Q5P - Intermediate Accounting (Kieso)

Question

The accounts listed below appeared in the December 31 trial balance of the Savard Theater.

	Debit	Credit
Equipment	\(192,000
Accumulated Depreciation—Equipment		\) 60,000
Notes Payable		90,000
Admissions Revenue		380,000
Advertising Expense	13,680
Salaries and Wages Expense	57,600
Interest Expense	1,400

Instructions 

1. From the account balances listed above and the information given below, prepare the annual adjusting entries necessary on December 31. (Omit explanations.) 
   1. The equipment has an estimated life of 16 years and a salvage value of \(24,000 at the end of that time. (Use straightline method.) 
   2. The note payable is a 90-day note given to the bank October 20 and bearing interest at 8%. (Use 360 days for denominator.) 
   3. In December, 2,000 coupon admission books were sold at \)30 each and recorded as Admissions Revenue. They could be used for admission any time after January 1. 
   4. Advertising expense paid in advance and included in Advertising Expense \(1,100. 
   5. Salaries and wages accrued but unpaid \)4,700.
2. What amounts should be shown for each of the following on the income statement for the year? 
   1. Interest expense. 
   2. Admissions revenue. 
   3. Advertising expense. 
   4. Salaries and wages expense.

Step-by-Step Solution

Answer

1. Total credit and debit side of Journal is $76,340
2. Interest expense = $1,440

            Admission expense = $320,000

            Advertising expense = $12,580

            Salaries and wages expense = $62,300

Step 1: Meaning of Income Statement

A company's management prepares an income statement, also known as a profit and loss statement, which details the company's revenues, expenses, and net gain or loss for a specific period.

Step 2: (a) Preparing Journal entries

Date	Particulars	Debit ($)	Credit ($)
1	Depreciation expense	10,500
	Accumulated Depreciation-     Equipment  $\left(\frac{1}{16}\times \$168,000\right)$		10,500
2	Interest expense	40
	Interest payable  $\mathbf{(}\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{8}\mathbf{\%}\mathbf{\times }\frac{\mathbf{72}}{\mathbf{360}}\mathbf{)}\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{400}$		40
3	Admission Revenue	60,000
	Unearned admission revenue       $\left(2,000\times \$30\right)$		60,000
4	Prepaid Advertising	1,100
	Advertising expense		1,100
5	Salaries and Wages Expense	4,700
	Salaries and Wages Payable		4,700
		$76,340	$76,340

Step 3: (b) Reporting of amount on the income statement

1. Interest expense is $1,440 ($1400 + $40)
2. Admission revenue is $320,000 ($380,000 - $60,00)
3. Advertising expense is $12,580 ($13,680 - $1,100)
4. Salaries and wages expense is $62,300 ($57,600 + $4,700)

Note: 30 days are assumed to calculate interest expense.