Adjusting, closing and correcting: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Accruing revenue earned but not yet invoiced
A maintenance company performed services worth $3,400.00 for a customer in December. The customer will be billed in January. Record the adjusting entry on December 31.
Assumptions: The company’s fiscal year ends on December 31. No sales tax applies.
Account Debit Credit Accounts Receivable $3,400.00 Service Revenue $3,400.00 Why
The revenue was earned in December, so it belongs to this year even though no bill has been sent: debit Accounts Receivable and credit Service Revenue for $3,400.00.
Accruing electricity not yet invoiced at year end
On December 31 the electricity used by the store in December has not been billed yet. The meter reading gives a cost of $380.00; the bill will arrive in January. Record the adjusting entry on December 31.
Account Debit Credit Utilities Expense $380.00 Utilities Payable $380.00 Why
The electricity was used in December, so its cost is a December expense even though the bill comes later: debit Utilities Expense and credit Utilities Payable for $380.00.
Recognizing unearned revenue at year end
On November 1 a customer paid $3,600.00 in advance for six months of maintenance service (November through April), and the company credited Unearned Revenue. Record the adjusting entry on December 31.
Assumptions: The company’s fiscal year ends on December 31, and it adjusts its accounts only at year end.
Account Debit Credit Unearned Revenue $1,200.00 Service Revenue $1,200.00 Why
Two of the six months of service have been provided, so $1,200.00 has been earned: it moves from Unearned Revenue to Service Revenue.
Adjusting prepaid insurance at year end
On October 1 a company paid $2,400.00 for a one-year insurance policy (coverage October 1 through September 30) and debited Prepaid Insurance. Record the adjusting entry on December 31.
Assumptions: The company’s fiscal year ends on December 31, and it adjusts its accounts only at year end.
Account Debit Credit Insurance Expense $600.00 Prepaid Insurance $600.00 Why
Three of the twelve months have passed, so $600.00 has expired: it moves from Prepaid Insurance to Insurance Expense.
Year-end straight-line depreciation
On January 1 a company bought a machine for $12,000.00. It has a useful life of 5 years and no salvage value. Record the depreciation for the year on December 31.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. Straight-line depreciation for a full year.
Account Debit Credit Depreciation Expense $2,400.00 Accumulated Depreciation—Equipment $2,400.00 Why
Straight-line depreciation is (cost − salvage value) divided by the useful life; with no salvage value, $12,000.00 / 5 = $2,400.00. Debit Depreciation Expense and credit Accumulated Depreciation, so the machine itself stays at cost.
Adjusting office supplies to the year-end count
On January 1 the Supplies account had a balance of $600.00. Supplies bought during the year for $2,400.00 were debited to Supplies, and no supplies expense has been recorded this year. The count on December 31 finds supplies costing $450.00 on hand. Record the adjusting entry.
Assumptions: The company records supplies as an asset (Supplies) and recognizes the supplies used only at year end.
Account Debit Credit Supplies Expense $2,550.00 Supplies $2,550.00 Why
Supplies available were $600.00 + $2,400.00; $450.00 are left, so $2,550.00 were used. Debit Supplies Expense and credit Supplies for $2,550.00, which leaves Supplies at the counted $450.00.
Adjusting the allowance for doubtful receivables to its required balance
Before adjustment, the Allowance for Doubtful Accounts has a credit balance of $1,200.00. An aging of accounts receivable shows that the allowance should have a balance of $2,100.00. Record the adjusting entry at year end.
Assumptions: The company uses the allowance method and sets the allowance from an aging schedule (percentage-of-receivables approach).
Account Debit Credit Bad Debt Expense $900.00 Allowance for Doubtful Accounts $900.00 Why
With the aging approach the entry brings the allowance to its required balance: $2,100.00 − $1,200.00 = $900.00. Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $900.00.
Accruing interest on a customer’s note at year end
A customer gave the company a six-month, 8% note for $12,000.00 3 months before December 31. Principal and interest are due at maturity. Record the interest earned to date at December 31.
Assumptions: Nothing has been recorded for the interest yet. Interest is computed in whole months: principal × rate × months / 12.
Account Debit Credit Interest Receivable $240.00 Interest Revenue $240.00 Why
Interest earned so far is $12,000.00 × 8% × 3/12 = $240.00. It is revenue of this year and a receivable until collected: debit Interest Receivable and credit Interest Revenue. Notes Receivable stays at the principal.
Recording inventory shrinkage at year end
At year end a store’s inventory records show merchandise costing $42,500.00. The physical count finds goods costing only $41,820.00; the difference is due to theft and breakage. Adjust the records to the count.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. The count is correct and the records contain no posting errors.
Account Debit Credit Cost of Goods Sold $680.00 Inventory $680.00 Also accepted
Account Debit Credit Inventory Shrinkage Expense $680.00 Inventory $680.00 Why
The records overstate inventory by $42,500.00 − $41,820.00 = $680.00, so Inventory is credited by $680.00. Shrinkage is part of the cost of merchandise, so the usual debit is Cost of Goods Sold; a separate Inventory Shrinkage Expense account is also accepted.
Closing the revenue accounts to Income Summary
At year end, after the adjusting entries, a sole proprietorship’s only revenue accounts are Sales Revenue with a credit balance of $86,400.00 and Interest Revenue with a credit balance of $520.00. Close the revenue accounts to Income Summary.
Assumptions: The business closes its revenue and expense accounts through Income Summary.
Account Debit Credit Sales Revenue $86,400.00 Interest Revenue $520.00 Income Summary $86,920.00 Why
A revenue account has a credit balance, so it is closed with a debit for that balance: debit Sales Revenue ($86,400.00) and Interest Revenue ($520.00), and credit Income Summary for the total, $86,920.00.
Closing the expense accounts to Income Summary
At year end, after the adjusting entries, a sole proprietorship’s only expense accounts are Salaries Expense with a debit balance of $42,600.00, Rent Expense with a debit balance of $14,400.00 and Utilities Expense with a debit balance of $3,180.00. Close the expense accounts to Income Summary.
Assumptions: The business closes its revenue and expense accounts through Income Summary.
Account Debit Credit Income Summary $60,180.00 Salaries Expense $42,600.00 Rent Expense $14,400.00 Utilities Expense $3,180.00 Why
An expense account has a debit balance, so it is closed with a credit for that balance: credit Salaries Expense ($42,600.00), Rent Expense ($14,400.00) and Utilities Expense ($3,180.00), and debit Income Summary for the total, $60,180.00.
Closing net income to Owner’s Capital
A sole proprietorship has closed all revenue and expense accounts for the year to Income Summary, which now has a credit balance of $38,200.00. Close Income Summary to Owner’s Capital.
Account Debit Credit Income Summary $38,200.00 Owner’s Capital $38,200.00 Why
Income Summary has a credit balance equal to net income; debiting it for $38,200.00 leaves it at zero, and the credit to Owner’s Capital adds the year’s net income to the owner’s equity.
Closing a net loss to Owner’s Capital
A sole proprietorship has closed all revenue and expense accounts for the year to Income Summary, which now has a debit balance of $8,700.00. Close Income Summary to Owner’s Capital.
Account Debit Credit Owner’s Capital $8,700.00 Income Summary $8,700.00 Why
A net loss leaves Income Summary with a debit balance; crediting it for $8,700.00 leaves it at zero, and the debit to Owner’s Capital reduces the owner’s equity by the loss.
Closing Owner’s Drawings to Owner’s Capital
During the year the owner of a sole proprietorship withdrew $24,000.00 for personal use. At year end, Owner’s Drawings has a debit balance of $24,000.00. Close it to Owner’s Capital.
Account Debit Credit Owner’s Capital $24,000.00 Owner’s Drawings $24,000.00 Why
Drawings reduce the owner’s equity but are not an expense, so they are closed directly to Owner’s Capital, not to Income Summary: debit Owner’s Capital and credit Owner’s Drawings for $24,000.00.
Reversing an accrued bonus at the start of the year
On December 31 the company accrued a bonus of $6,400.00 earned by its employees during the year, to be paid on February 28. The company uses reversing entries. Record the reversing entry on January 1 of the new year.
Assumptions: The December 31 entry debited Salaries Expense and credited Salaries Payable. Payroll taxes and withholdings are ignored in this item.
Account Debit Credit Salaries Payable $6,400.00 Salaries Expense $6,400.00 Why
A reversing entry is the exact opposite of the adjusting entry: debit Salaries Payable and credit Salaries Expense for $6,400.00. When the bonus is paid on February 28, the whole payment can be debited to Salaries Expense, and the expense of the new year nets to zero.
Correcting a customer payment posted to the wrong account
A customer paid $3,630.00 on account by check. The bookkeeper debited Cash and credited Sales Revenue instead of Accounts Receivable. Record the correcting entry.
Assumptions: The original sale was recorded correctly when the goods were sold on account.
Account Debit Credit Sales Revenue $3,630.00 Accounts Receivable $3,630.00 Why
The debit to Cash was right; only the credit went to the wrong account. The correcting entry takes the amount out of Sales Revenue (debit $3,630.00) and reduces Accounts Receivable (credit $3,630.00). Reversing the wrong entry and recording the right one is also accepted: the two Cash lines cancel out.
Correcting an insurance payment recorded at the wrong amount
The insurance premium for this month, $1,250.00, was paid by check, but the bookkeeper recorded the payment as $1,520.00: debit Insurance Expense, credit Cash. The check cleared the bank for $1,250.00. Record the correcting entry.
Assumptions: The premium covers this month only (nothing is prepaid).
Account Debit Credit Cash $270.00 Insurance Expense $270.00 Why
Both Insurance Expense and Cash were recorded $270.00 too high ($1,520.00 − $1,250.00). The correcting entry removes the excess: debit Cash and credit Insurance Expense for $270.00. Reversing the whole wrong entry and recording the right one is also accepted, because its net effect is the same.
Recording the income tax for the year
A corporation’s income before income taxes for the year is $186,400.00, which is also its taxable income. The tax rate is 21%. The tax will be paid next year. Record the income tax for the year on December 31.
Assumptions: Federal income tax only; state income taxes and deferred taxes are ignored. No estimated tax payments were made during the year.
Account Debit Credit Income Tax Expense $39,144.00 Income Tax Payable $39,144.00 Why
Income tax is an expense of the year in which the income is earned: $186,400.00 × 21% = $39,144.00. Debit Income Tax Expense and credit Income Tax Payable until it is paid.
Closing revenues and expenses directly to Retained Earnings
At year end, after all adjusting entries including income taxes, a service corporation’s only revenue and expense accounts are: Service Revenue $215,000.00 (credit balance), Salaries Expense $98,000.00, Rent Expense $18,000.00 and Income Tax Expense $12,250.00 (debit balances). Close them and transfer the net income to Retained Earnings in one compound entry.
Assumptions: The corporation closes its revenue and expense accounts directly to Retained Earnings.
Account Debit Credit Service Revenue $215,000.00 Salaries Expense $98,000.00 Rent Expense $18,000.00 Income Tax Expense $12,250.00 Retained Earnings $86,750.00 Why
Revenue is debited ($215,000.00) and each expense credited to leave them at zero; the difference, net income of $86,750.00, is credited to Retained Earnings. Going through Income Summary is also accepted: Income Summary nets to zero.
Not in this convention: Settling VAT for the period
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