Question

   Referring to the fourth transaction on December 1, Wolfpack makes the necessary year- end adjustment to recognize rent revenue. Received $9,000 cash for a three-month rental of equipment.

           Management estimates the “Estimated Sales Return Liability” credit balance at the end of December should be $4,000.

              For purposes of preparing its December bank reconciliation, the following information is available:

 

·        The bank statement shows a cash balance of $98,000 as of Dec 31.

·        Interest earned on the bank balance in December totals $250.

·        The cash deposit for the sale of land that occurred on Dec 27 has not yet cleared the bank. Received $27,000 in cash from the sale of a parcel of its land. The parcel had an original cost of $22,000.

·        Bank service charges for December amount to $70.

·        Checks written on December 31 have not yet cleared the bank (check numbers 509 through 521) Salaries Expense and Cash are both 15,000. (521) Cash is $4,000 and Notes Payable is $3840

          The company has already made estimated income tax payments of $40,000 during the year. At that time, the company debited “Income Tax Expense” and credited “Cash”.

 

To compute the final state and federal income tax expense information for the year, the following information is available:

 

·        The state income tax is 5%. (Hint: use the “income before income tax” subtotal computed above to determine the state income tax).

·        State income taxes are deductible for federal income tax purposes.

·        For simplification purposes, assume that all revenues per the company’s books are taxable, and all expenses per the company’s books are tax-deductible.

·        The federal income tax rate is a flat 21%.

Answer 1

date (December)	Particulars	Debit($)	Credit ($)
1	Cash A/c Dr.	9,000
	To Rent revenue A/c		3,000
	To Unearned income A/c		6,000

Explanation:

The following is the adjustment entry made in the month of December to recognize the rent revenue:

Date (December)	Particulars	Debit($)	Credit ($)
1	Cash A/c Dr.	9,000
	To Rent revenue A/c		3,000
	To Unearned income A/c		6,000
	(Being rent received in cash and advance)

Working note:

• It is assumed that the three months' rent is $9,000. So, the per month rent will be $3,000 ($9,000/3).

• The provided entry is for the month of December only.

• The traditional approach refers to using journals or accounts to make adjustments. 

• In the above entry, the cash account is debited because the cash is received by the company, and as per the golden rule of accounting debit all the things that come into the company.

• The rent account is credited with the amount of $3,000. It is because;

• Receiving rent is considered revenue and the golden rule of accounting said that credit all the revenues earned by the company.

• The amount credited to the rent account is $3,000 because as per the accrual basis of accounting the revenue should be recognized in the books of accounts as income at the time when it is earned not the time when the amount is received.

• Therefore, even if the cash is received in the amount of $9,000, only $3,000 is recorded as revenue income because in the month of December only $3,000 is the earned rental income for the Wolfpack.

• The unearned income is credited in the amount of $6,000, it is because;

• When the company received any amount before providing services then the unearned income account is opened and credited by the company because as per the GAAP (Generally Accepted Accounting Principles) and golden rules of accounting all the liabilities account should be credited.

• Here, the amount credited in the unearned income is $6,000 because the company provided service for the month of December only but received the two months' extra rent even before the providing service. Therefore, this amount is considered as the liability of the company as the amount is yet not earned by the Wolfpack but received by the company.