Chapter 3, P 2.
P2. On November 30, the end of the current fiscal year, the following information is available to assist Allerton Corporation's accountants in making adjusting entries: a. Allerton's SUpplies account shows a beginning balance of $2,350. Purchases during the year were $4,218. The end-of-year inventory reveals suppleis on hand of $1,397. b. The Prepaid Insurance account shows the following on November 30: Beginning balance $4,270 July 1 4,200 October 1 7,272 The beginning balance represents the unexpired portion of a one-year policy purchased in September of the previous year. The July 1 entry represents a new one-year policy, and the October 1 entry represents additional coverage in the form of a three-year policy. c. The following table contains the cost and annual depreciation for buildings and equipment, all of which Allerton purchased before the current year: Account Cost Annual Depreciation Buildings $298,000 $16,000 Equipment 374,000 40,000 d. On October 1, the company completed negotations with a client and accepted an advance of the $18,600 was credited to Unearned Services Revenue. e. The company caluclated that, as of November 30, it had earned $7,000 on an $11,000 contract that would be completed and billed in January. f. Among the liabilities of the company is a note payable in the amount of $300,000. On November 30, the accrued interest on this note amounted to $18,000. g. On Saturday, December 2, the company, which is on a six-day workweek, will pay its regular employees their weekly wages of $15,000. h. On November 29, the company completed negotiations and signed a contract to provide services to a new client at an annual rate of $23,000. i. Management estimates income taxes for the year to be $22,000. Required. 1. Prepare adjusting entries for each item listed above. 2. Concept - Explain how the conditions for revenue recognition are applied to transactions e and h.
1.			Adjusting entries recorded
	a.		Nov.	30		Supplies Expense												5,171
							Supplies													5,171
								To record supplies used
								$2,350			+	$4,218			$1,397
								=	$5,171
	b.			30		Insurance Expense												6,874
							Prepaid Insurance													6,874
								To record expired insurance
								$4,720
								1,750			[ (	$4,200			12	months )
											x	5	months ]
								404			[ (	$7,272			36	months )
											x	2	months ]
								$6,874
	c.			30		Depreciation ExpenseBuildings												16,000
						Depreciation ExpenseEquipment												40,000
							Accumulated DepreciationBuildings													16,000
							Accumulated DepreciationEquipment													40,000
								To record annual depreciation
	d.			30		Unearned Service Revenue												4,650
							Service Revenue													4,650
								To record service revenue earned on
								services collected in advance
								(	$18,600				12	months )
								x	3	months =			$4,650
	e.			30		Accounts Receivable												7,000
							Service Revenue													7,000
								To record service revenue earned on
								a contract to be billed in January
	f.			30		Interest Expense												18,000
							Interest Payable													18,000
								To record accrued interest on note
								payable

Chapter 3, P 2. (Continued)

g.

Nov.

30

Salaries Expense

10,000

Salaries Payable

10,000

To record accrued salaries

(

$15,000

6

days ) x

4

days

=

$10,000

h.

No entry

i.

30

Income Taxes Expense

23,000

Income Taxes Payable

23,000

To accrue estimated income taxes

for the year

2.

User Insight: Revenue recognition discussed

In transaction "e," $7,000 has to be recognized as revenue because services have

already been provided and there is an obligation to pay for them. In transaction

"h," November 29 is not a recognition point because no services have been pro-

vided and there is no obligation to pay for them. For each of the adjusting entries listed in the Posted Solution, explain why it is necessary and whether it increases or decreases financial position and whether it increases or decreases profitability (also called performance).