Question

Chapter 3 Homework Prepare adjusting entries for the Smith Company, which provides market research services, as of December 31 of the current year. 1) On November 1, Smith paid an insurance premium covering six months in the amount of $18,000, and recorded the payment in the Prepaid Insurance account >> The company started the year with $11,000 in the Office Supplies account, and purchased $4,000 more during the year, but a count at December 31 showed that $2,000 were on hand at the end of the year. 3) The company bought a new computer on January 2 for $45,000 The computer has an estimated useful life of five years and an estimated salvage value of $5,000. 4) Annual depreciation on the office furniture is $3,000 sThe company has five employees. Each employee earns $1,000 per week. At December 31, the company owed each employee two days pay since the 31" fell on a Tuesday. On December 15, the company signed a three-month contract where it agreed to provide research services to Wyatt Industries for $30,000, all of which is to be paid at the end of the contract term on March 15. Work began immediately. >> The company paid $3,200 to its landlord on December 1. This represented rent for December and January and the amount was recorded in the Prepaid Rent Account >> The company received a property tax bill on December 29 in the amount of $1,200, but the bill was unpaid at December 31. . This year, the company started a newsletter which discusses industry trends. The newsletter is distributed quarterly and an annual subscription is $20. This amount must be paid in advance. Smith credits Unearned Subscription Revenue when these amounts are received. The following summarizes the subscription activity this year: Number of Number of Paying subscribers Issues sent 200 3 100 2 100 50 Hint: Do each line separately - like the prepaid insurance problem we did in class. If an annual subscriptions is $20, how much revenue does the company eam when it sends out each issue? If we send out three issues a year, for 200 subscribers? 1 0

Answer 1

Answer:

Journal Entries for Smith Company as of December 31
Date	General Journal	Debit	Credit
1	Insurance Expense account	$         6,000
Prepaid Insurance account		$         6,000
(Being insurance expense for 2 months i.e. November and December booked) (See working note 1 for calculation)
2	Office suppies expense account	$       13,000
Office supplies account		$       13,000
(Being office supplies worth of $13000 consumbed during the year recorded) (See working note no.2)
3	Depreciation on Computer account	$         8,000
Computer account		$         8,000
(Being depreciation on computer charged on straight line basis with Cost- $45000, Salvage Value- $5000, Estimated useful life- 5 years) (See working note no. 3)
4	Depreciation on Office Furniture account	$         3,000
Office furniture account		$         3,000
(Being depreciation on office furniture charged as given in question)
5	Salary expense	$         2,000
Outstanding Salaries		$         2,000
(being 2 days pay outstanding dues for 5 employees earning $200 perday recorded) (see working note no. 4)
6	Accrued revenue account debit	$         5,000
Research Services provided account		$         5,000
(Being revenue booked for contract entered on Dec 15 with Wyatt industries for .5 months fall in current accounting year) (See working note 5)
7	Rent Expense Account	$         1,600
Prepaid Rent Expense		$         1,600
(Being rent expense for december month recorded out of the prepaid rent paid to landlord $3200 for 2 months (Dec and Jan) (See working note 6)
8	Property Tax	$         1,200
Outstanding/ unpaid property tax		$         1,200
(Being property tax remains unpaid worth of $1200 recorded under books)
9	Unearned subscription revenue account	$         4,500
Earned Subscription revenue account		$         4,500
(Being revenue earned with resepect to issue sent to the customer recorded) (see working note 7)

Working Notes:

1. Insurance paid $18000 for period November 1 to April 30 Since upto december only 2 months insurance expired, we need to book expense for 2 months which is Equal to $6000 ($18000/6 months Multiply 2 months)

2. Calculation of Office supplies expense: Opening Stock of office supplies-                                $11000 ADD: Purchase During the year-                                   $4000 Less: Closing Stock of office supplies-                    ($2000) Office supplies expense                                                $13000

3. Calculation of Depreciation for newly purchase computer on January 2 Original Cost of Computer: $45000 Less: Salvage Value:              $5000 Depreciable Value:            $40000 Estimated useful life:             5 years Depreciation for first year: $8000 ($40000/5 years)

4. Calculation of Salary outstanding for employees: Number of Employee: 5 employee Earning per week each employee - $1000 Earning per day: $200 ( $1000/5 days) (assuming 5 days working and weekend no working day) Company Owed: 2 days pay for all employee Outstanding Salary amount for 5 employees for 2 days= $2000 ( $200*5*2 i.e. 5 employees and 2 working days)

5. Calculation of Accrued revenue from the contract with Wyatt industries Contract Amount:- $30000 Contract Period:- 3 months Contract period fall in current accounting period:- .5 months (15 december to 31st december) Accrued revenue for current accounting year- $5000 ($30000/3 months Multiply .5 months)

6. Calculation of Rent Expense Rent paid for 2 months Dec and Jan:- $3200 Rent related to current accounting year:- $1600 ($3200/2 months)

7. Calculation of Earned Subscription Revenue
Quaterly Subscription revenue- $5 ( $20/4 quarters)

a	b	c	d
Number of Paying Subscription	Number of Issues sent	Quarterly revenue with respect to issue sent (b Multiply Quaterly subscription revenue)	Earned Revenue (c multiply a
200	3	15	$ 3,000.00
100	2	10	$ 1,000.00
100	1	5	$     500.00
50	0	0	$              -
			$ 4,500.00