Question

Arnez Company’s annual accounting period ends on December 31. The following information concerns the adjusting entries to be recorded as of that date. The Office Supplies account started the year with a $3,850 balance. During the year, the company purchased supplies for $15,901, which was added to the Office Supplies account. The inventory of supplies available at December 31 totaled $3,388. The Prepaid Insurance account had a $27,744 debit balance at December 31 before adjusting for the costs of any expired coverage for the year. An analysis of prepaid insurance shows that $20,004 of unexpired insurance coverage remains at year-end. The company has 15 employees, who earn a total of $1,800 in salaries each working day. They are paid each Monday for their work in the five-day workweek ending on the previous Friday. Assume that December 31 is a Tuesday, and all 15 employees worked the first two days of that week. Because New Year’s Day is a paid holiday, they will be paid salaries for five full days on Monday, January 6 of next year. The company purchased a building at the beginning of this year. It cost $725,000 and is expected to have a $45,000 salvage value at the end of its predicted 25-year life. Annual depreciation is $27,200. Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at $3,400 per month, starting on November 1. The rent was paid on time on November 1, and the amount received was credited to Rent Revenue. However, the tenant has not paid the December rent. The company has worked out an agreement with the tenant, who has promised to pay both December and January rent in full on January 31. On November 1, the company rented space to another tenant for $3,080 per month. The tenant paid five months' rent in advance on that date. The payment was recorded with a credit to the Unearned Revenue account. Assume no other adjusting entries are made during the year. Required: 1. Use the information to prepare adjusting entries as of December 31. 2. Prepare journal entries to record the first subsequent cash transaction in January of the next year for parts c and e.

Answer 1

1. The preparation of the adjusting entries as of December 31 for Arnez Company is as follows:

Adjusting Journal Entries:

1. Debit Office Supplies Expenses $16,363

Credit Office Supplies $16.363

2. Debit Insurance Expenses $7,740

Credit Prepaid Insurance $7,740

3. Debit Salaries Expenses $54,000

Credit Salaries Payable $54,000

4. Debit Rent Receivable $3,400

Credit Rent Revenue $3,400

5. Debit Unearned Rent Revenue $6,160

Credit Rent Revenue $6,160

2. The preparation of the journal entries to record the first subsequent cash transactions in January of the next year for Arnez Company is as follows:

Journal Entries:

Debit Salaries Payable $54,000

Credit Cash $54,000

Debit Cash $6,800

Credit Rent Receivable $3,400

Credit Rent Revenue $3,400

Adjusting Transaction Analysis:

1. Office Supplies Expenses $16,363 Office Supplies $16.363 ($3,850 + $15,901 - $3,388)

2. Insurance Expenses $7,740 Prepaid Insurance $7,740 ($27,744 - $20,004)

3. Salaries Expenses $54,000 Salaries Payable $54,000 ($1,800 x 15 x 2)

4. Rent Receivable $3,400 Rent Revenue $3,400

5. Unearned Rent Revenue $6,160 Rent Revenue $6,160 ($3,080 x 2)

January Transactions:

Salaries Payable $54,000 Cash $54,000

Cash $6,800 Rent Receivable $3,400  Rent Revenue $3,400

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