Question

PA4-4 Identifying and Preparing Adjusting Journal Entries [LO 4-1, LO 4-2, LO 4-3, LO 4-6]

[The following information applies to the questions displayed below.]

Val’s Hair Emporium operates a hair salon. Its unadjusted trial balance as of December 31, 2018, follows, along with information about selected accounts.

Account Names	Debit				Credit				Further Information
Cash	$	3,800							As reported on December 31 bank statement.
Supplies		4,300							Based on count, only $1,300 of supplies still exist.
Prepaid Rent		6,000							This amount was paid November 1 for rent through the end of January.
Accounts Payable					$	1,500			This represents the total amount of bills received for supplies and utilities through December 15. Val estimates that the company has received $450 of utility services through December 31 for which it has not yet been billed.
Salaries and Wages Payable						0			Stylists have not yet been paid $150 for their work on December 31.
Income Tax Payable						0			The company has paid last year’s income taxes but not this year’s taxes.
Common Stock						2,000			This amount was contributed for common stock in prior years.
Retained Earnings						900			This is the balance reported at the end of last year.
Service Revenue						75,800			Customers pay cash when they receive services.
Salaries and Wages Expense		29,100							This is the cost of stylist wages through December 30.
Utilities Expense		12,200							This is the cost of utilities through December 15.
Rent Expense		20,000							This year’s rent was $2,000 per month.
Supplies Expense		4,800							This is the cost of supplies used through November 30.
Income Tax Expense		0							The company has an average tax rate of 30%.
Totals	$	80,200			$	80,200

PA4-4 Part 1

Required:

1. Prepare the (preliminary) unadjusted net income statement for the year ended December 31, 2018.

PA4-4 Part 4

1. 4-a. Prepare the adjusted net income that the company should report for the year ended December 31, 2018.
2. 4-b. By what dollar amount did the adjustments in requirement (3) cause net income to increase or decrease?

Answer 1

Adjusting Journal Entries

Account Titles	Debit	Credit
Supplies Expense	$              3,000
Supplies		$            3,000
(Supplies consumed during the period)
Rent Expense	$              4,000
Prepaid Rent		$            4,000
(Prepaid rent expired for 2 months)
Utilities Expense	$                 450
Accounts Payable		$               450
(Utilities expense bill not received)
Salaries Expense	$                 150
Salaries Payable		$               150
(Salaries accrued but not paid)
Income Tax expense	$                 630
Income Tax payable		$               630
(Income tax expense accrued)

Income Statement (Unadjusted)
Revenue	$            75,800
Expenses
Wages Expense	$            29,100
Utilities Expense	$            12,200
Rent Expense	$            20,000
Supplies Expense	$              4,800
Total Expenses	$            66,100
Income before tax	$              9,700
Income tax @30%	$                     -
Net Income	$              9,700

Adjusted Income Statement

Income Statement
Revenue	$            75,800
Expenses
Wages Expense	$            29,250
Utilities Expense	$            12,650
Rent Expense	$            24,000
Supplies Expense	$              7,800
Total Expenses	$            73,700
Income before tax	$              2,100
Income tax @30%	$                 630
Net Income	$              1,470

Adjustments decreased the net income by $8230 i.e. $9700-1470