Question

Selected account balances before adjustment for Atlantic Coast Realty at July 31, the end of the current year, are as follows:

	Debits	Credits
Accounts Receivable	$75,000
Equipment	345,700
Accumulated Depreciation—Equipment		$112,500
Prepaid Rent	9,000
Supplies	3,350
Wages Payable		–
Unearned Fees		12,000
Fees Earned		660,000
Wages Expense	325,000
Rent Expense	–
Depreciation Expense	–
Supplies Expense	–

Data needed for year-end adjustments are as follows:

•	Unbilled fees at July 31, $11,150.
•	Supplies on hand at July 31, $900.
•	Rent expired, $6,000.
•	Depreciation of equipment during year, $8,950.
•	Unearned fees at July 31, $2,000.
•	Wages accrued but not paid at July 31, $4,840.

	Required:
1.	Journalize the six adjusting entries required at July 31, based on the data presented. Refer to the chart of accounts for the exact wording of the account titles. CNOW journals do not use lines for journal explanations. Every line on a journal page is used for debit or credit entries. CNOW journals will automatically indent a credit entry when a credit amount is entered.
2.	What would be the effect on the income statement if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?
3.	What would be the effect on the balance sheet if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?
4.	What would be the effect on the “Net increase or decrease in cash” on the statement of cash flows if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

CHART OF ACCOUNTSAtlantic Coast RealtyGeneral Ledger

	ASSETS
11	Cash
12	Accounts Receivable
13	Supplies
14	Prepaid Rent
15	Land
16	Equipment
17	Accumulated Depreciation-Equipment

	LIABILITIES
21	Accounts Payable
22	Unearned Fees
23	Wages Payable
24	Taxes Payable

	EQUITY
31	Owner’s Equity
32	Withdrawals

	REVENUE
41	Fees Earned
42	Rent Revenue

	EXPENSES
51	Advertising Expense
52	Insurance Expense
53	Rent Expense
54	Wages Expense
55	Supplies Expense
56	Utilities Expense
57	Depreciation Expense
59	Miscellaneous Expense

1. Journalize the six adjusting entries required at July 31, based on the data presented. Refer to the chart of accounts for the exact wording of the account titles. CNOW journals do not use lines for journal explanations. Every line on a journal page is used for debit or credit entries. CNOW journals will automatically indent a credit entry when a credit amount is entered.

JOURNAL ACCOUNTING EQUATION DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY Adjusting Entries 2 3 4 5 6 7 8 9 10 11 12 13

2. What would be the effect on the income statement if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

	Over/Understated	Amount
Fees earned
Wages expense
Net income

3. What would be the effect on the balance sheet if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

	Over/Understated	Amount
Accounts receivable
Total assets
Wages payable
Total liabilities
Owner’s equity
Total liabilities and owner’s equity

4. What would be the effect on the “Net increase or decrease in cash” on the statement of cash flows if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

Answer 1

1.

July	31	Accounts  Receivable	11,150
		Fees Earned		11,150
		Accrued fees earned.
	31	Supplies Expense	2,450
		Supplies		2,450
		Supplies used ($3,350 – $900).
	31	Rent Expense	6,000
		Prepaid Rent		6,000
		Prepaid rent expired.
	31	Depreciation  Expense	8,950
		Accumulated  Depreciation—Equipment		8,950
		Equipment  depreciation.
	31	Unearned Fees	10,000
		Fees Earned		10,000
		Fees earned ($12,000 – $2,000).
	31	Wages Expense	4,840
		Wages Payable		4,840
		Accrued wages.

2.

Fees Earned would be understated by $11,150, Wages Expense would be understated by $4,840, and net income would be understated by $6,310 ($11,150 – $4,840).

3.   

Accounts Receivable would be understated by $11,150, total assets would be understated by $11,150, Wages Payable would be understated by $4,840, total liabilities would be understated by $4,840, owner’s equity (Owner’s Capital) would be understated by $6,310 ($11,150 – $4,840), and total liabilities and owner’s equity would be understated by $11,150 ($6,310 + $4,840).

4.

There is no effect on the “Net increase or decrease in cash” on the statement of cash flows because adjusting entries do not affect cash.