Question

1. The companies last pay period ends on December 24^th. The biweekly payroll is consistent at $500,000 per pay period.
2. Interest payment on the company bonds ($1,000,000 face value, 6%) is made semiannually on January 15^th and July 15^th.
3. The company’s electric meter is read on the 15^th of each month, and the bill is not received until the first of the following month. The electric bill is consistently running $5,000 per month.
4. The company utilizes a storage facility on the other side of town. The landlord, as part of an inducement to the company, has agreed to delay the December cash payment for use until January 15^th of next year. The company signed a monthly rental agreement of $2,000 per month on December 1^st.

The direction has also asked the following questions:

1. Will these transactions require an adjusting entry? Why?
2. Is it an accrual or deferral and give your justification?
3. What are the accounts that will be debited and credited for this entry?

Answer 1

Adjusting entry are journal entries that are made at the end of an accounting period to convert the accounting records into accrual basis.

Will these transactions require an adjusting entry? Why?

yes, these transaction requires adjusting entry.

Transaction	Is Adjusting entry required?	WHY
The biweekly payroll is consistent at $500,000 per pay period.	Yes	The company's last pay period is dec 24th. Hence the next payperiod is Jan 7th. Here, Expenses already incurred for 7 days by the end of accounting period. However, it is not paid till Jan 7th, Hence its an expenses incurred, but not paid. Therefore it required adjusting entry for 7 days pay.
Interest payment on the company bonds ($1,000,000 face value, 6%) is made semiannually on January 15th and July 15th.	Yes	Here, interest payment on bond already incurred but not paid. Expense must be recorded in the accounting period in which it is incurred. Hence, accrued expenses must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid.
The company’s electric meter is read on the 15th of each month, and the bill is not received until the first of the following month.	Yes	Its an expense incurred by 15th of month, but payment is not given by first of the following month. Here, expense incurred by Dec 15th, however it is not received till dec 31st(Accounting period end). In additional, electric expense from Dec 16- Dec 31 is incurred in the accounting period, but not paid till Feb 1st. So, we have to pass adjusting entry for both adjustment.
December month rent of storage facility	Yes	In this case, the landlord has agreed to delay the December cash payment for use until January 15th of next year. So expenses is already incurred by Dec 31st, but payment is made only on Jan 15. Hence it required adjusting entry.

Is it an accrual or deferral and give your justification?

An accrual pertains to:

• expenses incurred but not paid
• revenues earned, but the money has not been received

A deferral occurs when a company has:

• expenses not incurred, but paid
• revenue not earned, but payment received

Transaction	Whether Accrual/ Deferral	Reason
The biweekly payroll is consistent at $500,000 per pay period.	Accrual	Its an expense incurred, but not paid till Jan 7 th. Hence it is accrual
Interest payment on the company bonds ($1,000,000 face value, 6%) is made semiannually on January 15th and July 15th.	Accrual	Its an expense incurred, but not paid till Jan 15. Hence it is accrual
The company’s electric meter is read on the 15th of each month, and the bill is not received until the first of the following month.	Accrual	The monthly electric expense till Dec 15th is not paid till Jan 1st. In additional, electric expense from Dec 16- Dec 31 is incurred in the accounting period, but not paid till Feb 1st.Hence its an accrual.
December month rent of storage facility	Accrual	Its an expenses incurred for the month, but paid only by Jan 15. Hence its an accrual.

What are the accounts that will be debited and credited for this entry?

Transaction	Debit	Credit	Entry
The biweekly payroll is consistent at $500,000 per pay period.	Salary expense	Salary payable	Salary A/c        Dr                                 250000      To Salary Payable                                       250000
Interest payment on the company bonds ($1,000,000 face value, 6%) is made semiannually on January 15th and July 15th.	Bond interest	Bond interest Payable	Bond Interst   Dr                                 27405.41      To Bond salary payable                           27405.41
The company’s electric meter is read on the 15th of each month, and the bill is not received until the first of the following month.	Electric expense	Electric expense payable	Electric expense Dr                            5000       To Electric expense payable               5000 (Being expense for the period Nov 15-Dec15) Electric expense Dr                              2500       To Electric expense payable                  2500 (Being expense for the period Dec 15 - Dec 31)
December month rent of storage facility	Rent	Rent Payable	Rent A/c                 Dr                             2000         To Rent payable                                       2000