Question

Arnez Company's annual accounting period ends on December 31. The following information concerns the adjusting entries to be recorded as of that date.

a. The Office Supplies account started the year with a $3,575 balance. During the year, the company purchased supplies for $14,765, which was added to the Office Supplies account. The inventory of supplies available at December 31 totaled $3,146.
b. The Prepaid Insurance account had a $31,320 debit balance at December 31 before adjusting for the costs of any expired coverage for the year. An analysis of prepaid insurance shows that $22,535 of unexpired insurance coverage remains at year-end.
c. The company has 15 employees, who earn a total of $1,600 in salaries each working day. They are paid each Monday for their work in the five-day workweek ending on the previous Friday. Assume that December 31 is a Tuesday, and all 15 employees worked the first two days of that week. Because New Year's Day is a paid holiday, they will be paid salaries for five full days on Monday, January 6 of next year.
d. The company purchased a building at the beginning of this year. It cost $745,000 and is expected to have a $45,000 salvage value at the end of its predicted 30-year life. Annual depreciation is $23,333.
e. Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at $2,200 per month, starting on November 1. The rent was paid on time on November 1, and the amount received was credited to Rent Revenue. However, the tenant has not paid the December rent. The company has worked out an agreement with the tenant, who has promised to pay both December and January rent in full on January 15.
f. On November 1, the company rented space to another tenant for $1,993 per month. The tenant paid five months' rent in advance on that date. The payment was recorded with a credit to the Unearned Revenue account. Assume no other adjusting entries are made during the year.
Required: Use the information to prepare adjusting entries as of December 31.

Answer 1

The Arnez Company requires six adjusting entries for office supplies, prepaid insurance, salaries, building depreciation, rent revenue uncollected, and earned rent revenue not yet reflected in the financial statements. These entries account for the inclusion of expenses incurred and revenues earned within the correct accounting period, adhering to the matching principle.

Step-by-step explanation:

Below are the adjusting entries required for Arnez Company as of December 31:

1. Office Supplies Expense: The company should recognize the cost of supplies used. The adjusting entry would debit Office Supplies Expense and credit Office Supplies for the difference between the supplies purchased and the ending inventory (\$14,765 - \$3,146 = \$11,619).
2. Insurance Expense: The company must recognize the insurance that has expired during the year. Debit Insurance Expense and credit Prepaid Insurance for the amount of coverage that has expired (\$31,320 - \$22,535 = \$8,785).
3. Salaries Expense: Salaries for the two days worked before December 31 and the paid holiday must be recognized. Debit Salaries Expense and credit Salaries Payable for two days' wages (2 days x \$1,600/day = \$3,200).
4. Depreciation Expense-Building: The annual depreciation must be recorded. Debit Depreciation Expense and Credit Accumulated Depreciation for \$23,333.
5. Accounts Receivable: Recognize the December rent not yet paid by the first tenant. Debit Accounts Receivable and credit Rent Revenue for \$2,200.
6. Unearned Revenue: Recognize rent revenue from the second tenant for one month. Debit Unearned Revenue and credit Rent Revenue for \$1,993.

These adjusting entries ensure that Arnez Company's financial statements reflect the correct amounts for revenues earned and expenses incurred during the period.