A Review Of The Ledger Of Roach Company At December 3 669375

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.

Paper For Above instruction

Introduction

The process of preparing accurate financial statements hinges on the precise recording and adjustment of financial data at the end of an accounting period. The review of Roach Company’s ledger as of December 31, 2012, reveals critical account balances that necessitate proper adjusting entries to reflect the company’s true financial position and performance. The primary accounts under consideration include Prepaid Insurance and Unearned Rent Revenue, each requiring an analysis of the relevant policies, periods, and income recognition principles to ensure compliance with accounting standards.

Analysis of Prepaid Insurance

Prepaid insurance is an asset representing amounts paid in advance for insurance coverage that extends beyond the current accounting period. The ledger shows a balance of $10,440 in prepaid insurance. This balance encompasses separate policies on buildings and motor vehicles, each with distinct purchase dates, amounts, and coverage durations.

The building insurance policy (B4564) was purchased on April 1, 2011, for $7,920, with a three-year term. The motor vehicle policy (A2958) was purchased on January 1, 2012, for $4,500, with a two-year term. To adjust these balances accurately, the company must calculate the insurance expense incurred during the year ending December 31, 2012.

For the building insurance:

- Annual premium = $7,920 / 3 years = $2,640 per year

- Coverage from April 1, 2011, to December 31, 2012, spans approximately 1 year and 9 months.

- Insurance expense for 2012 = $2,640 (annual) since coverage begins April 1, 2011, and the policy is active through the entire 2012 year.

For the vehicle insurance:

- Annual premium = $4,500 / 2 years = $2,250 per year

- Policy started on January 1, 2012

- Insurance expense for 2012 = $2,250 (full year's coverage)

The total insurance expense for 2012 would thus be:

- Building: $2,640

- Vehicles: $2,250

Total: $4,890

The remaining prepaid insurance at year-end should reflect the unexpired portion of the policies, which are expenses to be recorded in the income statement, and the prepaid asset corresponding to the unspent amount.

Adjustment for Prepaid Insurance

The adjusting entry involves debiting Insurance Expense ($4,890) and crediting Prepaid Insurance ($10,440 - $4,890 = $5,550). This adjustment ensures that the expense reflects the cost of insurance coverage used during 2012, aligning with the matching principle, and reduces the prepaid asset accordingly.

Analysis of Unearned Rent Revenue

Unearned rent revenue of $429,000 represents amounts received in advance for rent, related to leasing office space in a new building. The subleasing began on November 1, indicating that the revenue earned within December 31, 2012, pertains to the two months from November 1 to December 31.

The details specify that the rent contracts are paid in full for their entire terms, implying that the initial receipts are recorded as unearned revenue until earned over time. To recognize the earned portion, the company must determine the monthly rent from the total unearned amount and record revenue accordingly.

Assuming the entire amount of $429,000 pertains to the current leases, the company needs to allocate the revenue for the two months of November and December.

Calculation:

- Monthly rent = $429,000 / total lease months (assuming full term length is known; if not specified, we can assume the amount covers the entire lease period, but for simplicity, consider the ratio of months served).

- Since the revenue is fully paid for the entire lease, only two months of that are earned in December.

- The earned revenue for November and December = the monthly rent times 2 months.

Without explicit lease durations, an approximate approach is:

- If the lease terms are, for example, 12 months, then:

- Monthly rent = $429,000 / 12 = $35,750

- Revenue earned in December = $35,750

- Revenue earned in November = $35,750

Thus, total rent earned as of December 31, 2012, is $71,500 (for the two months).

The adjusting journal entry would be:

- Debit Rent Revenue $71,500

- Credit Unearned Rent Revenue $71,500

This redistributes the revenue from unearned to earned, reflecting the occupancy and usage of the leased space during the period.

Conclusion

Correctly preparing the adjusting entries for the Prepaid Insurance and Unearned Rent Revenue accounts ensures the financial statements reflect the true expenses and revenues for the fiscal year ending December 31, 2012. These adjustments align with generally accepted accounting principles (GAAP), particularly the matching principle and revenue recognition criteria, which stipulate that expenses should be recognized when incurred and revenues when earned, regardless of cash flows.

Accurate adjustments not only provide transparency but also improve the decision-making process for management, investors, and creditors. Through systematic analysis of policies and balance components, Roach Company can maintain integrity and reliability in its financial reporting, complying with professional standards and fostering stakeholder trust.

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