1. Learning Objectives Understand the Business – LO1 Explain why adjustments are needed. Study the accounting methods – LO2 Prepare adjustments needed at the end of the period. – LO3 Prepare an adjusted trial balance. – LO4 Prepare financial statements. – LO5 Explain the closing process. Evaluate the results – LO6 Explain how adjustments affect financial results. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

2. Making Required Adjustments Adjustments are not made every day because it is more efficient to do them all at once at the end of each period. LO2 2© McGraw-Hill Ryerson. All rights reserved.

3. The unadjusted trial balance is a key starting point for the adjustment process. Compare the unadjusted balance with the desired balance to determine the required adjusting entry. LO2 3© McGraw-Hill Ryerson. All rights reserved.

4. Deferral Adjustments LO2 (a) Supplies Used during the Period Of the $1,600 in supplies received in early September, $400 remain on hand at September 30. 4© McGraw-Hill Ryerson. All rights reserved.

5. 1 Analyze 2 Record 3 Summarize LO2 (a) Supplies Used during the Period 5© McGraw-Hill Ryerson. All rights reserved.

6. (b) Rent Benefits Expired during the Period Three months of rent were prepaid on September 1 for $7,200, but one month has now expired, leaving only two months prepaid at September 30. 1 / 3 x $7,200 = $2,400 expense used up as of Sept. 30 2 / 3 x $7,200 = $4,800 asset remains prepaid as of Sept. 30 LO2 6© McGraw-Hill Ryerson. All rights reserved.

7. 1 Analyze 2 Record 3 Summarize LO2 (b) Rent Benefits Expired during the Period 7© McGraw-Hill Ryerson. All rights reserved.

8. (c) Amortization Recorded for Use of Equipment The restaurant equipment, which was estimated to last five years, has now been used for one month, representing an estimated expense of $1,000. Amortization is the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used. A contra-account is an account that is an offset to, or reduction of, another account. LO2 8© McGraw-Hill Ryerson. All rights reserved.

9. (c) Amortization Recorded for Use of Equipment 1 Analyze 2 Record 3 Summarize LO2 9© McGraw-Hill Ryerson. All rights reserved.

10. Accumulated Amortization is a balance sheet account and Amortization Expense is an income statement account. The Accumulated Amortization account allows you to report both the original cost of equipment and a running total of the amount that has been amortized. The normal balance in a contra-account is always the opposite of the account it offsets. The amount of amortization depends on the method used for determining it. LO2 10© McGraw-Hill Ryerson. All rights reserved.

11. (d) Gift Cards Redeemed for Service Pizza Palace redeemed $160 of gift cards that customers used to pay for pizza. 1 Analyze 2 Record 3 Summarize LO2 11© McGraw-Hill Ryerson. All rights reserved.

12. Accrual Adjustments LO2 (e) Revenues Earned but not yet Recorded Pizza Palace provided $40 of Pizza to Emilio’s close friend on the last day of September, with payment to be received in October. 1 Analyze 2 Record 3 Summarize 12© McGraw-Hill Ryerson. All rights reserved.

13. (f) Wage Expense Incurred but not yet Recorded Pizza Palace owes $300 of wages to employees for work done on the last day of September. LO2 1 Analyze 2 Record 3 Summarize 13© McGraw-Hill Ryerson. All rights reserved.

14. (g) Interest Expense Incurred but not yet Recorded Pizza Palace has not paid or recorded the $100 interest that it owes for this month on its note payable to the bank. LO2 1 Analyze 2 Record 3 Summarize 14© McGraw-Hill Ryerson. All rights reserved.

15. Income tax is calculated by multiplying the company's adjusted income by the company’s tax rate. Calculate income tax expense after all revenue and expense adjustments. Pizza Palace’s income tax is $1,000 x 40% = $400 (h) Income Taxes Incurred but not yet Recorded Pizza Palace pays income tax at an average rate equal to 40 percent of the company’s income before taxes. LO2 15© McGraw-Hill Ryerson. All rights reserved.

16. (h) Income Taxes Incurred but not yet Recorded LO2 1 Analyze 2 Record 3 Summarize 16© McGraw-Hill Ryerson. All rights reserved.

17. LO2 (i) Dividend Declared and Paid Pizza Palace declares and pays a $500 cash dividend. Dividends are actually a daily transaction, but are included here for convenience. 1 Analyze 2 Record 3 Summarize 17© McGraw-Hill Ryerson. All rights reserved.

18. Adjusting journal entries never involve cash. Adjusting journal entries always include one balance sheet account and one income statement account. Dividends are not expenses; they are a reduction of retained earnings. LO2 18© McGraw-Hill Ryerson. All rights reserved.