Question

Arnez Company’s annual accounting period ends on December 31, 2017. The following information concernsthe adjusting entries to be recorded as of that date. (Entries can draw from the following partial chartof accounts: Cash; Rent Receivable; Office Supplies; Prepaid Insurance; Building; AccumulatedDepreciation—Building; Salaries Payable; Unearned Rent; Rent Earned; Salaries Expense; OfficeSupplies Expense; Insurance Expense; Depreciation Expense—Building.)

a. The Office Supplies account started the year with a \(4,000 balance. During 2017, the company purchasedsupplies for \)13,400, which was added to the Office Supplies account. The inventory of suppliesavailable at December 31, 2017, totaled \(2,554.

b. An analysis of the company’s insurance policies provided the following facts.

entriescy Date of Purchase Coverage Cost

A April 1, 2015 24 \)14,400

B April 1, 2016 36 12,960

C August 1, 2017 12 2,400

The total premium for each policy was paid in full (for all months) at the purchase date, and the

Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries for Prepaid

Insurance were properly recorded in all prior years.)

c. The company has 15 employees, who earn a total of \(1,960 in salaries each working day. They are paideach Monday for their work in the five-day workweek ending on the previous Friday. Assume thatDecember 31, 2017, is a Tuesday, and all 15 employees worked the first two days of that week. BecauseNew Year’s Day is a paid holiday, they will be paid salaries for five full days on Monday, January 6, 2018.

d. The company purchased a building on January 1, 2017. It cost \)960,000 and is expected to have a\(45,000 salvage value at the end of its predicted 30-year life. Annual depreciation is \)30,500.

e. Since the company is not large enough to occupy the entire building it owns, it rented space to a tenantat \(3,000 per month, starting on November 1, 2017. The rent was paid on time on November 1, and theamount received was credited to the Rent Earned account. However, the tenant has not paid theDecember rent. The company has worked out an agreement with the tenant, who has promised to payboth December and January rent in full on January 15. The tenant has agreed not to fall behind again.

f. On November 1, the company rented space to another tenant for \)2,800 per month. The tenant paidfive months’ rent in advance on that date. The payment was recorded with a credit to the UnearnedRent account.

Required

1. Use the information to prepare adjusting entries as of December 31, 2017.

2. Prepare journal entries to record the first subsequent cash transaction in 2018 for parts cand e.

Short answer

The unearned rent account is debited and rent revenue credited with $5,600. Journal entry shown in step 2.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of prepaid insurance

Prepaid insurance is the insurance that is paid in advance.

Adjusting entries

	JOURNAL ENTRY
Date	Particulars	Debit	Credit
a.	Office Supplies Expense	$14,846
	Office Supplies		$14,846
	(Entry for the office supplies used)
b.	Insurance Expense	$7,120
	Prepaid Insurance		$7,120
	(Entry of prepaid insurance)
c.	Salaries Expenses	$3,920
	Salaries Payable		$3,920
	(Entry for salaries payable)
d.	Depreciation Expense- Building	$30,500
	Accumulated Depreciation- Building		$30,500
	(Entry for the depreciation expense)
e.	Rent Receivable	$3,000
	Rent Revenue		$3,000
	(Entry for the rent receivable)
f.	Unearned Rent	$5,600
	Rent Revenue		$5,600
	(Entry for rent received in advance)