Basic Accounting Exercise – Adjusting Entries

Exercise Condition:

The ledger of Piper Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

  • Prepaid Insurance $ 3,600
  • Supplies 2,800
  • Equipment 25,000
  • Accumulated Depreciation—Equipment $ 8,400
  • Notes Payable 20,000
  • Unearned Rent 9,900
  • Rent Revenue 60,000
  • Interest Expense –0–
  • Wages Expense 14,000

An analysis of the accounts shows the following:

1. The equipment depreciates $400 per month.

2. One-third of the unearned rent was earned during the quarter.

3. Interest of $500 is accrued on the notes payable.

4. Supplies on hand total $700.

5. Insurance expires at the rate of $200 per month.

Task: prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.

Answer & Explanation:

First – entries for the adjustments:

1. D Depreciation expenses $400*3=$1,200
_________C Depreciation – Equipment $1,200

2. D Unearned rent revenue $9900/3=$3,300
_________C Rent revenue $3,300

3. D Interest expenses $500
_________C Interest payable $500

4. D Supplies expenses $2,800 (in supplies account before adjustments)-$700 (on hand actual)=$2,100
__________C Supplies $2,100

5. D Insurance expense $200*3=$600
__________C Prepaid insurance $600

Next step, balances of the accounts after adjustments:

Account D C
Prepaid insurance $3,000
Supplies $700
Equipment $25,000
Accumulated depreciation equipment $9,600
Notes payable $20,000
Unearned rent $6,600
Rent revenue $63,300
Interest expenses $500
Wages expenses $14,000
Depreciation expenses $1,200
Supplies expenses $2,100
Insurance expenses $600