Pastina Company Sells Various Types Of Pasta To Grocery Chai

Pastina Company Sells Various Types Of Pasta To Grocery Chains As Priv

Pastina Company sells various types of pasta to grocery chains as private label brands. The company's fiscal year-end is December 31. The unadjusted trial balance as of December 31, 2016, appears below. Account Title Debits Credits Cash 30,000 Accounts receivable 40,000 Supplies 1,500 Inventory 60,000 Note receivable 20,000 Interest receivable 0 Prepaid rent 2,000 Prepaid insurance 0 Office equipment 80,000 Accumulated depreciation—office equipment 30,000 Accounts payable 31,000 Salaries and wages payable 0 Note payable 50,000 Interest payable 0 Deferred revenue 0 Common stock 60,000 Retained earnings 24,500 Sales revenue 148,000 Interest revenue 0 Cost of goods sold 70,000 Salaries and wages expense 18,900 Rent expense 11,000 Depreciation expense 0 Interest expense 0 Supplies expense 1,100 Insurance expense 6,000 Advertising expense 3,000 Totals 343,500. Information necessary to prepare the year-end adjusting entries appears below: 1. Depreciation on the office equipment for the year is $10,000. 2. Employee salaries and wages are paid twice a month, on the 22nd for salaries and wages earned from the 1st through the 15th, and on the 7th of the following month for salaries and wages earned from the 16th through the end of the month. Salaries and wages earned from December 16 through December 31, 2016, were $1,500. 3. On October 1, 2016, Pastina borrowed $50,000 from a local bank and signed a note. The note requires interest to be paid annually on September 30 at 12%. The principal is due in 10 years. 4. On March 1, 2016, the company lent a supplier $20,000 and a note was signed requiring principal and interest at 8% to be paid on February 28, 2017. 5. On April 1, 2016, the company paid an insurance company $6,000 for a two-year fire insurance policy. The entire $6,000 was debited to insurance expense. 6. $800 of supplies remained on hand at December 31, 2016. 7. A customer paid Pastina $2,000 in December for 1,500 pounds of spaghetti to be delivered in January 2017. Pastina credited sales revenue. 8. On December 1, 2016, $2,000 rent was paid to the owner of the building. The payment represented rent for December 2016 and January 2017, at $1,000 per month.

Post the unadjusted balances and adjusting entries into the appropriate T-accounts.

Paper For Above instruction

Introduction

The unadjusted trial balance provides a snapshot of a company's financial position at a specific point in time, prior to the application of adjustments necessary for accurate financial reporting. For Pastina Company, a firm specialized in selling private label pasta to grocery chains, these adjustments ensure the proper recognition of revenues, expenses, and other financial elements as of December 31, 2016. This paper details the process of preparing year-end adjusting entries, posting them to T-accounts, and ensuring the financial statements reflect the true economic situation of the company. The adjustments involve depreciation, accrued salaries, interest receivable and payable, prepaid insurance and supplies, deferred revenue, and unearned rent, among others, all vital for an accurate accounting presentation.

Preparation of Adjusting Entries

The first adjustment involves depreciation expense of office equipment, which for the year amounts to $10,000. This reduces accumulated depreciation and increases depreciation expense, aligning expenses with the period incurred. The entry is:

Debit: Depreciation Expense $10,000
Credit: Accumulated Depreciation—Office Equipment $10,000

Second, salaries and wages earned from December 16-31, amounting to $1,500, need accrued expense recognition. Since wages are paid twice a month, the accrued wages should be recorded as:

Debit: Salaries and Wages Expense $1,500
Credit: Salaries and Wages Payable $1,500

Third, the interest expense on the bank loan from October 1, 2016, to December 31, 2016, must be accrued. The annual interest is 12% on $50,000, so for three months, interest equals:

Interest = Principal × Rate × Time

Interest = $50,000 × 12% × 3/12 = $1,500

The adjusting entry is:

Debit: Interest Expense $1,500
Credit: Interest Payable $1,500

Fourth, for the note lent to the supplier on March 1, 2016, interest at 8% must be accrued from March 1 to December 31, 2016, which is ten months:

Interest = $20,000 × 8% × 10/12 = $1,333.33 approximately

The entry:

Debit: Interest Receivable $1,333.33
Credit: Interest Revenue $1,333.33

Fifth, the prepaid insurance paid on April 1, 2016, covers two years, so six months of insurance expense should be recognized for December 2016. The monthly insurance expense:

Monthly expense = $6,000 / 24 months = $250

Six months:

$250 × 6 = $1,500

The adjusting entry:

Debit: Insurance Expense $1,500
Credit: Prepaid Insurance $1,500

Sixth, supplies on hand amount to $800 at year-end. Since supplies were initially debited at $1,500, the supplies used are:

Supplies used = $1,500 - $800 = $700

Adjusting entry:

Debit: Supplies Expense $700
Credit: Supplies $700

Seventh, the customer prepayment of $2,000 for spaghetti to be delivered in January 2017 was credited to sales revenue, which is premature. It should be recorded as a deferred revenue:

Debit: Sales Revenue $2,000
Credit: Deferred Revenue $2,000

Finally, rent paid on December 1 for December and January at $1,000 per month requires an adjusting entry for the December portion:

Rent expense for December:

Debit: Rent Expense $1,000
Credit: Prepaid Rent $1,000

The remaining balance of prepayment for January will be recognized next period.

Post-Adjusting Entries to T-Accounts

Each adjusting entry affects corresponding T-accounts, updating balances to reflect period-end adjustments. For example:

- Depreciation increases accumulated depreciation and depreciation expense.

- Salaries payable is credited for accrued wages.

- Interest payable is credited for accrued interest.

- Notes receivable and interest revenue are adjusted for accrued interest.

- Prepaid insurance is decreased by insurance expense recognized.

- Supplies are decreased by supplies used.

- Deferred revenue is credited for unearned sales.

- Prepaid rent is decreased for December rent.

Conclusion

The preparation and posting of adjusting entries are crucial to ensure that the financial statements accurately reflect the company's financial position and results of operations at year-end. These adjustments correct temporary account balances for accrued expenses, revenues, and depreciation, as well as proper classification of prepaid items and unearned revenue. Proper documentation and posting to T-accounts facilitate accurate financial reporting and compliance with generally accepted accounting principles (GAAP).

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