Question

Wells Technical Institute (WTI), a school owned by Tristana Wells, provides training to individuals who pay tuition directly to the school. WTI also offers training to groups in off-site locations. Its unadjusted trial balance as of December 31, 2013, follows. WTI initially records prepaid expenses and unearned revenues in balance sheet accounts. Descriptions of items a through h that require adjusting entries on December 31, 2013, follow.

An analysis of WTI's insurance policies shows that $3,864 of coverage has expired. An inventory count shows that teaching supplies costing $3,349 are available at year-end 2013. Annual depreciation on the equipment is $15,458. Annual depreciation on the professional library is $7,729. On November 1, WTI agreed to do a special six-month course (starting immediately) for a client. The contract calls for a monthly fee of $2,900, and the client paid the first five months' fees in advance. When the cash was received, the Unearned Training Fees account was credited. The fee for the sixth month will be recorded when it is collected in 2014. On October 15, WTI agreed to teach a four-month class (beginning immediately) for an individual for $4,700 tuition per month payable at the end of the class. The class started on October 15, but no payment has yet been received. (WTI's accruals are applied to the nearest half-month; for example, October recognizes one-half month accrual.) WTI's two employees are paid weekly. As of the end of the year, two days' salaries have accrued at the rate of $100 per day for each employee. The balance in the Prepaid Rent account represents rent for December. Prepare the necessary adjusting journal entries for items a through h. Assume that adjusting entries are made only at year-end. Adjusting entries (all dated Dec. 31, 2013). Post the balance from the unadjusted trial balance and the adjusting entries in to the T-accounts. Prepare Wells Technical Institute's income statement for the year 2013. Prepare Wells Technical Institute's statement of owner's equity for the year 2013. Prepare Wells Technical Institute's balance sheet as of December 31, 2013.

Answer 1

Concepts and reason

Journal entries: The record of business transactions in a chronological order in the journal is referred to as journal entry. A general journal is a primary book of original entry that records any type of business transactions or accounting adjustment. It records the date of the transaction, debited account, credited account, ledger folio number, amount for debit and credit, and narration of the transaction.

Rules of double entry system: The journal entries are formed basing on the three rules of double entry system. 1) According to the first rule, debit the receiver and credit the giver. 2) Basing on the second rule of double entry, debit what comes in and credit what goes out. 3) And from the three rule of the double entry system, debit all expense and losses, credit all incomes and gains.

Adjusting entries: Adjusting entries are the journal entries that convert the accounting records of a company to the accrual basis. These entries are generally prepared at the end of an accounting period to adjust the income and expense accounts.

Adjusting entries will ensure the principles of revenue as well as expense recognition. The revenue should be recorded when the obligations are completed or satisfied during the period. Likewise, the expense should be recorded when it actually incurred.

Financial Statements: Financial statements are a group of reports that present the financial information of an organization. Financial statements comprise of income statement, balance sheet and, cash flow statement. They are the most important source of financial information, which provides the company’s financial performance and financial position for a particular period.

Following are the financial statements that the businesses need to prepare:

Income statement

Cash flow statement

Statement of stockholder’s equity

Balance sheet

Fundamentals

T-accounts: The general ledger is prepared by preparing each account in T-form. T-accounts are basically two sided accounts where the left side is debit side and the right one is the credit side. The T-accounts are generally prepared to analyze business transactions that occur during a particular period. Summarizing the information is also a purpose while preparing a T-account.

Trial balance: Trial balance is a list of all general ledger accounts. It contains both capital accounts and revenue accounts. It is a statement prepared under double entry system, which implies that for every amount of debit, there is an equal amount of credit. The total of debits and credits should match with each other. The income statement, statement of owner’s equity, and balance sheet are prepared based on the listed accounts in the trial balance

Income statement: Income statement is one of the three major financial statements apart from balance sheet and cash flow statements. The income statement presents the financial results of a business for a period. All the revenues and expenses related to the current year are shown in the income statement. The excess of revenue over the expenses is the net income for the period.

Balance sheet: A balance sheet is a financial statement that presents information about a company’s assets, liabilities and, stockholder’s equity. The assets and liabilities are sub-categorized for easy access of information. Assets are categorized as current assets and noncurrent assets. Liabilities are categorized as current liabilities and long term liabilities. Liabilities also include stockholder’s equity, which is shown under the head total liabilities and stockholder’s equity.

Stockholder’s Equity: Stockholder’s equity is the portion of the balance sheet representing the capital received from investors in exchange for paid in capital (stock) and retained earnings.

Retained Earnings: Retained Earnings are the net income of the corporation, retained in the business to be used for reinvestment which has not been distributed to its stockholders. Retained earnings are one of the parts in the stockholders’ equity in addition to the common stock. It is the amount held by the entity by accumulating previous years’ undistributed profits earned by it.

1.

a)

Record the adjusted entry for insurance expense.

b)

Record the adjusted entry for supplies expense.

Working note:

Calculate the supplies expense to be adjusted.

c)

Record the adjusted entry for depreciation expense for equipment.

d)

Record the adjusted entry for depreciation expense of Professional library.

e)

Record the adjusted entry for unearned training fees.

f)

Record the adjusted entry for tuition fees.

g)

Record the adjusted entry for salaries expense.

h)

Record the adjusted entry for rent expense.

2.1

Prepare T-account for Cash.

Prepare T-account for accounts receivable.

Prepare T-account for teaching supplies.

Prepare T-account for prepaid insurance.

Prepare T-account for prepaid rent.

Prepare T-account for professional library.

Prepare T-account for accumulated depreciation – Professional library.

Prepare T-account for tuition fees earned.

Prepare T-account for training fees earned.

Prepare T-account for depreciation-professional library.

Prepare T-account for depreciation-Equipment.

Prepare T-account for salaries expense.

Prepare T-account for equipment.

Prepare T-account for accumulated-depreciation-Equipment.

Prepare T-account for accounts payable.

Prepare T-account for salaries payable.

Prepare T-account for unearned training fees.

Prepare T-account for capital.

Prepare T-account for withdrawals.

Prepare T-account for insurance expense.

Prepare T-account for rent expense.

Prepare T-account for teaching supplies expense

Prepare T-account for advertising expense.

Prepare T-account for utilities expense.

Prepare the adjusted trial balance.

3.1

Prepare the income statement.

3.2

Prepare the statement of owners’ equity.

3.3

Prepare the balance sheet of the company.

Ans: Part 1.a

Part 1.b

Part 1.c

Part 1.d

Part 1.e

Part 1.f

Part 1.g

Part 1.h

Part 2.1

The total of adjusted trial balance is $314,995.

Part 3.1

The Net income is $39,957.

Part 3.2

The ending balance of owners’ equity is $64,138.

Part 3.3

Total of the balance sheet is $106,897.