At the end of August, the first month of operations, the following selected data were taken from the financial statements of Tucker Jacobs, an attorney:

At the end of August, the first month of operations, the following selected data were taken from the financial statements of Tucker Jacobs, an attorney:

Net income for August $112,500

Total assets at August 31 650,000

Total liabilities at August 31 225,000

Total owner’s equity at August 31 425,000

In preparing the financial statements, adjustments for the following data were overlooked:

• Unbilled fees earned at August 31, $31,900.

• Depreciation of equipment for August, $7,500.

• Accrued wages at August 31, $5,200.

• Supplies used during August, $3,000.

Instructions

1. Journalize the entries to record the omitted adjustments.

2. Determine the correct amount of net income for August and the total assets, liabilities, and owner’s equity at August 31. In addition to indicating the corrected amounts, indicate the effect of each omitted adjustment by setting up and completing a columnar table similar to the following. The first adjustment is presented as an example.

Net Income Total Assets Total Liabilities Total Owner’s  Equity Reported amounts Corrections: $112,500 $650,000 $225,000 $425,000 Unbilled fees earned +31,900 +31,900 0 +31,900 Equipment depreciation __________ __________ ____________ ____________ Accrued wages __________ __________ ____________ ____________ Supplies used __________ __________ ____________ ____________ Corrected amounts                                                                                                 

Answer:

1.  Aug. 31 Accounts Receivable

Fees Earned31,900

Accrued fees earned.

31 Depreciation Expense

Accumulated Depreciation—Equipment 7,500

Equipment depreciation.

31 Wages Expense

Wages Payable5,200

Accrued wages.

31 Supplies Expense

Supplies3,000

Supplies used.

2.Total

Net Total Owner’s

Income Assets = + Equity

Reported amounts $112,500 $650,000 $425,000

Corrections:

Unbilled fees earned +31,900 +31,900 +31,900

Equipment depreciation –7,500 –7,500 –7,500

Accrued wages –5,200 0 –5,200

Supplies used –3,000 –3,000 –3,000

Corrected amounts $128,700 $671,400 $441,200

At the end of April, the first month of operations, the following selected data were taken from the financial statements of Shelby Crawford, an attorney:

At the end of April, the first month of operations, the following selected data were taken from the financial statements of Shelby Crawford, an attorney:

Net income for April $120,000

Total assets at April 30 750,000

Total liabilities at April 30 300,000

Total owner’s equity at April 30 450,000

In preparing the financial statements, adjustments for the following data were overlooked:

• Supplies used during April, $2,750.

• Unbilled fees earned at April 30, $23,700.

• Depreciation of equipment for April, $1,800.

• Accrued wages at April 30, $1,400.

Instructions

1. Journalize the entries to record the omitted adjustments.

2. Determine the correct amount of net income for April and the total assets, liabilities, and owner’s equity at April 30. In addition to indicating the corrected amounts, indicate the effect of each omitted adjustment by setting up and completing a columnar table similar to the following. The adjustment for supplies used is presented as an example.

Net Income Total Assets Total Liabilities Total Owner’s Equity Reported amounts Corrections: $120,000 $750,000 $300,000 $450,000 Supplies used –2,750 –2,750 0 –2,750 Unbilled fees earned ———–— —––——–— —––—–—–— —––—–—–— Equipment depreciation ———–— —––——–— —––—–—–— —––—–—–— Accrued wages ———–— —––——–— —––—–—–— —––—–—–— Corrected amounts                                                                                       

Answer:

1.  Apr. 30 Supplies Expense Supplies2,750 Supplies used. 30 Accounts Receivable Fees Earned23,700 Accrued fees earned. 30 Depreciation Expense Accumulated Depreciation—Equipment 1,800 Equipment depreciation. 30 Wages Expense Wages Payable1,400 Accrued wages. 2.Total Net Total Owner's Income Assets = + Equity Reported amounts $120,000 $750,000 $450,000 Corrections: Supplies used –2,750 –2,750 –2,750 Unbilled fees earned +23,700 +23,700 +23,700 Equipment depreciation –1,800 –1,800 –1,800 Accrued wages –1,400 0 –1,400 Corrected amounts $137,750 $769,150 $467,750

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.