Question

The following are several transactions of Ardery Company that occurred during the current year and were recorded in permanent (that is, balance sheet) accounts unless indicated otherwise:

Date	Transaction
Apr. 1	Purchased a delivery van for $20,000, paying $1,000 down, and issuing a 1-year, 6% note payable for the $19,000 balance. It is estimated that the van has a 4-year life and an $800 residual value; the company uses straight-line depreciation. The interest on the note will be paid on the maturity date.
May 15	Purchased $850 of office supplies.
June 2	Purchased a 2-year comprehensive insurance policy for $720.
Aug. 1	Received 6 months' rent in advance at $250 per month and recorded the $1,500 receipt as Rent Revenue.
Sept. 15	Advanced $600 to sales personnel to cover their future travel costs.
Nov. 1	Accepted a $4,000, 6-month, 12% (annual rate) note receivable from a customer, the interest to be collected when the note is collected.

The following information also is available:

1.	On January 1, the Office Supplies account had a $250 balance. On December 31, an inventory count showed $200 of office supplies on hand.
2.	The weekly (5-day) payroll of Ardery Company amounts to $2,000. All employees are paid at the close of business each Wednesday. A 2-day accrual is required for the current year.
3.	Sales personnel travel cost reports indicate that $500 of advances had been used to pay travel expenses.
4.	The income tax rate is 30% on current income and is payable in the first quarter of next year. The pretax income before the adjusting entries is $8,655.

Required:

On the basis of the above information, prepare journal entries to record whatever adjustments are necessary to bring the accounts up to date on December 31.

Answer 1

Adjustment entries on 31^st December

Date	Particulars	Debit	Credit
December 31	Interest expenses           Outstanding interest expenses* (provided for outstanding interest on $ 19,000 notes payable @ 6% p.a. for 9 months)	855	855
December 31	Depreciation expenses             Accumulated depreciation (provided depreciation for 9 months on delivery van)	3,600	3,600
December 31	Office supplies expenses          Office supplies (office supplies consumed)	900	900
December 31	Insurance expenses        Prepaid insurance (provided for 5 months insurance expired out of prepaid insurance)	210	210
December 31	Rent revenue      Unearned rent revenue (Provided for one month rent received in advance )	250	250
December 31	Travel expenses      Prepaid travel expenses (Provided for expired travel cost out of prepaid travel expenses)	500	500
December 31	Payroll expenses      Payroll expenses payable (Provided for outstanding payroll expenses for 2 days)	800	800
December 31	Tax expenses      Tax payable (provided for tax payable @ 30% on pre-tax income of $ 8,655)	2,596.50	2,596.50
December 31	Accrued interest**      Interest income (provided for accrued interest on notes receivable of $ 4,000 @ 12% p.a. for 2 months)	80	80

* An alternative for outstanding interest expenses account can be notes payable account.

** An alternative for accrued interest can be notes receivable account.

Working notes

1. Depreciation on delivery van has been provided for 9 months which is as follows

Annual depreciation = (20,000 – 800)/4 = 4,800

Depreciation for 9 months = (4,800/12) * 9 = 3,600

2. Office supplies consumed = opening supplies + purchase of supplies – closing supplies

i.e. = 250 + 850 – 200 = 900

3. Insurance expenses has been calculated as follows

Out of 24 months insurance payment only 7 months insurance has expired, it has been provided as insurance expenses out of prepaid insurance expenses

Insurance expenses = (720/24 ) * 5 = $ 210

4. Out of six months rent received, five months rent has expired, it has been calculated as follows

Ret received expired = 250 * 5 = 1,250

Remaining 250 ( 1,500 – 1,250) has been recorded as rent revenue received in advance .

5. Payroll expenses for 2 days have been calculated as follows

Outstanding payroll expenses = (2,000/5) * 2 = 800

These have been provided as outstanding expenses