Q42PGB - Horngren'S Financial And Managerial Accounting

Question

The unadjusted trial balance of Midway Inn Company at December 31, 2018, and the data needed for the adjustments follow.

Midway INN Company
Unadjusted Trial Balance
December 31, 2018
		Balance
Account Title	Debit	Credit
Cash	\( 14,500
Accounts Receivables	15,100
Prepaid Insurance	1,400
Office Supplies	700
Building	518,000
Accumulated Depreciation – Building		\) 310,000
Accounts Payable		4,210
Salaries Payable
Unearned Revenue		1,600
Common Stock		222,160
Dividends	1,890
Service Revenue		16,900
Salaries Expense	2,600
Insurance Expense
Depreciation Expense – Building
Advertising Expense	680
Supplies Expense
Total	\( 554,870	\) 554,870

Adjustment data at December 31 follow:

a. As of December 31, Midway Inn had \(800 of Prepaid Insurance remaining.

b. At the end of the month, Midway Inn had \)500 of office supplies remaining.

c. Depreciation on the building is \(2,100.

d. Midway Inn pays its employees on Friday for the weekly salaries. Its employees earn \)1,300 for a five-day workweek. December 31 falls on Wednesday this year.

e. On November 20, Midway Inn contracted to perform services for a client receiving \(1,600 in advance. Midway Inn recorded this receipt of cash as Unearned Revenue. As of December 31, Midway Inn has \)1,400 still unearned.

Requirements

1. Journalize the adjusting entries on December 31.

2. Using the unadjusted trial balance, open the accounts (use a four-column ledger) with the unadjusted balances. Post the adjusting entries to the ledger accounts.

3. Prepare the adjusted trial balance.

4. Assuming the adjusted trial balance has total debits equal to total credits, does this mean that the adjusting entries have been recorded correctly? Explain.

Step-by-Step Solution

Answer

Total of adjusted trial balance: $557,750

Step 1: Recording of adjusting entry

Date	Particular	Debit	Credit
2018
Dec 31	Insurance Expense	$ 600
	Prepaid Insurance		$ 600
	Being insurance expense incurred
Dec 31	Supplies Expense	$ 200
	Office Supplies		$ 200
	Being supplies expense incurred
Dec 31	Depreciation Expense – Building	$ 2,100
	Accumulated Depreciation - Building		$ 2,100
	Being depreciation charged on building
Dec 31	Salaries Expense	$ 780
	Salaries Payable		$ 780
	Being salaries payable for the last workweek for December
Dec 31	Unearned Revenue	$ 200
	Service revenue		$ 200
	Being service revenue earned
	Total	$ 4,400	$ 4,400

Step 2: Posting of adjusting entry into ledger

Insurance Expense
Date	Amount	Date	Amount
2018
Dec 31	$ 600
Bal.	$ 600

 

Prepaid Insurance
Date	Amount	Date	Amount
2018
Bal.	$ 1,400	Dec 31	$ 600
Bal.	$    800

Supplies Expense
Date	Amount	Date	Amount
2018
Dec 31	$ 200
Bal.	$ 200

 

Office Supplies
Date	Amount	Date	Amount
2018
Bal.	$ 700	Dec 31	$ 200
Bal.	$ 500

 

Depreciation Expense – Building
Date	Amount	Date	Amount
2018
Dec 31	$ 2,100
Bal.	$ 2,100

 

Accumulated Depreciation – Building
Date	Amount	Date	Amount
2018
Bal.			$ 310,000
		Dec 31	2,100
Bal.			$ 312,100

 

Salaries Expense
Date	Amount	Date	Amount
2018
Bal.	$ 2,600
Dec 31	780
Bal.	$ 3,380

Salaries Payable
Date	Amount	Date	Amount
2018
		Dec 31	$ 780
Bal.			$ 780

 

Unearned Revenue
Date	Amount	Date	Amount
2018
Bal.			$ 1,600
Dec 31	$ 200
Bal.			$ 1,400

 

Service Revenue
Date	Amount	Date	Amount
2018
Bal.			$ 16,900
		Dec 31	200
Bal.			$ 17,100

Step 3: Adjusted trial balance

Midway INN Company
Unadjusted Trial Balance
December 31, 2018
		Balance
Account Title	Debit	Credit
Cash	$ 14,500
Accounts Receivables	15,100
Prepaid Insurance	800
Office Supplies	500
Building	518,000
Accumulated Depreciation – Building		$ 312,100
Accounts Payable		4,210
Salaries Payable		780
Unearned Revenue		1,400
Common Stock		222,160
Dividends	1,890
Service Revenue		17,100
Salaries Expense	3,380
Insurance Expense	600
Depreciation Expense – Building	2,100
Advertising Expense	680
Supplies Expense	200
Total	$ 557,750	$ 557,750

Step 4: Meaning of equal debit and credit in adjusted trial balance

No, even if the adjusted trial balance has equal debits and credits, it does not mean that the adjustment entries have been made correctly or the trial balance has no error.

The adjusted trial balance shows the reflection of the adjustments made. If the adjustment has been made with the wrong amount or even the adjustment has been forgotten completely, even then the trial balance would match too. 

So the balancing of the trial balance does not guarantee the accurateness of the trial balance, it only shows that after adjustment the debits balances of the accounts are equal to the credit balances.