Chapter 4

Adjustments, Financial
Statements, and Financial
Results

Dr. Mengjia Li
Email: [email protected]
Location: SBA-2151
Office hours: Mon&Wed 1.00pm- 3.00pm

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 Learning Objective 4-1

Explain why adjustments are

needed.

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 Why Adjustments Are Needed
Accounting systems are designed to record most
recurring daily transactions, particularly any
involving cash.

However, cash is not always received or paid in the

period in which the company generates the related
revenue or incurs the related expense.

Solution: Adjustments are made to the accounting

records at the end of the period to state assets, liabilities,
revenues, and expenses at appropriate amounts.
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 Why Adjustments Are Needed, continued
Income Statement Balance Sheet
Revenues are recorded Assets are reported at
when (or as) the seller amounts representing the
fulfills its performance economic benefits that
obligation to the remain at the end of the
customer. current period.

Expenses are recorded at Liabilities are reported at

the costs incurred when amounts owed at the end
using up assets or of the current period that
incurring liabilities to obligate the company to
generate revenues. transfer resources.

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 1. Deferral Adjustments
An expense or revenue has been deferred if we have
postponed reporting it on the income statement until a
later period.

Sept. 1 Use up rent Sept. 30

benefits

Cash paid for Adjustment

rent in advance needed

Deliver
Jan. 1 subscription Jan. 31
service

Cash received Adjustment

for subscription needed
in advance

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 1. Deferral Adjustments, continued
Deferral adjustments Each deferral
are used to decrease adjustment involves
balance sheet accounts one asset and one
and increase expense account, or
corresponding income one liability and one
statement accounts. revenue account.

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 2. Accrual Adjustments
Accrual adjustments are needed when a company has
generated revenue or incurred an expense in the current
period but has not yet recorded it because the related
cash will not be received or paid until a later period.
Sept. 1 Incur income Sept. 30 Dec. 31
taxes

Adjustment Cash paid for

needed income taxes

Jan. 1 Jan. 31 March 31

Earn interest

Adjustment Cash received

needed for interest

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 2. Accrual Adjustments, continued
Accrual adjustments
are used to record Each accrual
revenue or expenses adjustment involves
when they occur prior one asset and one
to receiving or paying revenue account, or
cash, and to adjust one liability and one
corresponding balance expense account.
sheet accounts.

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 Learning Objective 4-2

Prepare adjustments needed

at the end of the period.

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 Making Required Adjustments

Adjustments are not made on a daily basis

because it’s more efficient to do them all at
once at the end of each period.
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 Adjustment Analysis, Recording
and Summarizing
1 Analyze
Determine the necessary adjustments to make to
the accounting records.

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 Adjustment Analysis, Recording
and Summarizing, continued

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 Deferral Adjustments (a)
(a) Supplies Used during the Period.
Noodlecake counts its supplies on hand at September 30. Of the supplies previously
purchased for $600, only $250 are now on hand.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(a) Supplies -350 Supplies
Expense (+E) -350

2 Record
(a) Supplies Expense (+E, -NI) 350
Supplies (-A) 350

3 Summarize
dr + Supplies (A) cr - dr + Supplies Expense (E, NI) cr -
Unadj. Bal. 600 Unadj. Bal. 0
350 AJE (a) AJE (a) 350
Adj. Bal. 250 Adj. Bal. 350

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 Financial Statement Effects

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 Deferral Adjustments (b)
(b) Rent Benefits Expired during the Period.
Three months of rent were prepaid on September 1 for $7,200, but one month has
now expired, leaving only two months prepaid at September 30.

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 Deferral Adjustments (b), continued
(b) Rent Benefits Expired during the Period.
Three months of rent were prepaid on September 1 for $7,200, but one month has
now expired, leaving only two months prepaid at September 30.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(b) Prepaid Rent
Rent -2,400 Expense (+E) -2,400

2 Record
(b) Rent Expense (+E, -NI) 2,400
Prepaid Rent (-A) 2,400

3 Summarize
dr + Prepaid Rent (A) cr - dr + Rent Expense (E, NI) cr -
Unadj. Bal. 7,200 Unadj. Bal. 0
2,400 AJE (b) AJE (b) 2,400
Adj. Bal. 4,800 Adj. Bal. 2,400

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 Deferral Adjustments (c)
(c) Depreciation Is Recorded for Use of Equipment.
The computer equipment, which was estimated to last two years, has now been
used for one month, representing an estimated expense of $400.

Depreciation is the process of allocating the cost of

buildings and equipment over their productive lives
using a systematic and rational method of allocation.

A contra-account
is an account that
is an offset to, or
reduction of,
another account.

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 Deferral Adjustments (c), continued
(c) Depreciation Is Recorded for Use of Equipment.
The computer equipment, which was estimated to last two years, has now been
used for one month, representing an estimated expense of $400.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(c) Accumulated Depreciation
Deprec.(+xA) -400 Expense (+E) -400

2 Record
(c) Depreciation Expense (+E, -NI) 400
Accumulated Depreciation (+xA, -A) 400

3 Summarize
dr - Accum. Depr. (xA) cr + dr + Depr. Expense (E, NI) cr - dr + Equipment (A) cr -
0 Unadj. Bal. Unadj. Bal. 0 Unadj. Bal. 9,600
400 AJE (c) AJE (c) 400
400 Adj. Bal. Adj. Bal. 400 Adj. Bal. 9,600

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 Depreciation
Note 1 Note 2

Accumulated Depreciation Accumulated

Equipment
Depreciation Expense Depreciation

Balance Income Total Amount

Original cost
Sheet Statement Depreciated

Note 3 Note 4

Contra- Depreciation
Account Amount

Opposes
Depends on
account it
method used
offsets

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 Deferral Adjustments (d)
(d) Amortization Is Recorded for Use of Software.
Software developed for Noodlecake, estimated to have three years of usefulness,
has now been used for one month at an estimated expense of $250.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(d) Accumulated Amortization
Amort .(+xA) -250 Expense (+E) -250

2 Record
(d) Amortization Expense (+E, -NI) 250
Accumulated Amortization (+xA, -A) 250

3 Summarize
dr - Accum. Amort. (xA) cr + dr + Amort. Expense (E, NI) cr - dr + Software (A) cr -
0 Unadj. Bal. Unadj. Bal. 0 Unadj. Bal. 9,000
250 AJE (d) AJE (d) 250
250 Adj. Bal. Adj. Bal. 250 Adj. Bal. 9,000

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 Deferral Adjustments (e)
(e) Gift Cards Redeemed.
Noodlecake accepted $100 of gift cards from customers as payment for game
downloads.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(e) Deferred Sales
Revenue -100 Revenue (+R) +100

2 Record
(e) Deferred Revenue (-L) 100
Sales Revenue (+R, +NI) 100

3 Summarize
dr - Deferred Revenue (L) cr + dr - Sales Revenue (R, NI) cr +
300 Unadj. Bal. 12,000 Unadj. Bal.
AJE (e) 100 100 AJE (e)
200 Adj. Bal. 12,100 Adj. Bal.

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 Accrual Adjustments (f)
(f) Services Given but Revenue Not Yet Recorded.
Noodlecake provided $3,250 of consulting services to other game developers in
September, with payment to be received in October.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(f) Accounts Service
Receivable +3,250 Revenue (+R) +3,250

2 Record
(f) Accounts Receivable (+A) 3,250
Service Revenue (+R, +NI) 3,250

3 Summarize
dr + Accounts Receivable (A) cr - dr - Service Revenue (R, NI) cr +
Unadj. Bal. 500 0 Unadj. Bal.
AJE (f) 3,250 3,250 AJE (f)
Adj. Bal. 3,750 3,250 Adj. Bal.

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 Accrual Adjustments (g)
(g) Wages Expense Incurred but Not Yet Recorded.
Noodlecake owes $1,950 of wages to employees for work done in the last part of
September.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(g) Salaries and Wages Salaries and Wages
Payable +1,950 Expense (+E) -1,950

2 Record
(g) Salaries and Wages Expense (+E, -NI) 1,950
Salaries and Wages Payable (+L) 1,950

3 Summarize
dr - Salaries & Wages Payable (L) cr + dr +Salaries & Wages Expense (E,NI) cr -
0 Unadj. Bal. Unadj. Bal. 7,800
1,950 AJE (g) AJE (g) 1,950
1,950 Adj. Bal. Adj. Bal. 9,750

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 Accrual Adjustments (h)
(h) Interest Expense Incurred but Not Yet Recorded.
Noodlecake has not paid or recorded the $100 interest that it owes for this month
on its note payable.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(h) Interest Payable +100 Interest
Expense (+E) -100

2 Record
(h) Interest Expense (+E, -NI) 100
Interest Payable (+L) 100

3 Summarize
dr - Interest Payable (L) cr + dr + Interest Expense (E, NI) cr -
0 Unadj. Bal. Unadj. Bal. 0
100 AJE (h) AJE (h) 100
100 Adj. Bal. Adj. Bal. 100

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 Accrual Adjustments (i)
(i) Income Taxes Incurred but Not Yet Recorded.
Noodlecake pays income tax at an average rate equal to 20 percent of the
company’s income before taxes.

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 Accrual Adjustments (i), continued
(i) Income Taxes Incurred but Not Yet Recorded.
Noodlecake pays income tax at an average rate equal to 20 percent of the
company’s income before taxes.
1 Analyze via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(i) Income Tax Income Tax
Payable +200 Expense (+E) -200

2 Record
(i) Income Tax Expense (+E, -NI) 200
Income Tax Payable (+L) 200

3 Summarize
dr - Income Tax Payable (L) cr + dr + Income Tax Expense (E, NI) cr -
0 Unadj. Bal. Unadj. Bal. 0
200 AJE (i) AJE (i) 200
200 Adj. Bal. Adj. Bal. 200

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 Noodlecake’s Adjusted Accounts

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 Additional Comments

Each adjusting entry

Adjusting journal entries always affects one balance
never involve cash. sheet and one income
statement account.

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 Learning Objective 4-3

Prepare an adjusted trial

balance.

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 NOODLECAKE STUDIOS, INC.

Account Name
Adjusted Trial Balance
At September 30, 2024 Adjusted
Debit Credit
Cash
Accounts Receivable
Supplies
$ 16,900
3,750
250
Trial Balance
Prepaid Rent 4,800
Equipment 9,600
Accumulated Depreciation $ 400
Software 9,000
Accumulated Amortization 250
Logo and Trademarks 300
Accounts Payable
Deferred Revenue
10,700 Partial Listing of T-accounts
200
Salaries and Wages Payable 1,950
Income Tax Payable 200
Interest Payable 100
Notes Payable (long-term) 20,000
Common Stock 10,000
Retained Earnings 0
Dividends 0
Sales Revenue 12,100
Service Revenue 3,250
Salaries and Wages Expense 9,750
Rent Expense 2,400
Utilities Expense 600
Advertising Expense 500
Depreciation Expense 400
Supplies Expense 350
Amortization Expense 250
Interest Expense 100
Income Tax Expense 200
Totals $ 59,150 $ 59,150
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 Learning Objective 4-4

Prepare financial statements.

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 NOODLECAKE STUDIOS, INC.
Adjusted Trial Balance
Financial Statements
At September 30, 2024 NOODLECAKE STUDIOS, INC.
Account Name Debit Credit Income Statement
Cash $ 16,900 For the Month Ended September 30, 2024
Accounts Receivable 3,750 Revenues
Supplies 250 Sales Revenue $12,100
Prepaid Rent 4,800 Service Revenue 3,250
Equipment 9,600 Total Revenues 15,350
Accumulated Depreciation $ 400
Software 9,000 Expenses
Accumulated Amortization 250 Salaries and Wages Expense 9,750
Logo and Trademarks 300 Rent Expense 2,400
Accounts Payable 10,700 Utilities Expense 600
Deferred Revenue 200 Advertising Expense 500
Salaries and Wages Payable 1,950 Depreciation Expense 400
Income Tax Payable 200 Supplies Expense 350
Interest Payable 100 Amortization Expense 250
Notes Payable (long-term) 20,000 Interest Expense 100
Common Stock 10,000 Income Tax Expense 200
Retained Earnings 0 Total Expenses
Dividends 0 14,550
Sales Revenue 12,100 Net Income
Service Revenue 3,250 $ 800
Salaries and Wages Expense 9,750
Rent Expense 2,400 NOODLECAKE STUDIOS, INC.
Utilities Expense 600 Statement of Retained Earnings
Advertising Expense 500 For the Month Ended September 30, 2024
Depreciation Expense 400 Retained Earnings, September 1 $ 0
Supplies Expense 350 Add: Net Income 800
Amortization Expense 250 Subtract: Dividends (0)
Interest Expense 100 Retained Earnings, September 30 $ 800
Income Tax Expense 200
Totals $ 59,150 $ 59,150
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 NOODLECAKE STUDIOS, INC.
Financial Statements, NOODLECAKE STUDIOS, INC. Balance Sheet
Adjusted Trial Balance
continued At September 30, 2024
At September 30, 2024
Assets
Account Name Debit Credit Current Assets
Cash $ 16,900 Cash $ 16,900
Accounts Receivable 3,750 Accounts Receivable 3,750
Supplies 250 Supplies 250
Prepaid Rent 4,800 Prepaid Rent 4,800
Equipment 9,600 Total Current Assets 25,700
Accumulated Depreciation $ 400 Equipment
Software 9,000 Accumulated Depreciation $9,600
Equipment, net (400)
Accumulated Amortization 250 9,200
Logo and Trademarks 300 Software
Accumulated Amortization 9,000
Accounts Payable 10,700
Software, net (250)
Deferred Revenue 200 8,750
Salaries and Wages Payable Logo and Trademarks 300
1,950
Income Tax Payable Total Assets $43,950
200
Interest Payable 100
Notes Payable (long-term) Liabilities and Stockholders’ Equity
20,000 Liabilities
Common Stock 10,000 Current Liabilities
Retained Earnings 0 Accounts Payable $ 10,700
Dividends 0
Deferred Revenue 200
Sales Revenue 12,100 Salaries and Wages Payable 1,950
Service Revenue 3,250 Income Tax Payable 200
Salaries and Wages Expense 9,750 Interest Payable
Rent Expense 2,400 100
Total Current Liabilities 13,150
Utilities Expense 600 Note Payable (long-term) 20,000
Advertising Expense 500 Total Liabilities: 33,150
Depreciation Expense 400 Stockholders’ Equity
Supplies Expense 350 Common Stock 10,000
Amortization Expense 250 Retained Earnings 800
Interest Expense 100 Total Stockholders’ Equity 10,800
Income Tax Expense 200 Total Liabilities and Stockholders’ Equity $43,950
Totals $ 59,150
$ 59,150
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 Learning Objective 4-5

Explain the closing process.

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 Closing Temporary Accounts

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 Closing Temporary Accounts, continued

Revenues Assets

Liabilities
Dividends
Expenses

Equity
Temporary Permanent
Accounts Accounts

Temporary accounts Permanent accounts

track financial track financial
results for a limited results from year to
period of time. year.

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 Closing Temporary Accounts, concluded
Two closing journal entries are needed:

 Debit each Revenue account and credit each

Expense account. Debit or credit the
difference to Retained Earnings.

 Credit Dividends and debit Retained Earnings.

Transfer net income (or Zero balances are

loss) and dividends to established in all
Retained Earnings. income statement and
dividend accounts.
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 NOODLECAKE STUDIOS, INC.

Account Name
Adjusted Trial Balance
At September 30, 2024 Closing Entries
Debit Credit
Cash $ 16,900
Accounts Receivable 3,750
Sales Revenue (-R) 12,100
Supplies 250
Service Revenue (-R) 3,250
Prepaid Rent 4,800
Salaries and Wages Expense (-E) 9,750
Equipment 9,600
Rent Expense (-E) 2,400
Accumulated Depreciation $ 400 Utilities Expense (-E) 600
Software 9,000
Advertising Expense (-E) 500
Accumulated Amortization 250 Depreciation Expense (-E) 400
Logo and Trademarks 300
Supplies Expense (-E) 350
Accounts Payable 10,700 Amortization Expense (-E) 250
Deferred Revenue 200 Interest Expense (-E) 100
Salaries and Wages Payable 1,950 Income Tax Expense (-E) 200
Income Tax Payable 200 Retained Earnings (+SE) 800
Interest Payable 100
Notes Payable (long-term) 20,000
Common Stock 10,000 Retained Earnings (-SE) xx
Retained Earnings 0 Dividends (-D) xx
Dividends 0
Sales Revenue 12,100
Service Revenue 3,250
Salaries and Wages Expense 9,750
Rent Expense 2,400
Utilities Expense 600
Advertising Expense 500
Depreciation Expense 400
Supplies Expense 350
Amortization Expense 250
Interest Expense 100
Income Tax Expense 200
Totals $ 59,150 $ 59,150
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 Closing Entries, continued
Sales Revenue (-R) 12,100
Service Revenue (-R) 3,250
Salaries and Wages Expense (-E) 9,750 After posting these
Rent Expense (-E)
Utilities Expense (-E)
2,400
600 closing entries, all
Advertising Expense (-E) 500
Depreciation Expense (-E)
Supplies Expense (-E)
400
350
the income
Amortization Expense (-E)
Interest Expense (-E)
250
100 statement accounts
Income Tax Expense (-E)
Retained Earnings (+SE)
200
800 and the dividend
Retained Earnings (-SE) xx
account will have a
Dividends (-D) xx
zero balance.

Partial Listing of T-accounts

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 NOODLECAKE STUDIOS, INC.
Post-Closing Trial Balance Post-Closing
At September 30, 2024

Cash $
Debit
16,900
Credit Trial Balance
Accounts Receivable 3,750
Supplies
Prepaid Rent
250
4,800
Final check that total
Equipment
Accumulated Depreciation
9,600
$ 400
debits still equal total
Software
Accumulated Amortization
9,000
250
credits and that all
Logo and Trademarks
Accounts Payable
300
10,700
temporary accounts
Deferred Revenue
Salaries and Wages Payable
200
1,950
have been closed.
Income Tax Payable 200
Interest Payable 100
Note Payable
Common Stock
20,000
10,000
Contains balances for
Retained Earnings
Dividends 0
800
only permanent
Sales Revenue
Service Revenue
0
0
accounts.
Salaries and Wages Expense 0
Rent Expense 0
Utilities Expense 0
Advertising Expense 0
Depreciation Expense 0 Is the last step in the
Supplies Expense 0
Amortization Expense 0 accounting process.
Interest Expense 0
Income Tax Expense 0
Total $ 44,600 $ 44,600

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 Learning Objective 4-6

Explain how adjustments

affect financial results.

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 Adjusted Financial Results

Adjustments help to ensure that all revenues

and expenses are reported in the period in which
they are generated and incurred.

Without adjustments, the financial statements

present an incomplete and misleading picture
of the company’s financial performance.

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Adjusted Financial Results, continued

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 Chapter 4
Solved Exercises

M4-5, M4-6, M4-9, M4-10, M4-

20,
E4-19 (Req. 1 and 2)

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 M4-5 Determine Accounting Equation Effects of Deferral
Adjustments
For each of the following transactions for the Sky Blue Corporation, give the
accounting equation effects of the adjustments required at the end of the
month on October 31:
a. Collected $2,400 rent for the period October 1 to December 31, which was credited
to Deferred Revenue on October 1. via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(a) Deferred Rent
Revenue -800 Revenue (+R) +800

b. Paid $1,200 for a two-year insurance premium on October 1 and debited Prepaid
Insurance for that amount. via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(b) Prepaid Insurance
Insurance -50 Expense (+E) -50
c. Used a machine purchased on October 1 for $48,000. The company estimates
annual depreciation of $4,800. via RE

Assets = Liabilities + Stockholders’ Equity +/- Temp Accounts NI

(c) Accumulated Depreciation
Deprec.(+xA) -400 Expense (+E) -400

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 M4-6 Recording Adjusting Journal Entries
Using the information in M4-5, prepare the adjusting journal entries
required on October 31.

a. Deferred Revenue (L) 800

Rent Revenue (+R, +NI) 800
($800 = $2,400/3 months)

b. Insurance Expense (+E, NI) 50

Prepaid Insurance (A) 50
($50 = $1,200/24 months)

c. Depreciation Expense (+E, NI) 400

Accumulated Depreciation (+xA, A) 400
($400 = $4,800/12 months)

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 M4-9 Preparing Journal Entries for Deferral Transactions and
Adjustments
For each of the following independent situations, prepare journal
entries to record the initial transaction on September 30 and the
adjustment required on October 31.
a. Hockey Helpers paid $4,000 cash on September 30 to rent an
arena for the months of October and November.

September 30:
Prepaid Rent (+A) 4,000
Cash (-A) 4,000

October 31 AJE:
Rent Expense (+E, -NI) 2,000
Prepaid Rent (-A) 2,000
($4,000/2 = $2,000 per month)

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 M4-9 Preparing Journal Entries for Deferral Transactions and
Adjustments, continued
b. Super Stage Shows received $16,000 on September 30 for
season tickets that admit patrons to a theatre event that will be
held twice (on October 31 and November 30).

September 30:
Cash (+A) 16,000
Deferred Revenue (+L) 16,000

October 31 AJE:
Deferred Revenue (-L) 8,000
Service Revenue (+R, +NI) 8,000
($16,000/2 = $8,000 per month)

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 M4-9 Preparing Journal Entries for Deferral Transactions and
Adjustments, concluded
c. Risky Ventures paid $3,000 on September 30 for insurance
coverage for the months of October, November, and December.

September 30:
Prepaid Insurance (+A) 3,000
Cash (-A) 3,000

October 31 AJE:
Insurance Expense (+E, -NI) 1,000
Prepaid Insurance (-A) 1,000
($3,000/3=$1,000 per month)

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 M4-10 Preparing Journal Entries for Deferral Transactions and
Adjustments
For each of the following independent situations, prepare journal
entries to record the initial transaction on December 31 and the
adjustment required on January 31.
a. Magnificent Magazines received $12,000 on December 31,
2024, for subscription services related to magazines that will be
published and distributed in January through December 2025.

December 30, 2024:

Cash (+A) 12,000
Deferred Revenue (+L) 12,000

January 31, 2025 AJE:

Deferred Revenue (-L) 1,000
Service Revenue (+R, +NI) 1,000
($12,000/12 = $1,000 per month)

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 M4-10 Preparing Journal Entries for Deferral Transactions and
Adjustments, continued
b. Walker Window Washing paid $1,200 cash for supplies on
December 31, 2024. As of January 31, 2025, $200 of these
supplies had been used up.

December 31, 2024:

Supplies (+A) 1,200
Cash (-A) 1,200

January 31, 2025 AJE:

Supplies Expense (+E, -NI) 200
Supplies (-A) 200

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 M4-10 Preparing Journal Entries for Deferral Transactions and
Adjustments, concluded
c. Indoor Raceway received $3,000 on December 31, 2024, from
race participants for providing services for three races. One race
is held January 31, 2025, and the other two will be held in March
2025.

December 31, 2024:

Cash (+A) 3,000
Deferred Revenue (+L) 3,000

January 31, 2025 AJE:

Deferred Revenue (-L) 1,000
Service Revenue (+R, +NI) 1,000
($3,000/3=$1,000 per race)

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 M4-20 Preparing and Posting Adjusting Journal Entries
At December 31, the unadjusted trial balance of H&R Tacks reports
Prepaid Insurance of $7,200 and Insurance Expense of $0. The
insurance was purchased on July 1 and provides coverage for 24
months. Prepare the adjusting journal entry on December 31. In
separate T-accounts for each account, enter the unadjusted balances,
post the adjusting journal entry, and report the adjusted balance.

Insurance Expense (+E, NI) 1,800

Prepaid Insurance (A) 1,800
($7,200 x 6/24 = $1,800 used)

dr + Prepaid Insurance (A) cr - dr + Insurance Expense (E, NI) cr -

Unadj. Bal. 7,200 Unadj. Bal. 0
1,800 AJE AJE 1,800
Adj. Bal. 5,400 Adj. Bal. 1,800

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance (Req.
1 and 2)

Daily Driver, Inc. (DDI), operates a driving service through a popular ride-sharing
app. DDI has prepared a list of unadjusted account balances at its December
31 year-end. You have reviewed the balances and made notes shown in the
right column.

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance
(Req. 1 and 2) Continued

Daily Driver, Inc. (DDI), operates a driving service through a popular ride-
sharing app. DDI has prepared a list of unadjusted account balances at its
December 31 year-end. You have reviewed the balances and made notes
shown in the right column.

Required:
1. Use the notes to determine and record adjusting entries needed on
December 31 for (a) supplies used up, (b) insurance costs, (c) using up
the car’s benefit, (d) salaries not yet accounted for, and (e) income taxes
for the year.
2. Post the adjusting entries from requirement 1 to T-accounts to determine
new adjusted balances, and prepare an adjusted trial balance.

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance
Continued (Req. 1 and 2 – part a)

Item (a): supplies used up

Supplies Expense (+E, NI) 20

Supplies (A) 20

dr + Supplies (A) cr - dr + Supplies Expense (E, NI) cr -

Unadj. Bal. 50 Unadj. Bal. 100
20 AJE AJE 20
Adj. Bal. 30 Adj. Bal. 120

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance
Continued (Req. 1 and 2 – part b)

Item (b): insurance costs

Insurance Expense (+E, NI) 1,200

Prepaid Insurance (A) 1,200

dr + Prepaid Insurance (A) cr - dr + Insurance Expense (E, NI) cr -

Unadj. Bal. 1,200 Unadj. Bal. 0
1,200 AJE AJE 1,200
Adj. Bal. 0 Adj. Bal. 1,200

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance
Continued (Req. 1 and 2 – part c)

Item (c): using up the car’s benefits

Depreciation Expense (+E, NI) 2,400

Accumulated Depreciation (+xA, -A) 2,400

dr - Accum. Depreciation (+xA, -A) cr + + Depreciation Expense (E, NI) -

2,400 Unadj. Bal. Unadj. Bal. 0
2,400 AJE AJE 2,400
4,800 Adj. Bal. Adj. Bal. 2,400

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance
Continued (Req. 1 and 2 – part d)

Item (d): salaries not yet accounted for

Salaries and Wages Expense (+E, NI) 800

Salaries and Wages Payable (+L) 800

dr - Salaries & Wages Payable (L) cr + dr+ Salaries & Wages Expense (E, NI) cr-
0 Unadj. Bal. Unadj. Bal. 8,800
800 AJE AJE 800
800 Adj. Bal. Adj. Bal. 9,600

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance
Continued (Req. 1 and 2 – part e)

Item (e): income taxes for the year

Unadjusted Net Income = $9,420 ($19,570 – 8,800 – 100 – 1,250)

Adjustments:
(a) - 20
(b) - 1,200
(c) - 2,400
(d) - 800
Adjusted Net Income = $ 5,000 x income tax rate 20% = $1,000
Income Tax Expense (+E, NI) 1,000
Income Tax Payable (+L) 1,000

dr.- Income Tax Payable (L) cr + dr + Income Tax Expense (E, NI) cr -
0 Unadj. Bal. Unadj. Bal. 0
1,000 AJE AJE 1,000
1,000 Adj. Bal. Adj. Bal. 1,000

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 E4-19 Preparing Adjusting Entries and Adjusted Trial Balance
Concluded (Req. 1 and 2)

Required:
Item 2. Prepare
(e): income anthe
taxes for adjusted
year trial balance.

Daily Driver, Inc.

Adjusted Trial Balance
At December 31
Account Name Debit Credit
Cash $ 1,000
Supplies 30
Prepaid Insurance 0
Equipment 40,000
Accumulated Depreciation $ 4,800
Salaries and Wages Payable 800
Income Tax Payable 1,000
Common Stock 25,000
Retained Earnings 5,430
Service Revenue 19,570
Salaries and Wages Expense 9,600
Supplies Expense 120
Depreciation Expense 2,400
Insurance Expense 1,200
Fuel Expense 1,250
Income Tax Expense 1,000
Totals $ 56,600
$ 56,600
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 End of Chapter 4

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