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Demonstration Problem
Chapter 4 – Exercise 11
Record Transactions and Adjustments
AccountingWhat the Numbers Mean 10e
Problem Definition
• Enter the following column heading across the top of a sheet of paper:
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
Problem Definition
• Enter the following column heading across the top of a sheet of paper:
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
Enter the transaction/adjustment letter in the first column and show the effect, ifany, of the transaction entry or adjusting entry on the appropriate balance sheetcategory or on the income statement by entering the amount and indicatingwhether it is an addition (+) or a subtraction (-). Column headings reflect theexpanded balance sheet equation; items that affect net income should not beshown as affecting stockholders’ equity. In some cases, only one column may beaffected because all of the specific accounts affected by the transaction areincluded in that category. Transaction a has been done as an illustration. (Note: As an alternative to using the horizontal model, you may write the journal entryfor each transaction or adjustment.)
a. Provided services to a client on account; revenues totaled $550.
b. Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited.
c. Recognized insurance expense for one month from the above premium via a reclassification adjusting entry.
d. Paid $800 of wages accrued at the end of the prior month.
e. Paid $2,600 of wages for the current month.f. Accrued $600 of wages at the end of the current month.g. Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Definition
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
a. +550 +550
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
a. +550 +550 Journal entry:
Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550 Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . . $550
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
a. +550 +550 Journal entry:
Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550 Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . . $550
Accounts receivable (an asset account) increases and Service Revenue (a revenue account) also increases which causes Net Income to increase.
a. Provided services to a client on account; revenues totaled $550.
b. Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited.
c. Recognized insurance expense for one month from the above premium via a reclassification adjusting entry.
d. Paid $800 of wages accrued at the end of the prior month.
e. Paid $2,600 of wages for the current month.f. Accrued $600 of wages at the end of the current month.g. Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Definition
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
b. -360 +360
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
b. -360 +360 Journal entry:
Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . $360 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
b. -360 +360 Journal entry:
Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . $360 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360
Prepaid Insurance (an asset account) increases and Cash (an asset account) decreases. No effect on Net Income.
a. Provided services to a client on account; revenues totaled $550.
b. Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited.
c. Recognized insurance expense for one month from the above premium via a reclassification adjusting entry.
d. Paid $800 of wages accrued at the end of the prior month.e. Paid $2,600 of wages for the current month.f. Accrued $600 of wages at the end of the current month.g. Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Definition
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
c. -30 -30
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
c. -30 -30
Journal entry:
Dr. Insurance Expens . . . . . . . . . . . . . . . . . . . . . . . . $30 Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . $30
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
c. -30 -30
Journal entry:
Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . $30 Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . $30
Insurance Expense (an expense account) increases which causes Net Income to decrease; Prepaid Insurance (an asset account) decreases.
a. Provided services to a client on account; revenues totaled $550.
b. Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited.
c. Recognized insurance expense for one month from the above premium via a reclassification adjusting entry.
d. Paid $800 of wages accrued at the end of the prior month.
e. Paid $2,600 of wages for the current month.f. Accrued $600 of wages at the end of the current month.g. Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Definition
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
d. -800 -800
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
d. -800 -800 Journal entry:
Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
d. -800 -800 Journal entry:
Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800
Wages Payable (a liability account) decreases and Cash (an asset account) also decreases. No effect on Net Income.
a. Provided services to a client on account; revenues totaled $550.
b. Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited.
c. Recognized insurance expense for one month from the above premium via a reclassification adjusting entry.
d. Paid $800 of wages accrued at the end of the prior month.
e. Paid $2,600 of wages for the current month.f. Accrued $600 of wages at the end of the current month.g. Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Definition
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
e. -2,600 -2,600
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
e. -2,600 -2,600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
e. -2,600 -2,600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600
Wages Expense (an expense account) increases which causes Net Income to decrease; Cash (an asset account) decreases.
a. Provided services to a client on account; revenues totaled $550.
b. Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited.
c. Recognized insurance expense for one month from the above premium via a reclassification adjusting entry.
d. Paid $800 of wages accrued at the end of the prior month.e. Paid $2,600 of wages for the current month.f. Accrued $600 of wages at the end of the current
month.g. Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Definition
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
f. +600 -600
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
f. +600 -600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $600 Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . $600
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
f. +600 -600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $600 Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . $600
Wages Expense (an expense account) increases which causes Net Income to decrease; Wages Payable (a liability account) increases.
a. Provided services to a client on account; revenues totaled $550.
b. Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited.
c. Recognized insurance expense for one month from the above premium via a reclassification adjusting entry.
d. Paid $800 of wages accrued at the end of the prior month.
e. Paid $2,600 of wages for the current month.f. Accrued $600 of wages at the end of the current month.g. Received cash of $1,500 on accounts receivable
accrued at the end of the prior month.
Problem Definition
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
g. +1,500 -1,500
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
g. +1,500 -1,500 Journal entry:
Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500 Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . .
$1,500
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
g. +1,500 -1,500 Journal entry:
Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500 Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . . $1,500
Cash (an asset account) increases and Accounts Receivable (an asset account) decreases. No effect on Net Income.
Problem Solution
Transaction/ Stockholders’ Net Adjustment Assets Liabilities Equity Income
a. +550 +550 b. -360 +360 c. -30 -30 d. -800 -800 e. -2,600 -2,600 f. +600 -600 g. +1,500 -1,500
Problem SolutionJournal entries:
a. Dr. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . $ 550 Cr. Service Revenue . . . . . . . . . . . . . . . . . . . . . . $ 550b. Dr. Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 360 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360c. Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . 30 Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . 30d. Dr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800e. Dr. Wages Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600f. Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 Cr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . . 600g. Dr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . . 1,500
AccountingWhat the Numbers Mean 10e
David H. MarshallWayne W. McManus
Daniel F. Viele
You should now have a better understandingof recording transactions and adjustments.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.
