Question

The following transactions occurred during December 31, 2018, for the Falwell Company. A three-year fire insurance policy was purchased on July 1, 2018, for $14,400. The company debited insurance expense for the entire amount. Depreciation on equipment totaled $13,750 for the year. Employee salaries of $20,000 for the month of December will be paid in early January 2019. On November 1, 2018, the company borrowed $260,000 from a bank. The note requires principal and interest at 12% to be paid on April 30, 2019. On December 1, 2018, the company received $4,600 in cash from another company that is renting office space in Falwell’s building. The payment, representing rent for December and January, was credited to deferred rent revenue. Prepare the necessary adjusting entries for each of the above situations. Assume that no financial statements were prepared during the year and no adjusting entries were recorded.

Answer 1

prepaid insurance 12,000 debit

insurance expense 12,000 credit

depreciation expense 13,750 debit

accumulated depreication 13,750 credit

salaries expense 20,000 debit

salaries payable 20,000 credit

interest expense 5,200 debit

interest payable 5,200 credit

deferred rent revenue 2,300 debit

rent revenue 2,300 credit

Step-by-step explanation:

teh insurance expense for the year should be for the months outstanding during 2018 only, thus the unexpired portion should be delcare a prepaid.

July 1st to December 31th: 6 months.

Unexpired insurance:

14,400 x (36 - 6) /36 = 14,400 (30 unexpired month)/36 = 12,000

for depreciation and salaries we record the stated amountsquite self-explanatory

for the note payable we need to record the accrued interest:

principal x rate x time

260,000 x 12% x 2/12 = 5,200

We shoudl accrued revenue for the month expired (December)

4,600 rent for two months:

4,600 / 2 = 2,300 rent for a month