Question

The following transactions occurred during December 31, 2021, for the Falwell Company.

1. A three-year fire insurance policy was purchased on July 1, 2021, for $14,040. The company debited insurance expense for the entire amount.
2. Depreciation on equipment totaled $13,500 for the year.
3. Employee salaries of $19,500 for the month of December will be paid in early January 2022.
4. On November 1, 2021, the company borrowed $250,000 from a bank. The note requires principal and interest at 12% to be paid on April 30, 2022.
5. On December 1, 2021, the company received $7,500 in cash from another company that is renting office space in Falwell’s building. The payment, representing rent for December, January, and February was credited to deferred rent revenue.
6. On December 1, 2021, the company received $7,500 in cash from another company that is renting office space in Falwell’s building. The payment, representing rent for December, January, and February was credited to rent revenue rather than deferred rent revenue for $7,500 on December 1, 2021.

Prepare the necessary adjusting entries for each of the above situations. Assume that no financial statements were prepared during the year and no adjusting entries were recorded. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Date	Particulars	Debit ($)	Credit ($)
1.	Prepaid insurance	11,700
	Insurance expense (14040 * 30/36)		11,700
	(To record prepaid insurance)
2	Depreciation expense	13,500
	Accumulated depreciation		13,500
	(To record depreciation)
3	Salaries expense	19,500
	Salaries payable		19,500
	(To record salaries payable)
4	Interest expense (See note 1)	5,000
	Interest payable		5,000
	(To record interest expense)
5	Deferred rent revenue (Note 2)	2,500
	Rent revenue		2,500
	(To record rent deferred)
6	Rent revenue (Note 3)	5,000
	Deferred rent revenue		5,000
	(To cancel rent revenue)

Note 1

The company borrowed on Nov for 2 months for the current year.

Hence, interest = 250,000 * 12% * 2/12 = $ 5,000.

Note 2

The payment for 3 months Dec, Jan and Feb has been credited to deferred revenue. For current year, Dec month will accrue and rent revenue will be recognized.

Hence, rent revenue to be recognized = 7500/3 = $ 2500

Note 3

In this case, rent for Jan and Feb credited to rent revenue although they have not accrued and still is rent received in advance. Hence, they need to be corrected by cancelling rent revenue for Jan and Feb = 7500/3 * 2 = $ 5000

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