Question

Sweeney & Allen, a large marketing firm, adjusts its accounts at the end of each month. The following information is available for the year ending December 31.

1. A bank loan had been obtained on December 1. Accrued interest on the loan at December 31 amounts to $1,310. No interest expense has yet been recorded.
2. Depreciation of the firm’s office building is based on an estimated life of 30 years. The building was purchased four years ago for $310,000.
3. Accrued, but unbilled, revenue during December amounts to $67,000.
4. On March 1, the firm paid $1,400 to renew a 12-month insurance policy. The entire amount was recorded as Prepaid Insurance.
5. The firm received $15,000 from King Biscuit Company in advance of developing a six-month marketing campaign. The entire amount was initially recorded as Unearned Revenue. At December 31, $4,300 had actually been earned by the firm.
6. The company’s policy is to pay its employees every Friday. Since December 31 fell on a Wednesday, there was an accrued liability for salaries amounting to $1,900.

a. Record the necessary adjusting journal entries on December 31.

b. By how much did Sweeney & Allen’s net income increase or decrease as a result of the adjusting entries performed in part a? (Ignore income taxes.)

Answer 1

Answer:

a)	JOURNAL ENTRIES FOR ADJUSTMENT:
1	Interest expense	1,310
	Interest payable		1,310
2	Depreciation expense-Building =310000/(30*12) =	861
	Accumulated depreciation-Building		861
3	Accounts receivable	67,000.
	Sales revenue		67,000.
4	Insurance expense (1400/12)	116
	Prepaid insurance		116
5	Unearned revenue	4,300
	Sales revenue		4,300
6	Wages and salaries expense	1,900
	Wages and salaries payable		1,900.
b)	Increase in revenue = 67000+4,300= $71,300
	Increase in expenses = 1,310+861 +116+1,900 = 4187
	Increase in net income = 71,300 - 4187 = $67,113