91Ó°ÊÓ

The accounting firm Seaver \(\&\) Co. prepares its own financial statements at the end of each year. Based on the following information, prepare any adjustments that are needed for the accounting records as of December 31,1999 in terms of the basic accounting equation. a. As of December 31 , Seaver \(\&\) Co. has rendered \(\$ 20,500\) worth of services to clients for which they have not yet billed the client and for which they have not made any accounting entry. b. Seaver \& Co. owns equipment (computers and so on) having an original cost of \(\$ 12,000 .\) The equipment has an expected life of six years. c. On January \(1,1999,\) Seaver borrowed \(\$ 15,000 .\) Both principal and interest are due on December \(31,2000 .\) The interest rate is \(11 \%\) d. On January \(1,1999,\) Seaver rented storage space for three years. The entire three-year charge of \(\$ 15,000\) was paid at this time. Seaver (correctly) created a prepaid rent account in the amount of \(\$ 15,000\) e. As of December 31 , workers have earned \(\$ 10,200\) in wages that are unpaid and unrecorded.

Step by step solution

01

Analyze the Unbilled and Unrecorded Services

Seaver & Co. rendered $20,500 in services for which it has not billed the client. This would increase Seaver & Co.'s accounts receivable (asset) and also its service revenue (equity). So, both sides of the equation (assets = liabilities + shareholder’s equity) would increase by the same amount.

02

Calculate Depreciation on the Equipment

The depreciation expense for one year would be calculated as follows: Original cost of equipment divided by expected life = $12,000 / 6 = $2,000. This would increase the accumulated depreciation (asset) and also increase the depreciation expense (equity). Since accumulated depreciation reduces the value of the asset, it's recorded as an increase in liabilities on one side of the equation, and since depreciation expense reduces the equity, it reduces the shareholder’s equity on the other side of the equation.

03

Record the Interest Payable

As of December 31, 1999 Seaver would owe one year of interest on the $15,000 loan. The interest would be calculated as follows: Principal amount times interest rate = $15,000 * 0.11 = $1,650. This increases the interest payable (liability) and also increases the interest expense (equity). So, the equation would increase on liability side and reduce in shareholder’s equity.

04

Adjust for Prepaid Rent

The prepaid rent for three years was $15,000. The rent expense for a year would be calculated by dividing the total amount by the number of years: $15,000 / 3 = $5,000. So, the prepaid rent (asset) would decrease by $5,000 and the rent expense (equity) too would decrease by $5,000. This decreases the asset and the shareholder’s equity by the same amount.

05

Record the Unpaid and Unrecorded Wages

As of December 31, 1999, its workers have provided labor services worth $10,200, which are still unpaid and unrecorded. This would increase the wages payable (liability) and also increase the wages expense (equity). So, the liabilities goes up and shareholder’s equity goes down by an equal amount.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91Ó°ÊÓ!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Accounting Equation

The accounting equation is the fundamental principle behind the double-entry bookkeeping system. It is expressed as: \( \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} \). This means that what a company owns (assets) is financed by what it owes (liabilities) along with the owners' stake (equity).

• Assets include everything the company owns, such as cash, inventory, and equipment.
• Liabilities are obligations or debts owed to others, like loans and accounts payable.
• Shareholders’ equity represents the owners' claim after all liabilities have been settled.

Changes in this equation reflect transaction impacts and adjustments, maintaining a balanced state. Understanding this helps assess a company's financial health, making it crucial for financial statement preparation.

Accrual Accounting

Accrual accounting adheres to the principle that revenues and expenses are recognized when they are incurred or earned, rather than when cash is exchanged. This approach provides a more accurate picture of a company's financial status by reflecting all outstanding obligations and expected earnings.
With Seaver & Co., when they render services worth $20,500 without yet billing a client, they record it as revenue under the accounts receivable. Similarly, unpaid wages and interest on loans are recognized as expenses before actual payment, ensuring that their financial statements genuinely reflect all income and obligations for the period.

Depreciation

Depreciation is the method used to allocate the cost of a tangible asset over its useful life. It reflects how much of the asset's value has been used up. For example, Seaver & Co.'s equipment, bought for $12,000 with a useful life of six years, would write off its value at $2,000 per year.

• This amount is recorded as a depreciation expense, reducing the carrying value of the asset on the balance sheet.
• Simultaneously, it increases accumulated depreciation, a contra-asset account.
• The equity side is also adjusted since the depreciation expense reduces net income.

Understanding depreciation helps in accurately determining profits and maintaining asset values on the financial statements.

Prepaid Expenses

Prepaid expenses represent payments that have been made in advance for goods or services to be received in the future. Companies initially record these expenses as an asset, which converts into an expense over time.
Seaver & Co. pre-paid $15,000 for three years of rent. Each year's portion, like $5,000 for 1999, is expensed annually, reducing the prepaid asset balance.

• They provide a systematic approach to allocate costs to the period they belong, matching expenses with the revenue they help generate.
• This ensures the company's financial statements accurately reflect operational expenses and assets at any given time.

Unearned Revenue

Unearned revenue arises when a company receives payment for goods or services yet to be delivered. Initially recorded as a liability, it signifies the company's obligation to deliver these goods or services in the future.
As Seaver & Co. might also engage in similar transactions, understanding this concept is essential:

• Upon servicing or delivery, unearned revenue transitions into earned revenue, impacting both liabilities and income categories.
• Recognizing unearned revenue properly ensures accurate financial reports, depicting both current liabilities and potential future revenues accurately.

By adhering to this principle, companies ensure they do not prematurely recognize revenue, aligning their financial sources and obligations correctly.