Selected account balances before adjustment for Atlantic Coast Realty at July 31, the end of the current year, are as follows:

Selected account balances before adjustment for Atlantic Coast Realty at July 31, the end of the current year, are as follows:

Debits Credits Accounts Receivable $  75,000 Equipment 345,700 Accumulated Depreciation—Equipment $112,500 Prepaid Rent 9,000 Supplies  3,350

Wages Payable— Unearned Fees 12,000 Fees Earned 660,000 Wages Expense 325,000 Rent Expense — Depreciation Expense — Supplies Expense —

Data needed for year-end adjustments are as follows:

• Unbilled fees at July 31, $11,150.

• Supplies on hand at July 31, $900.

• Rent expired, $6,000.

• Depreciation of equipment during year, $8,950.

• Unearned fees at July 31, $2,000.

• Wages accrued but not paid at July 31, $4,840.

Instructions

1. Journalize the six adjusting entries required at July 31, based on the data presented.

2. What would be the effect on the income statement if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

3. What would be the effect on the balance sheet if the adjustments for unbilled fees and accrued wages were omitted at the end of the year? 

4. What would be the effect on the “Net increase or decrease in cash” on the statement of cash flows if the adjustments for unbilled fees and accrued wages were omitted at the end of the year?

Answer:

1.  July 31 Accounts Receivable11,150 Fees Earned 11,150 Accrued fees earned. 31 Supplies Expense2,450 Supplies2,450 Supplies used ($3,350 – $900). 31 Rent Expense6,000 Prepaid Rent6,000 Prepaid rent expired. 31 Depreciation Expense8,950 Accumulated Depreciation—Equipment 8,950 Equipment depreciation. 31 Unearned Fees10,000 Fees Earned10,000 Fees earned ($12,000 – $2,000). 31 Wages Expense4,840 Wages Payable4,840 Accrued wages.

2. Fees Earned would be understated by $11,150, Wages Expense would be understated by $4,840, and net income would be understated by $6,310 ($11,150 – $4,840).

3. Accounts Receivable would be understated by $11,150, total assets would be understated by $11,150, Wages Payable would be understated by $4,840, total liabilities would be understated by $4,840, owner’s equity (Owner’s Capital) would be understated by $6,310 ($11,150 – $4,840), and total liabilities and owner’s equity would be understated by $11,150 ($6,310 + $4,840). 

4. There is no effect on the “Net increase or decrease in cash” on the statement of cash flows because adjusting entries do not affect cash.