Question

Greco Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows.

GRECO RESORT TRIAL BALANCE AUGUST 31, 2017
	Debit	Credit
Cash	\( 19,600
Prepaid Insurance	4,500
Supplies	2,600
Land	20,000
Buildings	120,000
Equipment	16,000
Accounts Payable		\) 4,500
Unearned Rent Revenue		4,600
Mortgage Payable		60,000
Common Stock		91,000
Retained Earnings		9,000
Dividends	5,000
Rent Revenue		76,200
Salaries and Wages Expense	44,800
Utilities Expenses	9,200
Maintenance and Repairs Expense	3,600
	\(245,300	\)245,300

Other data:

1. The balance in prepaid insurance is a one-year premium paid on June 1, 2017.
2. An inventory count on August 31 shows \(450 of supplies on hand.
3. Annual depreciation rates are buildings (4%) and equipment (10%). Salvage value is estimated to be 10% of cost.
4. Unearned Rent Revenue of \)3,800 was earned prior to August 31.
5. Salaries of \(375 were unpaid at August 31.
6. Rentals of \)800 were due from tenants at August 31.
7. The mortgage interest rate is 8% per year.

Instructions

(a) Journalize the adjusting entries on August 31 for the 3-month period June 1–August 31. (Omit explanations.)

(b) Prepare an adjusted trial balance on August 31.

Short answer

a) Adjusting entries are recorded in Step 2.

b) Total debit and credit of adjusted trial balance equals $249,115.

Step-by-step solution

Meaning of Trial balance

The trial balance is a worksheet that is utilized in bookkeeping. In order to create averages for the credit and debit account columns, which are always equal, each account’s balance is considered.

(a) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
1, Aug. 31	Insurance expense ($4,500 x3/12)	1,125
	Prepaid expense		1,125
2, Aug. 31	Supplies expense ($2,600 - $450)	2,150
	Supplies		2,150
3, Aug. 31	Depreciation expense	1,080
	Accumulated depreciation – Building		1,080
Aug. 31	Depreciation expense	360
	Accumulated depreciation- Equipment		360
4, Aug. 31	Unearned rent revenues	3,800
	Rent revenue		3,800
5. Aug. 31	Salaries and wages expense	375
	Salaries and wages payable		375
6, Aug. 31	Accounts receivable	800
	Rent revenue		800
7, Aug. 31	Interest expense	1,200
	Interest payable ($60,000 x 8% x 3/12)		1,200

Working notes

Calculation of depreciation-Building

$\begin{array}{c}\mathbf{Depreciation}\mathbf{=}[\mathbf{Building}\mathbf{value}\mathbf{-}(\mathbf{Building}\mathbf{value}\mathbf{\times }\mathbf{Salvage}\mathbf{value})]\mathbf{\times }\mathbf{Annual}\mathbf{rates}\mathbf{\times }\frac{\mathbf{Total}\mathbf{month}}{\mathbf{Total}\mathbf{month}\mathbf{in}\mathbf{a}\mathbf{year}}\\ \mathbf{=}[\mathbf{120}\mathbf{,}\mathbf{000}\mathbf{-}(\mathbf{120}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%})]\mathbf{\times }\mathbf{4}\mathbf{\%}\mathbf{\times }\frac{3}{12}\\ \mathbf{=}\mathbf{\$}\mathbf{108}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{4}\mathbf{\%}\mathbf{\times }\frac{3}{12}\\ =\$1080\end{array}$

Calculation of depreciation-Equipment

$\begin{array}{c}\mathbf{Depreciation}\mathbf{=}[\mathbf{Equipment}\mathbf{value}\mathbf{-}(\mathbf{Equipment}\mathbf{value}\mathbf{\times }\mathbf{Salvage}\mathbf{value})]\mathbf{\times }\mathbf{Annual}\mathbf{rates}\mathbf{\times }\frac{\mathbf{Total}\mathbf{month}}{\mathbf{Total}\mathbf{month}\mathbf{in}\mathbf{a}\mathbf{year}}\\ \mathbf{=}[\mathbf{16}\mathbf{,}\mathbf{000}\mathbf{-}(\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{\times }\mathbf{10}\mathbf{\%})]\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{3}{12}\\ \mathbf{=}\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{400}\mathbf{\times }\mathbf{4}\mathbf{\%}\mathbf{\times }\frac{3}{12}\\ =\$360\end{array}$

(b) Preparing an adjusted trial balance

GRECO RESORT ADJUSTED TRIAL BALANCE AUGUST 31, 2017
	Debit	Credit
Cash	$ 19,600
Accounts receivables	800
Prepaid Insurance ($4,500 -$1,125)	3,375
Supplies	450
Land	20,000
Buildings	120,000
Accumulated depreciation-Building		$1,080
Equipment	16,000
Accumulated depreciation-Equipment		$360
Accounts Payable		$ 4,500
Unearned Rent Revenue ($4,600 - $3,800)		800
Interest payable		1,200
Salaries and wages payable		375
Mortgage Payable		60,000
Common Stock		91,000
Retained Earnings		9,000
Dividends	5,000
Rent Revenue ($76,200+$3,800+$800)		80,800
Salaries and Wages Expense ($44,800 + $375)	45,175
Utility Expenses	9,200
Maintenance and Repairs Expense	3,600
Insurance expense	1,125
Supplies expense	2,150
Depreciation expense ($1,080+$360)	1,440
Interest expense	1,200
	$249,115	$249,115