Accounts Receivable And Accumulated Depreciation Equipment

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Garrett Wolfe Company needs to record adjusting entries for various transactions and accrued items as of December 31, 2012. These adjustments ensure that financial statements accurately reflect the company’s financial position at the end of the accounting period, following the matching and revenue recognition principles of accrual accounting. The following analysis and journal entries address seven specific adjustments based on the provided data.

Paper For Above instruction

1. Accrued interest on the note payable

Garrett Wolfe borrowed $9,975 on September 1, 2012, at 12% interest for one year. To accrue interest revenue or expense as of December 31, 2012, the company must recognize the interest accrued over three months (September to December). The interest calculation is as follows:

Interest = Principal × Rate × Time = $9,975 × 12% × (4/12) = $9,975 × 0.12 × 0.3333 ≈ $334

Since the company issued a note payable, it pays interest, so the adjusting entry is to recognize interest expense accrued but not yet paid:

Journal Entry:

• Debit: Interest Expense $334
• Credit: Interest Payable $334

2. Supplies adjustment

Initial supplies balance: $2,292. An inventory count shows supplies of $834 remaining at December 31, 2012. Therefore, supplies used during the period are ($2,292 - $834) = $1,458. The adjusting entry records supplies expense for the used supplies:

Journal Entry:

• Debit: Supplies Expense $1,458
• Credit: Supplies $1,458

3. Equipment depreciation

Annual depreciation expense on equipment is $1,397 for 2012. This amount needs to be recorded to allocate the cost of equipment over its useful life:

Journal Entry:

• Debit: Depreciation Expense—Equipment $1,397
• Credit: Accumulated Depreciation—Equipment $1,397

4. Prepaid insurance adjustment

The company paid $2,160 on June 1, 2012, for 12 months of insurance coverage. As of December 31, 2012, seven months (June through December) have expired. Insurance expense for these months is:

Insurance expense = $2,160 × (7/12) = $2,160 × 0.5833 ≈ $1,260

Remaining prepaid insurance at year-end is $2,160 - $1,260 = $900. The adjusting entry records insurance expense for the period:

Journal Entry:

• Debit: Insurance Expense $1,260
• Credit: Prepaid Insurance $1,260

5. Unearned service revenue recognition

Garrett Wolfe collected $30,800 on December 1, 2012, for services to be performed from December 1, 2012, through March 31, 2013. Since one month (December) has elapsed, the amount earned is proportional to one month:

Revenue earned = $30,800 × (1/4) = $7,700

The adjusting entry recognizes the revenue earned in December:

Journal Entry:

• Debit: Unearned Service Revenue $7,700
• Credit: Service Revenue $7,700

6. Accrued services revenue

Garrett Wolfe performed consulting services in December but has not yet billed the client. The billed amount is $4,441, which must be accrued as revenue in December with an adjusting entry:

Journal Entry:

• Debit: Accounts Receivable $4,441
• Credit: Service Revenue $4,441

7. Accrued salaries expense

Employees are paid $5,580 weekly for a 5-day workweek, and the last payment was made on Monday, December 29, covering December 24-28. However, employees worked the last three days of 2012 (December 29-31). The weekly salaries are $5,580, so the daily rate is $5,580 / 5 = $1,116. The salaries for December 29-31 are three days:

Salaries expense = $1,116 × 3 = $3,348

This amount has not yet been paid or recorded as of December 31, so the adjustment records accrued salaries:

Journal Entry:

• Debit: Salaries and Wages Expense $3,348
• Credit: Salaries and Wages Payable $3,348

Conclusion

Properly recording these adjusting entries ensures that Garrett Wolfe Company's financial statements accurately reflect the company's financial condition at year-end 2012. These adjustments align income and expenses with the period in which they were incurred, following the principles of accrual accounting.

References

• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting (12th ed.). John Wiley & Sons.
• Heisinger, K. (2015). Financial Accounting (4th ed.). South-Western Cengage Learning.
• Gibson, C. H. (2018). Financial Reporting & Analysis (13th ed.). Cengage Learning.
• Staubus, G. J. (2018). Managerial Accounting (4th ed.). Pearson.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting: A Business Perspective (10th ed.). McGraw-Hill Education.
• AccountingTools. (2022). Adjusting journal entries. https://www.accountingtools.com/articles/adjusting-journal-entries.html
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• CFO.com. (2021). Prepaid Expenses and how to record them. https://www.cfo.com/accounting-tax/2021/03/prepaid-expenses-and-how-to-record-them/
• AICPA. (2019). Understanding and preparing adjusting journal entries. https://www.aicpa.org/article/understanding-adjusting-journal-entries
• Fox, M. (2019). How to record accrued salaries. AccountingCoach. https://www.accountingcoach.com/blog/how-to-record-accrued-salaries