Question

Arnez Company’s annual accounting period ends on December 31. The following information concerns the adjusting entries to be recorded as of that date.

The Office Supplies account started the year with a $4,350 balance. During the year, the company purchased supplies for $17,966, which was added to the Office Supplies account. The inventory of supplies available at December 31 totaled $3,828.
The Prepaid Insurance account had a $25,224 debit balance at December 31 before adjusting for the costs of any expired coverage for the year. An analysis of prepaid insurance shows that $18,216 of unexpired insurance coverage remains at year-end.
The company has 15 employees, who earn a total of $2,850 in salaries each working day. They are paid each Monday for their work in the five-day workweek ending on the previous Friday. Assume that December 31 is a Tuesday, and all 15 employees worked the first two days of that week. Because New Year’s Day is a paid holiday, they will be paid salaries for five full days on Monday, January 6 of next year.
The company purchased a building at the beginning of this year. It cost $755,000 and is expected to have a $45,000 salvage value at the end of its predicted 30-year life. Annual depreciation is $23,667.
Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at $2,100 per month, starting on November 1. The rent was paid on time on November 1, and the amount received was credited to Rent Revenue. However, the tenant has not paid the December rent. The company has worked out an agreement with the tenant, who has promised to pay both December and January rent in full on January 15.
On November 1, the company rented space to another tenant for $1,903 per month. The tenant paid five months' rent in advance on that date. The payment was recorded with a credit to the Unearned Revenue account. Assume no other adjusting entries are made during the year.
Required:
1. Use the information to prepare adjusting entries as of December 31.

Answer 1

1. Adjust Office Supplies account to (4,350 + 17,966 - 3,828).

2. Adjust Prepaid Insurance to (25,224 - 18,216).

3. Adjust Salaries Expense for (15 x 2,850 x 2).

4. Record Depreciation Expense of $23,667.

5. Adjust Unearned Revenue for November rent received ($2,100). No adjustment yet for December and January rent.

Step-by-step explanation:

Let's prepare the adjusting entries based on the information provided:

1. Office Supplies:

- Beginning balance: $4,350

- Purchased supplies: $17,966

- Ending inventory: $3,828

- Adjusting entry: 4,350 + 17,966 - 3,828 = Adjusted Office Supplies

2. Prepaid Insurance:

- Debit balance at December 31: $25,224

- Unexpired insurance at year-end: $18,216

- Adjusting entry: 25,224 - 18,216 = Adjusted Prepaid Insurance

3. Salaries Expense:

- 15 employees x $2,850 per day x 2 days (December 30 and 31)

- Adjusting entry: 15 x 2,850 x 2 = Adjusted Salaries Expense

4. Depreciation Expense:

- Annual depreciation: $23,667

- Adjusting entry: 23,667 = Depreciation Expense

5. Unearned Revenue (November Rent):

- Rent received for November: $2,100

- Adjusting entry: 2,100 = Unearned Revenue

6. Unearned Revenue (December and January Rent):

- No adjusting entry needed at this point. It will be recorded when the payment is received on January 15.

These adjusting entries will help ensure that the financial statements accurately reflect the company's financial position at the end of the accounting period (December 31).