S. Shirley Land Company, a closely held corporation, invests in commercial rental properties. Shirley's annual accounting period ends on December 31. At the end of each year, numerous adjusting entries must be made because many transactions completed during current and prior years have economic effects on the financial statements of the current and future years. Assume that the current year is 2011.
Required:
This case concerns four transactions that have been selected for your analysis. Answer the questions for each.
Transaction (a): On January 1, 2009, the company purchased office equipment costing $14,000 for use in the business. The company estimates that the equipment's cost should be allocated at $1,400 annually.
1. Over how many accounting periods will this transaction directly affect Shirley's financial statements? Explain.
2. How much depreciation expense was reported on the 2009 and 2010 income statements?
3. How should the office equipment be reported on the 2011 balance sheet?
4. Would Shirley make an adjusting entry at the end of each year during the life of the equipment? Explain your answer.
Transaction (b): On September 1, 2011, Shirley collected $24,000 rent on office space. This amount represented the monthly rent in advance for the six-month period, September 1, 2011, through February 29, 2012. Unearned Rent Revenue was increased (credited) and Cash was increased (debited) for $24,000.
1. Over how many accounting periods will this transaction affect Shirley's financial statements? Explain.
2. How much rent revenue on this office space should Shirley report on the 2011 income statement? Explain.
3. Did this transaction create a liability for Shirley as of the end of 2011? Explain. If yes how much?
4. Should Shirley make an adjusting entry on December 31, 2011? Explain why. If your answer is yes, give the adjusting entry.
Transaction (c): On December 31, 2011, Shirley owed employees unpaid and unrecorded wages of $7,500 because the employees worked the last three days in December 2011. The next payroll date is January 5, 2012.
1. Over how many accounting periods does this transaction affect Shirley's financial statements? Explain.
2. How would this $7,500 affect Shirley's 2011 income statement and balance sheet?
3. Should Shirley make an adjusting entry on December 31, 2011? Explain why. If your answer is yes, give the adjusting entry.
Transaction (d): On January 1, 2011, Shirley agreed to supervise the planning and subdivision of a large tract of land for a customer, V. Vulchkov. This service job that Shirley will perform involves four separate phases. By December 31, 2011, three phases had been completed to Vulchkov's satisfaction.
The remaining phase will be performed during 2012. The total price for the four phases (agreed on in advance by both parties) was $60,000. Each phase involves about the same amount of services. On December 31, 2011, Shirley had collected no cash for the services already performed.
1. Should Shirley record any service revenue on this job for 2011? Explain why. If yes how much?
2. If your answer to part (1) is yes, should Shirley make an adjusting entry on December 31, 2011? If yes, give the entry. Explain.
3. What entry will Shirley make when it completes the last phase, assuming that the full contract price is collected on the completion date, February 15, 2012?