Question

Sweeney & Allen, a large marketing firm, adjusts its accounts at the end of each month. The following information is available for the year ending December 31.

A bank loan had been obtained on December 1. Accrued interest on the loan at December 31 amounts to $1,500. No interest expense has yet been recorded.
Depreciation of the firm’s office building is based on an estimated life of 30 years. The building was purchased four years ago for $450,000.
Accrued, but unbilled, revenue during December amounts to $75,000.
On March 1, the firm paid $2,400 to renew a 12-month insurance policy. The entire amount was recorded as Prepaid Insurance.
The firm received $15,000 from King Biscuit Company in advance of developing a six-month marketing campaign. The entire amount was initially recorded as Unearned Revenue. At December 31, $9,000 had actually been earned by the firm.
The company’s policy is to pay its employees every Friday. Since December 31 fell on a Wednesday, there was an accrued liability for salaries amounting to $1,900.
a. Record the necessary adjusting journal entries on December 31.
b. By how much did Sweeney & Allen’s net income increase or decrease as a result of the adjusting entries performed in part a? (Ignore income taxes.)

Answer 1

Adjusting journal entries are made at the end of the accounting period to ensure the proper recognition of revenues, expenses, assets, and liabilities. The necessary adjusting journal entries for Sweeney & Allen on December 31 are listed and explained. Sweeney & Allen's net income decreased by $1,900 as a result of the adjusting entries.

Step-by-step explanation:

Adjusting journal entries are made at the end of the accounting period to ensure the proper recognition of revenues, expenses, assets, and liabilities. Based on the information provided, the necessary adjusting journal entries for Sweeney & Allen on December 31 would be:

1. To record interest expense and accrued interest on the bank loan:
   Debit: Interest Expense ($1,500)
   Credit: Accrued Interest Payable ($1,500)
2. To record depreciation expense for the building:
   Debit: Depreciation Expense ($45,000)
   Credit: Accumulated Depreciation-Building ($45,000)
3. To record the accrued, but unbilled, revenue:
   Debit: Accounts Receivable ($75,000)
   Credit: Service Revenue ($75,000)
4. To adjust the prepaid insurance:
   Debit: Insurance Expense ($200)
   Credit: Prepaid Insurance ($200)
5. To recognize the earned portion of the unearned revenue:
   Debit: Unearned Revenue ($6,000)
   Credit: Service Revenue ($6,000)
6. To record the accrued liability for salaries:
   Debit: Salaries Expense ($1,900)
   Credit: Salaries Payable ($1,900)

b. Sweeney & Allen's net income would decrease by $1,900 as a result of the adjusting entries performed.

Answer 2

Sweeney & Allen's net income increased by $62,400 as a result of the adjusting entries made on December 31, which accounted for accrued interest, depreciation, unbilled revenues, insurance expense, earned revenue from advance payment, and accrued salaries.

Step-by-step explanation:

Adjusting Journal Entries for Sweeney & Allen

To properly adjust the accounts for the year, we need to make five adjusting journal entries on December 31:

1. Interest Expense 1,500
   Interest Payable 1,500
   (To record accrued interest on the bank loan)
2. Depreciation Expense 15,000
   Accumulated Depreciation—Building 15,000
   (To record depreciation for the year: 450,000 / 30 years = 15,000)
3. Accounts Receivable 75,000
   Service Revenue 75,000
   (To record accrued unbilled revenue)
4. Insurance Expense 200
   Prepaid Insurance 200
   (To record insurance expense for the year: 2,400 / 12 months * 10 months = 200 remaining as prepaid)
5. Unearned Revenue 6,000
   Service Revenue 6,000
   (To recognize revenue earned from the amount previously recorded as unearned)
6. Salaries Expense 1,900
   Salaries Payable 1,900
   (To record accrued salaries)

Total expenses recorded are 1,500 + 15,000 + 200 + 1,900 = 18,600 and total revenues recorded are 75,000 + 6,000 = 81,000. The net increase in income due to adjusting entries is 81,000 - 18,600 = 62,400.

Net Income Effect from Adjusting Entries

Sweeney & Allen’s net income increased by 62,400 as a result of the adjusting entries. This increase comes from recognizing accrued revenues that were not previously billed and earned revenue from the advance payment, offset by the expenses for accruing interest, depreciation, insurance, and salaries.