Question

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. (Enter any decreases to Assets, Liabilities, or Stockholders' Equity with a minus sign.)
a. Collected $2,400 rent for the period October 1 to December 31, which was credited to Unearned Revenue on October 1.

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

c. Used a machine purchased on October 1, for $48,000. The company estimates annual depreciation of $4,800

Answer 1

Answer:

a.Dr Unearned revenue(Liabilities -)             $800

  Cr Earned revenue(Stockholders' equity+)          $800

b.Dr Insurance expense(Stockholder's equity-)  $50

  Cr Prepaid insurance(Asset-)                                    $50

c.Dr Depreciation (Stockholders' equity-)    $400

  Cr Accumulated depreciation(Asset-)                  $400

Explanation:

The collection of $2,400 rent received in advance means that the following entries are passed in the first instance.

Dr   Cash(Asset+)                              $2,400

Cr Unearned revenue(Liabilities+)                     $2,400

The adjusting entries would have the following impact:

$2400*1/3=$800

Dr Unearned revenue(Liabilities -)             $800

Cr Earned revenue(Stockholders' equity+)          $800

Secondly, the payment of two-year insurance  would have the following entries on 1 October.

Dr Prepaid Insurance(Asset+)    $1200

Cr Cash(Asset-)                                      $1200

The adjustment would have the following entries:

$1200*1/24=$50

Dr Insurance expense(Stockholder's equity-)  $50

Cr Prepaid insurance(Asset-)                                    $50

Lastly, the purchase of machine would be recorded as follows:

Dr Machine (Asset+)            $48,000

Cr Cash(Asset-)                                    $48,000

The depreciation for one month is $400 ($4800*1/12),which would recorded thus:

Dr Depreciation (Stockholders' equity-)    $400

Cr Accumulated depreciation(Asset-)                  $400

Answer 2

Answer:

                                                 Assets    = Liabilities +   Equity

A. Unearned Revenue:     2400      =     1600  +           800

     

B.  Prepaid Insurance              - 50        =   No effect        +         - 50

     

C. Machine Purchased  No effect    =   No effect  +       No effect

     

C. Depreciation                     - 400     =   No effect        +          - 400

Explanation:

A. We collected cash $2400 for the rent of 3 months which means per month rent is $800. Since we earned $800 at Oct.31, it will increase our Equity account by $800 and the remaining is unearned revenue which increases our Liability account by $1600.

B. Paid $1,200 for two years which means per month insurance premium is 1200/24 = $50. The Assets initially has no effect on Oct.1 because Prepaid Insurance increases and cash decreases and the assets remain same. But at the end of month, the 1 month Prepaid insurance expired consists of $50. The Equity account decreases by insurance expense $50.

C. The purchased of Machine has no effect on accounting equation. However, the estimates annual depreciation is 4,800 and the per month depreciation is $400. Since the depreciation decreases the amount of Machine, the assets decreases by $400. And the Depreciation is an expense, so our Equity account also decreases by $400.