1. 1 1. Accrual of Expenses - Example 1 Raider Company borrowed $10,000 on October 1, 2008. The note included a 5 percent annual interest rate, payable each September 30, starting Sept. 30, 2009. How much interest must Raider accrue at Dec. 31, 2008 before financial statements are prepared? Calc: Principal x rate x time P x R x T AJE: Interest Expense125 Interest Payable125 10,000 x.05 x 3/12 of a year = $125

2. 2 2. Accrual of Revenues - Example 2 Raider Company leases out part of its office building to Tu Company for $2,000 per month. At the end of the year, Tu owes Raider for December’s rent. Prepare the AJE for Raider Company: Rent Receivable2,000 Rent Revenue 2,000

3. 3 3.Prepaid Expenses - Example 3 Raider Company purchased a 1-year insurance policy on April 1, 2008 at a cost of $2,400 General JE at time of purchase: Prepaid Insurance2,400 Cash 2,400 Calculation for AJE at December 31 to recognize the portion that has been used up: 2,400 /12 = 200 per month x 9 months= $1,800 AJE: Insurance Expense 1,800 Prepaid Insurance 1,800

4. 4 3.Prepaid Expenses - Example 4 Raider Company purchased equipment in 2006 at a cost of $30,000. The equipment has a useful life of 10 years and no salvage value. Calculation for AJE at December 31, 2008 for the current year’s depreciation. 30,000/10 = 3,000 per year AJE: Depreciation Expense 3,000 Accumulated Depr. 3,000

5. 5 4.Unearned Revenues - Example 5 Raider Company received $6,000 on November 30, 2008 for subscriptions to be delivered over the next 12 months, starting in December of 2008. General JE at time cash received: Cash6,000 Unearned Revenues6,000 AJE at end of the period (for portion earned): 6,000 / 12 = 500 per month, so 1 month earned. Unearned Revenues500 Subscription Revenues 500

6. 6 Class Problem – Prepare Adjusting Entries The trial balance of Mega Company, Inc. at the end of its annual accounting period is as follows: Mega Company Trial Balance December 31, 2008 Cash $ 3,000 Prepaid Insurance 1,600 Supplies 2,100 Equipment 20,000 Accumulated depreciation $ 2,000 Common Stock 10,000 Retained Earnings 7,000 Dividends 1,000 Revenue 33,000 Salaries Expense 18,300 Rent Expense 6,000 ______ Totals$52,000 $52,000

7. 7 Adjusting Entries 1. Unexpired insurance at December 31 was $1,000. (So expired insurance is $600) AJE: Insurance Expense600 Prepaid Insurance600

8. 8 Adjusting Entries 2. Unused supplies, per inventory, $800 at December 31. So used supplies = 2,100 - 800 = 1,300 Supplies Expense1,300 Supplies1,300

9. 9 Adjusting Entries 3. Estimated Depreciation for 2008 is $1,000 Depreciation Expense1,000 Accumulated Depr.1,000

10. 10 Adjusting Entries 4. Earned but unpaid salaries at December 31, $700. Salaries Expense700 Salaries Payable700

11. 11 Closing Journal Entries (CJEs) - Example Closing Journal Entries (CJEs) - Example Refer to Mega Company Adjusted Trial Balance. Close revenues and expense to retained earnings: Revenue 33,000 Salaries Expense 19,000 Rent Expense 6,000 Insurance Expense 600 Supplies Expense 1,300 Depreciation Expense 1,000 Retained Earnings 5,100

12. 12 Closing Journal Entries (CJEs) - Example Closing Journal Entries (CJEs) - Example Refer to Mega Company. Now close the balance in the Dividends account to Retained Earnings. Retained Earnings 1,000 Dividends 1,000

13. 13 Closing Journal entries Retained Earnings 7,000 Beginning 5,100 Net IncomeDividends 1,000 11,100 Ending Now post the effects of retained earnings to the RE general ledger account.

14. Exercise 4-29 7/1 Cash50,000 Notes Payable 50,000 7/31 Calc: 50,000 x.12 x 1/12 = $500 AJE Int. Expense 500 Int. Payable 500 8/31 Owe? 50,000 + 50,000 x.12 x 2/12 = $51,000 Cash51,000 Notes Pay.50,000 Int. Payable 500 Int. Expense 500

15. Problem 4-3 a. Calc: (15,000 - 250)/5 = 2,950 per yr. Depreciation Exp. 2,950 Accum. Depr. 2,950 b. Calc.: Begin. 3,600 + Purch 17,600 - Unused (1,850) =Used 19,350 Supplies Expense19,350 Office Supplies 19,350

16. Problem 4-3 c. Earned? 24,000/6 = 4,000 per mo. x 5 mos. = $20,000 Customer Deposits20,000 Revenue 20,000 d. Calc: 2,700 per mo. x 2 mos = 5,400 used Rent Expense 5,400 Prepaid Rent 5,400

17. Problem 4-3 e. Calc: 200,000 x.09 x 2/12 = $3,000 (use months unless otherwise instructed) Interest Expense3,000 Interest Payable 3,000 f. If paid on the last day of work week: Owes for Fri., Mon., Tues., and Wed. 4 days x $500 per day = $2,000 owed. Salaries Expense 2,000 Salaries Payable 2,000

18. Problem 4-3 Part 2: effect on I/S if not recorded? Depr. Exp. not recorded + 2,950 Supplies Exp. not recorded +19,350 Revenues not recorded -20,000 Rent Exp. not recorded +5,400 Interest Exp. not recorded +3,000 Salaries Exp. not recorded+2,000 Net effect: Net Inc. Over by 12,700

19. Exercise 4-20 For CengageNOW, you must use Income Summary, like your text: Close revenues: Ad. Fee Earned58,500 Int. Revenue 2,700 Inc. Summary61,200 Close expenses: Inc. Summary Wage & Sal. Exp.14,300 Util. Exp.12,500 Ins. Exp. 7,300 Depr. Exp.16,250 Int. Exp. 2,600 Inc. Tax Exp. 3,300 56,250

20. Exercise 4-20 Close Income Summary to Retained Earn.: 61,200 CR - 56,250 DR = 4,950 CR Balance in Inc. Summary (this the net income that will appear on Income Statement) Inc. Summary 4,950 Retained Earnings4,950 Now close Dividends to Retained Earn.: Retained Earnings 2,000 Dividends2,000

21. Exercise 4-15 Ignore AJE? Effect on Net Income? O =Overstate U=Understate NE=no effect 1. no depr. exp.? O 2. no revenues? U 3. no ins. exp? O 4. no int. exp? O 5. no commission exp.? O 6. no rent revenue? U