Question

Gauge Construction Company is making adjusting entries for the year ended March 31 of the current year. In developing information for the adjusting entries, the accountant learned the following: The company paid $3,900 on January 1 of the current year to have advertisements placed in the local monthly neighborhood paper. The ads were to be run from January through June. The bookkeeper debited the full amount to Prepaid Advertising on January 1. At March 31 of the current year, the following data relating to Construction Equipment were obtained from the records and supporting documents. Construction equipment (at cost) $ 550,000 Accumulated depreciation (through March 31 of the prior year) 148,800 Estimated annual depreciation for using the equipment 42,400 Required:
1. Record the adjusting entry for advertisements at March 31 of the current year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
2. Record the adjusting entry for the use of construction equipment during of the current year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
3. What amount should be reported on the current year's income statement for Advertising Expense? For Depreciation Expense?
4. What amount should be reported on the current year's balance sheet for Prepaid Advertising? For Construction Equipment (at net book value)?

Answer 1

Answer:

Gauge Construction Company

1. Adjusting Journal Entry:

Advertising Expense     $1,950

Prepaid Advertising                       1,950

To record advertising expense for the three-month period.

2.Adjusting Journal Entry:

Depreciation Expense - Construction Equipment $42,500

Accumulated Depreciation- Construction Equipment              $42,500

To record depreciation charge for the year.

3. For the current year's income statement:

i) Advertising Expense = $1,950 ($3,900*3/6)

ii) Depreciation Expense = $42,400

4. For the current year's balance sheet:

i) Prepaid Advertising = $1,950 ($3,900*3/6)

ii) Construction Equipment:

Book Value =                           $550,000

Accumulated Depreciation =   $191,200 ($148,800 + 42,400)

Net Book Value =                  $358,800

Explanation:

Adjusting entries are journal entries made at the end of the accounting period to recognize accrued expenses and income.  Some items that are affected by adjusting entries are Accrued expenses, Deferred revenues, Prepaid expenses, and Depreciation expenses.

Adjusting entries become necessary at the end of a financial period for the following reasons: 1) A single transaction may affect revenues or expenses in more than one accounting period.   The adjusting entry will be made to carry over some amount of the transaction to the next period so that only the amount relating to the current period is charged to the income statement, e.g. Prepaid Advertising.  2) Some transactions have not been recognized in the accounting records during the period.  This is especially for Depreciation of assets, which is always done at the period's end.

Answer 2

Answer:

1. Record the adjusting entry for advertisements at March 31 of the current year.

advertisement expense per month = $3,900 / 6 months = $650

$650 x 3 months = $1,950

Dr Advertising expense 1,950

    Cr Prepaid advertising 1,950

2. Record the adjusting entry for the use of construction equipment during of the current year.

Dr Depreciation expense 42,400

    Cr Accumulated depreciation - equipment 42,400

3. What amount should be reported on the current year's income statement for Advertising Expense?

$1,950

For Depreciation Expense?

$42,400

4. What amount should be reported on the current year's balance sheet for Prepaid Advertising?

$1,950 (= $3,900 - $1,950)

For Construction Equipment (at net book value)?

$358,800 (= $550,000 - $191,200)

Explanation:

Accrual accounting principle states that both revenues and expenses must be recognized during the periods that they effectively occur. They are not necessarily recorded during the periods in which they were collected or paid for.