3-21E - Horngren'S Financial And Managerial Accounting

Question

Question :Consider the following situations: a. Business receives \(3,200 on January 1 for 10-month service contract for the period January 1 through October 31. b. Total salaries for all employees is \)3,600 per month. Employees are paid on the 1st and 15th of the month. c. Work performed but not yet billed to customers for the month is \(1,600. d. The company pays interest on its \)16,000, 4% note payable of $53 on the first day of each month. Assume the company records adjusting entries monthly. Journalize the adjusting entries needed as of January 31.

Step-by-Step Solution

Answer

Adjusting entries are as follows :

Transactions	Accounts and Explanation	Debit	Credit
(a)	Unearned Revenue	$320
	Service Revenue		$320
	To record service revenue earned
(b)	Salaries Expense	$1,800
	Salaries Payable		$1,800
	To record accrued salaries expense
(c)	Accounts Receivable	$1,600
	Service Revenue		$1,600
	To record service revenue earned
(d)	Interest Expense	$53
	Interest Payable		$53
	To record accrued interest expense

Step1: Calculation of Service Revenue Service revenue is calculated as follows:

$$\begin{gathered} \mathbf{ServiceRevenue}\mathbf{=}\mathbf{AmountReceived}\mathbf{\times }\frac{\mathbf{NumberofMonthsExpired}}{\mathbf{TotalMonthsofContract}} \\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{200}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{10}} \\ \mathbf{=}\mathbf{\$}\mathbf{320} \end{gathered}$$

Step2: Calculation of Salaries Expense

Salaries expense is calculated as follows

$$\begin{gathered} \mathbf{SalariesExpense}\mathbf{=}\frac{\mathbf{TotalSalaries}}{\mathbf{NumberofTimesPaidinMonth}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}}{\mathbf{2}} \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{800} \end{gathered}$$