 years, we will report the premium only for the relevant period, that is, from Ist July 2014 to 31st December 2014 (6 months). Total amount that would get adjusted would be $600 ($2,400*6/24). It would result in an increase in total expenses, with a corresponding decrease in net income and stockholder's equity. Total assets would also get reduced after the adjustment (because prepaid insurance is reported as a current asset in the balance sheet).
________
Transaction f)
The amount of rent that would get adjusted for 2 months would be $3,200 (9,600*2/6) at 31st December 2014. At the time of adjustment, total revenues will increase (because of transfer from unearned revenue) resulting in a corresponding increase in net income and stockholder's equity. The liability of unearned revenue as reported in the balance sheet would get reduced.
________
Transaction g)
Since, the services have already been performed, we will recognize the amount of $800 due, as the revenue for the year 2014. Accordingly, the total amount of revenues would increase resulting in an increase in net income and stockholder's equity. It will also result in an increase in accounts receivables balance in the balance sheet resulting in an increase in total assets.
Balance Sheet Income Statement Transaction Assets Liabilities Stockholder's Equity Revenues Expenses Net Income a 0 2,700 -2,700 0 2,700 -2,700 b -675 0 -675 0 675 -675 c 1,120 0 1,120 1,120 0 1,120 d -12,100 0 -12,100 0 12,100 -12,100 e -600 0 -600 0 600 -600 f 0 -3200 3,200 3,200 0 3,200 g 800 0 800 800 0 800