Question

The Unadjusted Trial Balance for Palicio Security Systems Inc. is presented below as of and for the year ended December 31, 2020. Required: Review the Trial Balance and make a list of the balance sheet accounts that might need to be adjusted prior to preparing the financial statements. For each account identified, explain in your own words, how you would determine the adjustment for the account. An example answer for the Supplies account is provided below. Supplies - Supplies are physically counted at period end and the Supplies balance sheet account is adjusted up or down to the cost of the supplies on hand. Palicio Security Systems Inc. Trial Balance 12/31/2020 Credit Debit 74,210 13,500 $ 500 6,620 3,200 200 4,000 50,000 Cash Accounts receivable Allowance for Doubtful Accounts Inventory Prepaid rent Supplies Land Equipment Less: Acc. Depr Accounts payable Salaries payable Unearned revenue Notes payable Common stock Preferred stock Additional paid-in-capital Dividends Retained earnings Sales Cost of goods sold Transportation-out Salaries expense Utilities expense Depreciation expense Interest expense Gain on sale of land 20,000 1,950 1,000 900 3,000 10,000 5,000 35,000 10,000 21,430 157,120 57,120 250 25,000 2,500 10,000 50 750 256,650 $ 256,650 $

Answer 1

List of Balance sheet accounts that might need adjustment prior to preparing the financial statements

i. Accounts Receivable – Any goods delivered or service performed and bills raised on customer should be accounted as revenue by debiting accounts receivable and crediting sales revenue. The billing book has to be checked for any credit sales to be adjusted at year end.

ii. Allowance for doubtful debts- Bad debts Provison are provided at the end of the period based on estimate of Accounts receivable aging

iii. Prepaid rent – The expiry of rent should be charged to the income statement. The expiry of rent should be determined based on rent agreement and the period for which rent has been paid in advance

iv. Salaries payable – The salaries if any unpaid at the end of the period based on salaries register should be accrued and salaries payable should be credited

v. Unearned revenue – Any goods delivered or service performed for advance received from customers should be recognised as sales revenue for the period. If unearned revenue is received for certain number of months it should be recognised as revenue for the completed months at year end

vi. Interest expense- Interest accrued and not paid should be accounted at the end of the year. Interest accrual depends on the interest rate on the notes payable and calculated for the number of months outstanding.