Problem

Make corrections and adjustments to income statement and balance sheet Big Blue Rental Cor...

Make corrections and adjustments to income statement and balance sheet Big Blue Rental Corp. provides rental agent services to apartment building owners. Big Blue Rental Corp.’s preliminary income statement for August 2010, and its August 31, 2010, preliminary balance sheet, did not reflect the following:

a. Rental commissions of $1,000 had been earned in August but had not yet been received from or billed to building owners.

b. When supplies are purchased, their cost is recorded as an asset. As supplies are used, a record of those used is kept. The record sheet shows that $720 of supplies were used in August.

c. Interest on the note payable is to be paid on May 31 and November 30. Interest for August has not been accrued—that is, it has not yet been recorded. (The Interest Payable of $160 on the balance sheet is the amount of the accrued liability at July 31.) The interest rate on this note is 10%.

d. Wages of $520 for the last week of August have not been recorded.

e. The Rent Expense of $2,040 represents rent for August, September, and October, which was paid early in August.

f. Interest of $560 has been earned on notes receivable but has not yet been received.

g. Late in August, the board of directors met and declared a cash dividend of $5,600, payable September 10. Once declared, the dividend is a liability of the corporation until it is paid.

BIG BLUE RENTAL CORP. Income Statement August 2010
	Adjustments/Corrections
	Preliminary	Debit	Credit	Final
Commissions revenue	$ 18,000	$	$	$
Interest revenue	3,400	______	________	__________
Total revenue	$ 21,400	$_____	$_______	$_______
Rent expense	$ 2,040	$	$	$
Wages expense	4,760
Supplies expense	‒
Interest expense	‒	_____	______	_______
Total expenses	$ 6,800	$_____	$_______	$_________
Net income	$ 14,600	$_____	$_______	$_______

BIG BLUE RENTAL CORP. Balance Sheet August 31, 2010
		Adjustments/Corrections
	Preliminary		Debit	Credit	Final
Assets
Cash	$ 1,600		$	$	$
Notes receivable	52,000
Commissions receivable	‒
Interest receivable	‒
Prepaid rent	‒
Supplies	2,600		_______	_______	_______
Total assets	$ 56,200		$_______	$_______	$_______
Liabilities and Owners’ Equity
Accounts payable	$ 480		$	$	$
Notes payable	9,600
Interest payable	160
Wages payable	‒
Dividends payable	‒		_______	_______	_______
Total l iabilities	$ 10,240		$_______	$_______	$_______
Paid-in capital	$ 9,600		$_______	$_______	$_______
Retained earnings:
Balance, August 1	$ 21,760		$	$	$
Net income	14,600
Dividends	‒		_______	_______	_______
Balance, August 31	$ 36,360		$_______	$_______	$_______
Total owners’ equity	$ 45,960		$_______	$_______	$_______
Total liabilities and owners’ equity	$ 56,200		$_______	$_______	$_______

Required:

a. Using the columns provided on the income statement and balance sheet for Big Blue Rental Corp., make the appropriate adjustments/corrections to the statements, and enter the correct amount in the Final column. Key your adjustments/corrections with the letter of the item in the preceding list. Captions/account names that you will have to use are on the statements. (Hint: Use the five questions of transaction analysis. What is the relationship between net income and the balance sheet?)

b. Consider the entries that you have recorded in your answer to part a. Using these items as examples, explain why adjusting entries normally have an effect on both the balance sheet and the income statement.

c. Explain why the Cash account on the balance sheet is not usually affected by adjustments. In your answer, identify the types of activities and/or events that normally cause the need for adjustments to be recorded. Give at least one example of an adjustment (other than those provided in the problem data).