Situations a. The business has interest expense of $$ \$ 3,400 $$ that it must pay early in January 2024 . b. Interest revenue of $$ \$ 4,700 $$ has been earned but not yet received. c. On July 1,2023 , when the business collected $$ \$ 12,000 $$ rent in advance, it debited Cash and credited Unearned Rent Revenue. The tenant was paying for two years' rent. d. Salary expense is $$ \$ 6,400 $$ per day-Monday through Friday-and the business pays employees each Friday. This year, December 31 falls on a Thursday. e. The unadjusted balance of the Supplies account is $$ \$ 2,700 $$. The total cost of supplies on hand is $$ \$ 1,800 $$. f. Equipment was purchased on January 1 of this year at asost of $$ \$ 120,000 $$. The equipment's useful life is five years. There is no residual value. Record depreciation for this year and then determiñe the equipment's book value.

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Certainly! Let's address each of the situations (a) through (f) individually. These scenarios involve various types of adjusting entries typically encountered in accrual accounting. Adjusting entries ensure that revenues and expenses are recognized in the period they are incurred, adhering to the **matching principle**.

---

### **a. Accrued Interest Expense of \$3,400**

**Situation:**  
The business has incurred an interest expense of \$3,400 that it must pay in early January 2024. This expense relates to the current accounting period but hasn't been paid or recorded yet.

**Adjustment Needed:**  
To recognize the interest expense incurred during the year.

**Adjusting Journal Entry:**

| Account Title        | Debit (\$) | Credit (\$) |
|----------------------|------------|-------------|
| **Interest Expense** | 3,400      |             |
| **Interest Payable** |            | 3,400       |

**Explanation:**  
- **Interest Expense** increases, reflecting the cost incurred.
- **Interest Payable** increases, indicating a liability to be paid in the future.

---

### **b. Accrued Interest Revenue of \$4,700**

**Situation:**  
Interest revenue amounting to \$4,700 has been earned during the period but has not yet been received or recorded.

**Adjustment Needed:**  
To recognize the interest revenue earned during the current period.

**Adjusting Journal Entry:**

| Account Title          | Debit (\$) | Credit (\$) |
|------------------------|------------|-------------|
| **Interest Receivable** | 4,700      |             |
| **Interest Revenue**    |            | 4,700       |

**Explanation:**  
- **Interest Receivable** increases as an asset, representing money to be received.
- **Interest Revenue** increases, recognizing the income earned.

---

### **c. Unearned Rent Revenue Adjustment**

**Situation:**  
On July 1, 2023, the business received \$12,000 in advance rent, debiting Cash and crediting Unearned Rent Revenue for a two-year tenancy.

**Adjustment Needed at Year-End (Assuming December 31, 2023):**  
Recognize the portion of rent that has been earned during the current year.

**Calculation:**

- **Total Rent Period:** 2 years = 24 months
- **Monthly Rent Revenue:** \$12,000 / 24 = \$500
- **Months Earned by December 31, 2023:** July to December = 6 months
- **Rent Earned:** 6 months × \$500 = \$3,000

**Adjusting Journal Entry:**

| Account Title            | Debit (\$) | Credit (\$) |
|--------------------------|------------|-------------|
| **Unearned Rent Revenue** | 3,000      |             |
| **Rent Revenue**          |            | 3,000       |

**Explanation:**  
- **Unearned Rent Revenue** decreases, reducing the liability as rent is earned.
- **Rent Revenue** increases, recognizing income earned during the period.

---

### **d. Accrued Salary Expense of \$25,600**

**Situation:**  
The business incurs a salary expense of \$6,400 per day from Monday through Friday and pays employees each Friday. December 31 falls on a Thursday, meaning salaries for Monday through Thursday (\$6,400 × 4 = \$25,600) have been incurred but not yet paid.

**Adjustment Needed:**  
To recognize the salary expense incurred up to December 31.

**Adjusting Journal Entry:**

| Account Title       | Debit (\$) | Credit (\$) |
|---------------------|------------|-------------|
| **Salary Expense**  | 25,600     |             |
| **Salaries Payable** |            | 25,600      |

**Explanation:**  
- **Salary Expense** increases, reflecting the cost incurred.
- **Salaries Payable** increases, indicating a liability owed to employees.

---

### **e. Supplies Expense Adjustment**

**Situation:**  
- **Unadjusted Supplies Account Balance:** \$2,700
- **Supplies on Hand at Year-End:** \$1,800
- **Supplies Used:** \$2,700 - \$1,800 = \$900

**Adjustment Needed:**  
To recognize the supplies expense for the period.

**Adjusting Journal Entry:**

| Account Title       | Debit (\$) | Credit (\$) |
|---------------------|------------|-------------|
| **Supplies Expense** | 900        |             |
| **Supplies**          |            | 900         |

**Explanation:**  
- **Supplies Expense** increases, recognizing the cost of supplies used.
- **Supplies** decreases, reflecting the reduction in asset inventory.

---

### **f. Depreciation of Equipment and Book Value Calculation**

**Situation:**  
- **Equipment Cost:** \$120,000
- **Purchase Date:** January 1 of the current year
- **Useful Life:** 5 years
- **Residual (Salvage) Value:** \$0

**Calculation of Depreciation:**

Using the **Straight-Line Depreciation Method**:

$$
\text{Annual Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} 
$$

$$
\text{Annual Depreciation Expense} = \frac{120,000 - 0}{5} = \$24,000 \text{ per year}
$$

**Book Value Calculation at Year-End:**

$$
\text{Book Value} = \text{Cost} - \text{Accumulated Depreciation}
$$

$$
\text{Book Value} = 120,000 - 24,000 = \$96,000
$$

**Adjusting Journal Entry:**

| Account Title                | Debit (\$) | Credit (\$) |
|------------------------------|------------|-------------|
| **Depreciation Expense**     | 24,000     |             |
| **Accumulated Depreciation** |            | 24,000      |

**Explanation:**  
- **Depreciation Expense** increases, representing the allocation of the equipment's cost over its useful life.
- **Accumulated Depreciation** increases, a contra-asset account reducing the equipment's book value on the balance sheet.

---

### **Summary of Adjusting Entries**

| Situation | Debit Account          | Credit Account          | Amount (\$) |
|-----------|------------------------|-------------------------|-------------|
| a         | Interest Expense       | Interest Payable        | 3,400       |
| b         | Interest Receivable    | Interest Revenue        | 4,700       |
| c         | Unearned Rent Revenue  | Rent Revenue            | 3,000       |
| d         | Salary Expense         | Salaries Payable        | 25,600      |
| e         | Supplies Expense       | Supplies                | 900         |
| f         | Depreciation Expense   | Accumulated Depreciation| 24,000      |

---

### **Impact on Financial Statements**

1. **Income Statement:**
   - Increases in **Interest Expense**, **Salary Expense**, **Supplies Expense**, and **Depreciation Expense** will reduce net income.
   - Increases in **Interest Revenue** and **Rent Revenue** will increase net income.

2. **Balance Sheet:**
   - **Interest Receivable**, **Salaries Payable**, and **Interest Payable** affect current assets and liabilities.
   - **Unearned Rent Revenue** decreases (liability reduction).
   - **Supplies** decreases (asset reduction).
   - **Accumulated Depreciation** increases (contra-asset), reducing the net book value of equipment.

3. **Statement of Cash Flows:**
   - Adjusting entries typically impact operating activities through changes in working capital accounts but do not directly affect cash flows unless they involve non-cash transactions like depreciation.

---

By making these adjusting entries, the financial statements will accurately reflect the company's financial position and performance for the period, adhering to Generally Accepted Accounting Principles (GAAP).
Here are the adjusting entries needed for each situation: 1. **Interest Expense:** - **Debit:** Interest Expense \$3,400 - **Credit:** Interest Payable \$3,400 2. **Interest Revenue:** - **Debit:** Interest Receivable \$4,700 - **Credit:** Interest Revenue \$4,700 3. **Rent Revenue:** - **Debit:** Unearned Rent Revenue \$3,000 - **Credit:** Rent Revenue \$3,000 4. **Salary Expense:** - **Debit:** Salary Expense \$25,600 - **Credit:** Salaries Payable \$25,600 5. **Supplies Expense:** - **Debit:** Supplies Expense \$900 - **Credit:** Supplies \$900 6. **Depreciation Expense:** - **Debit:** Depreciation Expense \$24,000 - **Credit:** Accumulated Depreciation \$24,000

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