Question

Karla Tanner opens a web consulting business called Linkworks and recorded the following transactions in its first month of operations.

Apr. 1 Tanner invests $80,000 cash along with office equipment valued at $26,000 in the company in exchange for common stock.
Apr. 2 The company prepaid $9,000 cash for twelve months' rent for office space. The company's policy is record prepaid expenses in balance sheet accounts.
Apr. 3 The company made credit purchases for $8,000 in office equipment and $3,600 in office supplies. Payment is due within 10 days.
Apr. 6 The company completed services for a client and immediately received $4,000 cash.
Apr. 9 The company completed a $6,000 project for a client, who must pay within 30 days.
Apr. 13 The company paid $11,600 cash to settle the account payable created on April 3.
Apr. 19 The company paid $2,400 cash for the premium on a 12-month insurance policy. The company's policy is record prepaid expenses in balance sheet accounts.
Apr. 22 The company received $4,400 cash as partial payment for the work completed on April 9.
Apr. 25 The company completed work for another client for $2,890 on credit.
Apr. 28 The company paid $5,500 cash in dividends.
Apr. 29 The company purchased $600 of additional office supplies on credit.
Apr. 30 The company paid $435 cash for this month's utility bill.
Descriptions of items that require adjusting entries on April 30, 2015, follow.

a) On April 2, the company prepaid $9,000 cash for twelve months' rent for office space.

b) The balance in Prepaid insurance represents the premium paid for a 12-month insurance policy; the policy's coverage began on April 1.

c) Office supplies on hand as of April 30 total $1,200.

d) Straight-line depreciation of office equipment, based on a 5-year life and a $4,000 salvage value, is $500 per month.

e) The company has completed work for a client, but has not yet billed the $1,800 fee.

f) Wages due to employees, but not yet paid, as of April 30 total $2,600.

Use the 3-step adjusting entry process to prepare the adjusting entry necessary to correctly report the revenue earned or the expense incurred:

Step 1: Determine what the current account balance equals (See General Ledger tab)

Step 2: Determine what the current account balance should equal.

Step 3: Prepare an adjusting entry to get from Step 1 to Step 2.

Generally Accepted Accounting Principles (GAAP):
The GAAP is a blend of recommendations from government bodies and widely accepted accounting principles for reporting information. It promotes openness in the exchange of economic data and makes clear and consistent financial reporting possible across organizations.

Answer 1

a) On April 2, the company prepaid $9,000 cash for twelve months' rent for office space.

Step 1:

Prepaid rent $9,000

Step 2:

Prepaid rent $9,000 - $750 = $8,250

Step 3:

Dr Rent expense 750

Cr Prepaid rent 750

b) The balance in Prepaid insurance represents the premium paid for a 12-month insurance policy; the policy's coverage began on April 1.

Step 1:

Prepaid insurance $2,400

Step 2:

Prepaid rent $2,400 - $200 = $2,200

Step 3:

Dr Insurance expense 200

Cr Prepaid expenses 200

c) Office supplies on hand as of April 30 total $1,200.

Step 1:

Office supplies $3,600 + $600 = $4,200

Step 2:

Office supplies $4,200 - $3,000 = $1,200

Step 3:

Dr Office supplies expense 3,000

Cr Office supplies 3,000

d) Straight-line depreciation of office equipment, based on a 5-year life and a $4,000 salvage value, is $500 per month.

Step 1:

Office equipment $26,000 + $8,000 = $34,000

Step 2:

Office supplies $34,000 - $500 = $33,500

Step 3:

Dr Depreciation expense 500

Cr Accumulated depreciation - equipment 500

e) The company has completed work for a client, but has not yet billed the $1,800 fee.

Step 1:

Service revenue $4,000 + $6,000 + $2,890 = $12,890

Step 2:

Service revenue $12,890 + $1,800 = $14,690

Step 3:

Dr Accrued receivable 1,800

Cr Service revenue 1,800

f) Wages due to employees, but not yet paid, as of April 30 total $2,600.

Step 1:

Wages expense $0

Step 2:

Wages expense $0 + $2,600 = $2,600

Step 3:

Dr Wages expense 2,600

Cr Wages payable 2,600