Question

Following are the accounts and balances that appear in the unadjusted trial balance for Just Like Fred Astaire (aka ‘Fred’) dance studio as of 9/30/2019. Assume all accounts have their normal debit or credit balance:

Account:	Amount:		Account:	Amount:
Cash	$18,944		Retained Earnings	$41,392
Accounts Receivable (A/R)	$15,088		Service Revenue	$89,430
Prepaid Rent	$10,100		Advertising Expense	$12,550
Equipment	$37,920		Wages Expense	$48,000
Accumulated Depreciation-Equipment	$16,195		Utilities Expense	$2,775
Accounts Payable (A/P)	$5,901		Depreciation Expense	$0
Wages Payable	$0		Rent Expense	$0
Deferred Revenue	$240		Cleaning Expense	$9,040
Common Stock	$1,259

The following additional information was gathered at September 30, 2019, the end of Just Like Fred Astaire’s quarterly accounting period. Assume Fred uses a quarterly accounting period and all adjustments and adjusting entries are made only at the end of each quarterly accounting period (i.e. AJEs are only made on March 31, June 30, September 30 and December 31^st).   No adjusting entries have been made yet for the third quarter, ending September 30^th, 2019 related to the below items:

1. On August 1, 2019, Fred prepaid $8,700 for the next six months’ rent, covering the period of August 1, 2019 – January 31, 2020. This was recorded as Prepaid Rent. Fred last prepaid rent on February 1, 2019 in the amount of $8,400, which covered the six-month period of February 1, 2019 – July 31, 2019.
2. Fred charges customers $60 for each dance class. On September 15^th, Daniel registered for three group classes with Fred. One was provided in September, on September 25^th. The other two lessons will be provided in the following accounting period, on October 2^nd and October 9^th. Daniel will pay for all three classes on October 9^th. Fred has not yet billed Daniel for the September class, and no entry related to the September class already provided has been recorded yet.
3. Fred purchased a truck for $37,920 on February 1, 2016, which was recorded as Equipment. The truck has $0 salvage value, and has an estimated useful life of 8 years. Fred uses the straight-line depreciation method to allocate the cost of the truck evenly over its eight-year useful life.
4. Fred pays its workers a total of $8,000 every 2-week pay period. Each 2-week pay period includes exactly 10 work days, i.e. $800 per work day. The last cash payment to workers was made on Friday September 20^th for the pay period of September 7^th – September 20^th.   The next cash payment of $8,000 will be made on October 4^th and covers the pay period of September 21^st – October 4^th, which includes 6 work days left in September and 4 work days in October.
5. Fred charges customers $60 for each dance class. On July 28^th, Grace signed up for four separate group dance classes, one which was provided in August, two which were provided in September, and one which will be provided in October. Grace prepaid Fred $240 in advance for all four classes on July 28^th which was recorded as Deferred Revenue.

PART A: Record Adjusting Journal Entries (AJEs) : Record the five AJEs related to the information above that Fred would make on 9/30/19. Make sure to use proper formatting for all entries, and to include the date of each entry and a brief description of each entry. You must show all of your work on calculations.

PART B: Calculate adjusted Net Income for 2019: Calculate the amount of Net Income that Fred would report on its income statement for the period ended September 30, 2019.   You must show all of your work on calculations.

PART C: Calculating Net Book Value : Calculate the net book value of the equipment that would be reported on the classified Balance Sheet as of 9/30/2019. You must show all of your work on calculations.

Answer 1

PART A: Record Adjusting Journal Entries (AJEs)

Debit ($) Credit ($) 4,300 4,300 60 60 1,185 Date Account Description Sep 30 Rent Expense Prepaid Rent (Rent expense booked for Jul to Sep period) Sep 30 Accounts Receivables Service Revenue (Billing customers for services provided) Sep 30 Depreciation Expense Accumulated Depreciation - Truck (Depreciation expense booked for Q3) Sep 30 Salaries & Wages Expense Salaries & Wages Payable (Salaries & Wages expense unpaid for the period) Sep 30 Unearned Revenues Service Revenue (Unearned revenue earned for Aug & Sep) 1,185 4,800 4,800 180 180

PART B: Calculate adjusted Net Income for 2019 = $7,020

PART C: Calculating Net Book Value = Book Value - Accumulated Depreciation = 37920-(16195+1185) = $20,540

Workings and Rationale

Rationale Debit ($) Credit ($) working 4,300 =(8400*1/6)+(8700*2/6) 4,300 Insurance expense needs to be booked for Jul-Sep 60 given 60 Only revenue for services provided in Sep should be booked 1.185 Date Account Description Sep 30 Rent Expense Prepaid Rent (Rent expense booked for Jul to Sep period) Sep 30 Accounts Receivables Service Revenue (Billing customers for services provided) Sep 30 Depreciation Expense Accumulated Depreciation - Truck (Depreciation expense booked for Q3) Sep 30 Salaries & Wages Expense Salaries & Wages Payable (Salaries & Wages expense unpaid for the period) Sep 30 Unearned Revenues Service Revenue (Unearned revenue earned for Aug & Sep) =(37920/8)*3/12 1,185 Depreciation expense has been booked for Jul-Sep period 4,800 =8000*6/10 4,800 Salary expense incurred but not paid will be booked as an expense and a liability will be created 180 =240*3/4 180 Revenue earned during the period will reduce unearned revenue liability and increase revenues

Net Income Calculation = Revenus - expenses = (89430+240) - (12550+48000+4800+2775+1185+4300+9040) = 89670-82650 = $7,020

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