Adjusting entries. You have been retained to examine the records of Kathy's Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following: •On January 1, 20X3, the Supplies account had a balance of $2,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31.
•Unrecorded interest owed to the center totaled $275 as of December 31.
•All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $75,500 on August 31. With the exception of $15,500, which represented prepayments for 10 months' tuition from several well-to-do families, all amounts were for the current semester ending on December 31.
•Depreciation on the school's van was $3,000 for the year.
•On August 1, the center began to pay rent in 6-month installments of $21,000. Kathy wrote a check to the owner of the building and recorded the check in Prepaid Rent, a new account.
•Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.
•Kathy's Day Care paid insurance premiums as follows, each time debiting Prepaid Insurance:
Date Paid Policy No. Length of Policy Amount
Feb. 1, 20X2 1033MCM19 1 year $540
Jan. 1, 20X3 7952789HP 1 year 912
Aug. 1, 20X3 XQ943675ST 2 years 840
Instructions
The center's accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary under the accrual basis of accounting.I am stuck on this problem PLEASE HELP.
To prepare the adjusting entries for Kathy's Day Care Center, we need to consider the information provided and make the necessary adjustments to ensure that all revenues and expenses are recorded in the correct accounting period. Let's go through each item and determine the appropriate adjusting entry:
1. Supplies: The supplies account shows a beginning balance of $2,350, $5,520 worth of supplies purchased during the year, and $1,620 remaining unused at the end of the year. We need to adjust the supplies expense and the supplies account accordingly.
Adjusting entry:
Debit: Supplies Expense - $6,250 ($2,350 + $5,520 - $1,620)
Credit: Supplies - $1,620
2. Unrecorded Interest: There is $275 of unrecorded interest owed to the center as of December 31. We need to recognize this interest revenue.
Adjusting entry:
Debit: Accounts Receivable - $275
Credit: Interest Revenue - $275
3. Unearned Tuition Revenue: The Unearned Tuition Revenue account was credited for $75,500 on August 31. However, $15,500 of this amount represents prepayments for the next reporting period. We need to recognize the portion of the revenue that was earned during the current period.
Adjusting entry:
Debit: Unearned Tuition Revenue - $60,000 ($75,500 - $15,500)
Credit: Tuition Revenue - $60,000
4. Depreciation Expense: The depreciation on the school's van for the year amounts to $3,000. We need to record this expense.
Adjusting entry:
Debit: Depreciation Expense - $3,000
Credit: Accumulated Depreciation - Van - $3,000
5. Prepaid Rent: The center pays rent in 6-month installments of $21,000. As of December 31, four months have passed, and we need to recognize the portion of rent expense related to the current period.
Adjusting entry:
Debit: Rent Expense - $7,000 ($21,000 * 4 / 6)
Credit: Prepaid Rent - $7,000
6. Salaries Expense: Two salaried employees earn $400 each for a 5-day week. December 31 falls on a Thursday, so one additional day of salary expense needs to be recognized.
Adjusting entry:
Debit: Salaries Expense - $800 ($400 * 2)
Credit: Salaries Payable - $800
7. Prepaid Insurance: The center paid insurance premiums on February 1, 20X2, January 1, 20X3, and August 1, 20X3. We need to adjust the Prepaid Insurance account to recognize the portion of the premiums that have expired as of December 31.
For the policy paid on February 1, 20X2:
Adjusting entry:
Debit: Insurance Expense - $540
Credit: Prepaid Insurance - $540
For the policy paid on January 1, 20X3:
Adjusting entry:
Debit: Insurance Expense - $76 ($912 / 12 * 1)
Credit: Prepaid Insurance - $76
For the policy paid on August 1, 20X3:
Adjusting entry:
Debit: Insurance Expense - $560 ($840 / 2 * 4 / 12)
Credit: Prepaid Insurance - $560
Once you have prepared these adjusting entries, you can use them to update the appropriate accounts in the general ledger and ensure accurate financial reporting for Kathy's Day Care Center.