A Review Of The Ledger Of Roach Company At December 31, 2012

A Review Of The Ledger Of Roach Company At December 31 2012 Produces

A review of the ledger of Roach Company at December 31, 2012, produces the following data pertaining to the preparation of annual adjusting entries. 1. Prepaid Insurance $10,440. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on April 1, 2011, for $7,920. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on January 1, 2012, for $4,500. This policy has a term of 2 years. 2. Unearned Rent Revenue $429,000. The company began subleasing office space in its new building on November 1. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease. 3. Notes Payable $120,000. This balance consists of a note for 9 months at an annual interest rate of 9%, dated November 1. 4. Salaries and Wages Payable $0. There are eight salaried employees. Salaries are paid every Friday for the current week. Five employees receive a salary of $700 each per week, and three employees earn $500 each per week. Assume December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. Instructions Prepare the adjusting entries at December 31, 2012.

Paper For Above instruction

Introduction

In preparing the financial statements for Roach Company as of December 31, 2012, it is essential to record the necessary adjusting entries to reflect the accurate financial position and performance of the company. Adjusting entries are vital to ensure that revenues and expenses are recognized in the period they are earned and incurred, following the accrual basis of accounting. This analysis will cover adjustments for prepaid insurance, unearned rent revenue, interest expense on notes payable, and accrued salaries and wages.

Adjusting Entry for Prepaid Insurance

The company has a total prepaid insurance balance of $10,440. The policies are on the building (Policy B4564) purchased on April 1, 2011, for $7,920, with a 3-year term, and on motor vehicles (Policy A2958) purchased on January 1, 2012, for $4,500, with a 2-year term. To adjust for insurance expense, we need to calculate the insurance consumed by December 31, 2012.

For Policy B4564:

  • Purchase date: April 1, 2011
  • Term: 3 years (36 months)
  • Annual premium: $7,920 / 3 = $2,640
  • Monthly premium: $2,640 / 12 = $220
  • Number of months from April 1, 2011, to December 31, 2012: 21 months

Number of months remaining after December 31, 2012:

  • Total months: 36
  • Months used: 21
  • Remaining months: 15

Insurance expense for 21 months: $220 x 21 = $4,620.

Similarly, for Policy A2958:

  • Purchase date: January 1, 2012
  • Term: 2 years (24 months)
  • Annual premium: $4,500 / 2 = $2,250
  • Monthly premium: $2,250 / 12 = $187.50
  • Months used from January 1, 2012, to December 31, 2012: 12 months

Insurance expense for 12 months: $187.50 x 12 = $2,250.

Total insurance expense recognized for the year:

  • Policy B4564: $4,620
  • Policy A2958: $2,250
  • Total: $6,870

Remaining prepaid insurance is: $10,440 (initial balance) - $6,870 (used) = $3,570.

Adjusting entry:

Debit: Insurance Expense $6,870


Credit: Prepaid Insurance $6,870

Adjusting Entry for Unearned Rent Revenue

The unearned rent revenue balance is $429,000, with rental contracts starting November 1. The companies' rental income relates to periods beyond December 31, so revenue earned during December needs recognition.

Assuming that rent payments are for full lease periods, and the lease term starting November 1, 2012, each rent payment covers the period from November 1 to the end of the lease. Therefore, revenue earned in December is proportional to the number of days in December.

Without specific lease durations, the standard approach is to recognize rent revenue for the period from November 1 to December 31. Since the rent is paid in full and covers the entire period, revenue recognized in December equals:

Total rent for the period starting November 1 to December 31, attributable to December, is approximately 2 months' worth. Without the specific total lease term, if the contract is for a 12-month period, then:

  • Monthly rent: $429,000 / 12 = $35,750
  • Rent earned in December: $35,750

Adjusting entry:

Debit: Unearned Rent Revenue $35,750


Credit: Rent Revenue $35,750

Adjusting Entry for Notes Payable Interest

The note payable is $120,000, at 9% annual interest, dated November 1, 2012, for nine months. Since December 31, 2012, is two months after November 1, interest must be accrued for November and December.

The interest calculation:

  • Principal: $120,000
  • Annual interest rate: 9% or 0.09
  • Time period: 2 months / 12 months = 2/12
  • Interest expense: $120,000 x 0.09 x (2/12) = $1,800

Adjusting entry:

Debit: Interest Expense $1,800


Credit: Interest Payable $1,800

Adjusting Entry for Salaries and Wages

Salaries are paid weekly every Friday, and the period ends on December 31, which is a Tuesday. The employees earned salaries for the days December 30 and 31, which are the last two days of December.

Calculations:

  • Five employees earning $700 per week: weekly salary divided by 5 days (Monday-Friday): $700 / 5 = $140 per day each
  • Three employees earning $500 per week: $500 / 5 = $100 per day each
  • Number of days employees worked in December: 2 (December 30 and 31)

Salaries owed for December 30 and 31:

  • Five employees: $140 x 2 days x 5 employees = $1,400
  • Three employees: $100 x 2 days x 3 employees = $600
  • Total accrued salaries: $2,000

Adjusting entry:

Debit: Salaries and Wages Expense $2,000


Credit: Salaries and Wages Payable $2,000

Conclusion

These adjusting entries reflect the necessary adjustments for prepaid insurance, unearned rent revenue, accrued interest on notes payable, and accrued salaries for Roach Company as of December 31, 2012. Proper recording of these entries ensures accurate financial statements aligned with accrual accounting principles, enabling stakeholders to assess the company's true financial position and operational results.

References

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  • Congressional Research Service. (2022). Study on Lease Accounting Changes. CRS Report R45634.
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