Maquoketa River Resort opened for business on June 1 with eight air-conditioned units. Its trial balance before adjustment on August 31 is as follows.
MAQUOKETA RIVER RESORT Trial Balance August 31, 2014
Account Number
Debit
Credit
101
Cash
$ 19,600
126
Supplies
3,300
130
Prepaid Insurance
6,000
140
Land
25,000
143
Buildings
125,000
149
Equipment
26,000
201
Accounts Payable
$ 6,500
208
Unearned Rent Revenue
7,400
275
Mortgage Payable
80,000
301
Owner’s Capital
100,000
306
Owner’s Drawings
5,000
429
Rent Revenue
80,000
622
Maintenance and Repairs Expense
3,600
726
Salaries and Wages Expense
51,000
732
Utilities Expense
9,400
$273,900
$273,900
In addition to those accounts listed on the trial balance, the chart of accounts for Maquoketa River Resort also contains the following accounts and account numbers: No. 112 Accounts Receivable, No. 144 Accumulated Depreciation—Buildings, No. 150 Accumulated Depreciation—Equipment, No. 212 Salaries and Wages Payable, No. 230 Interest Payable, No. 620 Depreciation Expense, No. 631 Supplies Expense, No. 718 Interest Expense, and No. 722 Insurance Expense.
- Insurance expires at the rate of $300 per month.
- A count on August 31 shows $800 of supplies on hand.
- Annual depreciation is $6,000 on buildings and $2,400 on equipment.
- Unearned rent revenue of $4,800 was earned prior to August 31.
- Salaries of $400 were unpaid at August 31.
- Rentals of $4,000 were due from tenants at August 31. (Use Accounts Receivable.)
- The mortgage interest rate is 9% per year. (The mortgage was taken out on August 1.)
Instructions
(a) Journalize the adjusting entries on August 31 for the 3-month period June 1–August 31.
(b) Prepare a ledger using the three-column form of account. Enter the trial balance amounts and post the adjusting entries. (Use J1 as the posting reference.)
(c) Prepare an adjusted trial balance on August 31.
(d) Prepare an income statement and an owner’s equity statement for the 3 months ending August 31 and a balance sheet as of August 31.
The Correct Answer and Explanation is :
(a) Journalizing Adjusting Entries on August 31:
Here are the adjusting entries for the period June 1–August 31:
- Insurance Expense
Insurance expires at $300 per month. For 3 months (June, July, August), total insurance expense = $300 * 3 = $900.
- Journal Entry:
Insurance Expense 900 Prepaid Insurance 900
- Supplies Expense
The supplies on hand at August 31 are $800, so the supplies used during the period are:
Beginning Supplies = $3,300
Ending Supplies = $800
Supplies Used = $3,300 – $800 = $2,500.
- Journal Entry:
Supplies Expense 2,500 Supplies 2,500
- Depreciation on Buildings and Equipment
Depreciation on buildings = $6,000 annually, or $6,000 / 12 months = $500 per month. For 3 months: $500 * 3 = $1,500.
Depreciation on equipment = $2,400 annually, or $2,400 / 12 months = $200 per month. For 3 months: $200 * 3 = $600.
- Journal Entry:
Depreciation Expense 2,100 Accumulated Depreciation—Buildings 1,500 Accumulated Depreciation—Equipment 600
- Unearned Rent Revenue
$4,800 of the unearned rent revenue has been earned by August 31.
- Journal Entry:
Unearned Rent Revenue 4,800 Rent Revenue 4,800
- Salaries and Wages Payable
Salaries of $400 were unpaid at August 31.
- Journal Entry:
Salaries and Wages Expense 400 Salaries and Wages Payable 400
- Accounts Receivable
Rentals of $4,000 are due from tenants at August 31.
- Journal Entry:
Accounts Receivable 4,000 Rent Revenue 4,000
- Mortgage Interest Expense
The mortgage interest rate is 9% per year. Mortgage = $80,000. The interest for 1 month (August) = $80,000 * 9% / 12 = $600.
- Journal Entry:
Interest Expense 600 Interest Payable 600
(b) Prepare the Ledger Using the Three-Column Form of Account:
Here, we will prepare the ledger for the accounts affected by the adjustments and post the trial balance entries along with the adjusting entries.
(c) Adjusted Trial Balance on August 31:
| Account | Debit ($) | Credit ($) |
|---|---|---|
| Cash | 19,600 | |
| Accounts Receivable | 4,000 | |
| Supplies | 800 | |
| Prepaid Insurance | 5,100 | |
| Land | 25,000 | |
| Buildings | 125,000 | |
| Equipment | 26,000 | |
| Accumulated Depreciation—Buildings | 1,500 | |
| Accumulated Depreciation—Equipment | 600 | |
| Accounts Payable | 6,500 | |
| Unearned Rent Revenue | 2,600 | |
| Mortgage Payable | 80,000 | |
| Owner’s Capital | 100,000 | |
| Owner’s Drawings | 5,000 | |
| Rent Revenue | 84,800 | |
| Salaries and Wages Expense | 51,400 | |
| Maintenance and Repairs Expense | 3,600 | |
| Utilities Expense | 9,400 | |
| Depreciation Expense | 2,100 | |
| Supplies Expense | 2,500 | |
| Interest Expense | 600 | |
| Salaries and Wages Payable | 400 | |
| Interest Payable | 600 |
(d) Financial Statements
- Income Statement for the 3 Months Ending August 31:
- Revenue:
- Rent Revenue: $84,800
- Expenses:
- Maintenance and Repairs Expense: $3,600
- Salaries and Wages Expense: $51,400
- Utilities Expense: $9,400
- Depreciation Expense: $2,100
- Supplies Expense: $2,500
- Interest Expense: $600
- Insurance Expense: $900
- Total Expenses: $70,400
- Net Income: $84,800 – $70,400 = $14,400
- Owner’s Equity Statement for the 3 Months Ending August 31:
- Beginning Owner’s Equity: $100,000
- Add: Net Income: $14,400
- Less: Drawings: $5,000
- Ending Owner’s Equity: $100,000 + $14,400 – $5,000 = $109,400
- Balance Sheet as of August 31:
- Assets:
- Cash: $19,600
- Accounts Receivable: $4,000
- Supplies: $800
- Prepaid Insurance: $5,100
- Land: $25,000
- Buildings (net): $125,000 – $1,500 = $123,500
- Equipment (net): $26,000 – $600 = $25,400
- Total Assets: $19,600 + $4,000 + $800 + $5,100 + $25,000 + $123,500 + $25,400 = $203,400
- Liabilities:
- Accounts Payable: $6,500
- Salaries and Wages Payable: $400
- Unearned Rent Revenue: $2,600
- Interest Payable: $600
- Mortgage Payable: $80,000
- Total Liabilities: $6,500 + $400 + $2,600 + $600 + $80,000 = $90,100
- Owner’s Equity: $109,400
- Total Liabilities and Owner’s Equity: $90,100 + $109,400 = $199,500
The total assets and total liabilities and equity should balance, and the adjusted financial statements reflect the accounting adjustments based on the trial balance and additional information provided.