Elected Amounts At December 31, 2003, From The Hay And Barna
Elected Amounts At December 31 2003 From The Hay And Barnabas Compan
Elected amounts at December 31, 2003, from the Hay and Barnabas Company’s information system appear as follows: Cash paid employees for salaries and wages $300,000; Cash collected from sales customers $1,850,000; Bonds payable $500,000; Cash $150,000; Common stock $60,000; Equipment $840,000; Prepaid insurance $30,000; Inventory $250,000; Prepaid rent $140,000; Retained earnings $130,000; Salaries and wages expense $328,000; Sales $2,000,000. The task is to analyze adjustments and classify items for the December 31, 2003, balance sheet.
Paper For Above instruction
The financial statements of a company serve as a vital communication tool for stakeholders, providing an accurate snapshot of the company's financial position at a specific point in time. When preparing financial statements, accurate adjustments are crucial to reflect the true economic reality of the entity's assets, liabilities, and equity. This paper will analyze the effects of five specific adjustments on the accounting equation and classify those items into appropriate balance sheet categories, based on the December 31, 2003, financial data of the Hay and Barnabas Company.
Part A: Effect of Adjustments on the Accounting Equation
The accounting equation—Assets = Liabilities + Stockholders’ Equity—must be balanced after adjustments. The following five adjustments influence various accounts:
- Depreciation of Equipment: The company purchased equipment on January 1, 2003, with a useful life of 12 years and no salvage value, using straight-line depreciation. Annual depreciation expense equals the equipment cost divided by its useful life.
- Interest Accrued on Bonds Payable: An accrued interest of $20,000 on bonds payable as of December 31, 2003, needs to be recognized, increasing liabilities.
- Unexpired Insurance: Prepaid insurance totals $30,000, with $7,000 unexpired at year-end. The expired portion of insurance ($23,000) is an expense, reducing prepaid insurance and retained earnings.
- Prepaid Rent: Rent paid for four months from December 1, 2003, through March 31, 2004, totals $140,000. Since December 2003 is only one month, $35,000 of rent expense should be recognized, decreasing prepaid rent.
- Salaries and Wages Payable: Salaries earned but unpaid ($28,000) at December 31, 2003, are liabilities, increasing accrued expenses and reducing retained earnings.
Effect on the Accounting Equation:
For each adjustment:
- Depreciation Expense: Reduces equipment net book value (via accumulated depreciation), decreases assets, with a corresponding expense reducing retained earnings and stockholders’ equity.
- Interest Payable: Increases liabilities, no immediate effect on assets; reduces net income, thus decreasing retained earnings.
- Prepaid Insurance: Decrease in current asset (Prepaid Insurance) and recognition of Insurance Expense, which reduces net income and retained earnings.
- Prepaid Rent: Decrease in prepaid rent (asset), recognition of rent expense, reducing net income and retained earnings.
- Salaries and Wages Payable: Increase in liabilities (salaries payable), with an expense recognized, decreasing retained earnings and stockholders’ equity.
Part B: Classification of Items on the December 31, 2003, Balance Sheet
Based on the adjustments and original balances, the classification of each item is as follows:
| Item | Classification | Notes |
|---|---|---|
| Cash | Current Asset | Available on hand or on deposit |
| Cash collected from sales | Not a balance sheet item | Sales figure appears in income statement |
| Bonds payable | Long-term Liability | Due after one year from balance sheet date |
| Common stock | Stockholders’ Equity | Part of owners’ equity representing invested capital |
| Equipment | Property, Plant, and Equipment | Long-term asset used in operations |
| Prepaid insurance | Current Asset | Prepaid expense that will be consumed within a year |
| Inventory | Current Asset | Goods available for sale |
| Prepaid rent | Current Asset | Prepaid expense applicable to the upcoming year |
| Retained earnings | Stockholders’ Equity | Accumulated net income retained in the business |
| Salaries and wages expense | Income Statement Item | Reported on the income statement, affects retained earnings |
Conclusion
Adjustments are fundamental to accurate financial reporting, reflecting expenses incurred, obligations, and consumption of prepaid assets. Proper classification of assets, liabilities, and equity ensures clarity and useful insights for stakeholders. The Hay and Barnabas Company’s adjustments highlight the importance of meticulous accounting procedures to produce truthful and compliant financial statements, relying on a systematic approach to recording, recognizing, and classifying financial data.
References
- Gibson, C. H. (2020). Financial Reporting & Analysis. Cengage Learning.
- Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2019). Introduction to Financial Accounting. Pearson.
- Shim, J. K., & Siegel, J. G. (2019). Financial Statement Analysis. McGraw-Hill Education.
- Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting. Wiley.
- Antonio, P., & Mohamed, A. (2018). Principles of Accounting. Routledge.
- Kieso, D., Weygandt, J., & Warfield, T. (2019). Intermediate Accounting. Wiley.
- Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
- Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification.
- International Financial Reporting Standards (IFRS). (2021). IAS 1 Presentation of Financial Statements.
- Horngren, C. T., et al. (2021). Cost Accounting: A Managerial Emphasis. Pearson.