Chapter 5: Adjustments and the WorksheetChapter Opener: Thinking CriticallyStudents should suggest that accountants estimate the amount of wear and tear on the equipment. Thisexpense should be charged against the income earned during that same period. The concept of adjustmentsand depreciation can be introduced at this time.Fast Facts• William Boeing founded Pacific Aero Products Company in 1916; the name was changed to Boeing in1917.• In 1917 the company employed 28 people. In 2004 Boeing employed more than 159,000 people in48 U.S. states and 67 foreign countries.• Boeing is the largest contractor working for NASA.• Along with the ISS, the Boeing Company manufactures and services commercial airplanes, militaryaircraft, helicopters, a variety of electronic defense systems, and advanced communication systems.• Boeing’s newest division, Connexion, equips aircraft with a broadband connection that provides high-speed access to the Internet, entertainment and television—all in real-time.• Boeing’s 2004 sales were $52.5 billion from customers in 145 countries. International sales accounted fornearly 30 percent of total sales.Computers in Accounting: Thinking CriticallyAnswers will vary, but students should demonstrate an understanding of the word “integrated” as it applies tocomputerized accounting systems. Each accounting module (accounts payable, accounts receivable,general ledger, fixed asset, etc.) communicates with the others, transferring data, keeping the entire systemin balance.Computers in Accounting: Internet ApplicationStudents can find information at www.accubooks.com. Reports will vary. The Accu-Books general ledgermodule provides the following features: produces financial reports, offers customizable chart of accounts,and provides easy-to-use forms for journal entries.Managerial Implications: Thinking CriticallyAdjustments ensure that the financial statements reflect the true condition and performance of the business.Discussion QuestionsThese questions are designed to check students’ understanding of new terms, concepts, and procedurespresented in the chapter.1. Debit Depreciation Expense – Machine, $125; Credit Accum. Depr. – Machine, $1252. Debit Insurance Expense; credit Prepaid Insurance.3. Expense items that are acquired and paid for in advance of their use. Supplies, prepaid rent, prepaidinsurance, and advertising.4. Update supplies accounts at the end of a period to reflect amounts used.5. b, d, f, g, and i are depreciated.6. a. none b. none c. none d. decrease7. a. decrease b. none c. none d. decrease8. To create a permanent record of any changes in account balances that are shown on the worksheet.9. Asset cost, accumulated depreciation, book value.10. Contra asset accounts have a credit balance. Asset accounts have a debit balance.11. Cost of asset less accumulated depreciation.12. To keep a record of total depreciation taken; to reduce the book value of asset.13. Charges off an equal amount of cost of asset during each accounting period in asset’s useful life.14. Equipment, buildings, and automobiles.70 䡲 Chapter 5 Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Price_SM_ch05.qxd 10/26/05 2:40 PM Page 70ExercisesExercise 5.11. Rent Expense, $1,500 Dr.Prepaid Rent, $1,500 Cr.($9,000 ⫼ 6 months = $1,500 per month)2. Supplies Expense, $1,475 Dr.Supplies, $1,475 Cr.($2,375 – $900 = $1,475)3. Depreciation Expense—Equipment, $225 Dr.Accumulated Depreciation—Equipment, $225 Cr.($27,000 ⫼ 120 months = $225)Exercise 5.21. Insurance Expense, $250 Dr.Prepaid Insurance, $250 Cr.($6,000 ⫼ 24 months = $250 month)2. Advertising Expense, $450 Dr.Prepaid Advertising, $450 Cr.($5,400 ⫼ 12 months = $450)Exercise 5.3Mason CompanyWorksheet (Partial)Month Ended January 31, 2007Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5 䡲 71Trial Balance AdjustmentsAdjusted Trial BalanceAccount Name Debit Credit Debit Credit Debit CreditCash 62,000 62,000Accounts Receivable 21,500 21,500Supplies 8,000 (a) 5,200 2,800Prepaid Insurance 7,200 (b) 1,800 5,400Equipment 90,500 90,500Accumulated Depr.—Equipment (c) 1,575 1,575Accounts Payable 15,700 15,700Jerry Mason, Capital 80,950 80,950Fees Income 112,000 112,000Rent Expense 9,600 9,600Salaries Expense 9,850 9,850Supplies Expense (a) 5,200 5,200Insurance Expense (b) 1,800 1,800Depreciation Expense—Equipment (c) 1,575 1,575Totals 208,650 208,650 8,575 8,575 210,225 210,225Price_SM_ch05.qxd 10/26/05 2:40 PM Page 71Exercise 5.4Net Income Before Adjustments . . . . . . . . . . $40,000Less Adjustments:Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . $3,000Depreciation Expense . . . . . . . . . . . . . . . . . . 3,600Supplies Expense . . . . . . . . . . . . . . . . . . . . . 1,300Total Adjustments for Expenses Not Made . . 7,900Corrected Net Income . . . . . . . . . . . . . . . . . . $32,100If the adjusting entries are not made, total expenses will be understated by $7,900 and net income will beoverstated by $7,900.Exercise 5.5GENERAL JOURNAL PAGE 3Post. Date Description Ref. Debit CreditAdjusting Entries2007 Dec. 31 Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 2,500Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 2,50031 Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521 1,800Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 1,80031 Depreciation Expense—Equipment . . . . . . . . . . . . . . . . 517 1,200Accumulated Depreciation—Equipment . . . . . . . . . . . 142 1,20072 䡲 Chapter 5 Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Price_SM_ch05.qxd 10/26/05 2:40 PM Page 72GENERAL LEDGERACCOUNT Supplies ACCOUNT NO. 121Post. BalanceDate Description Ref. Debit Credit Debit Credit2007Dec. 1 J1 4,000 4,00031 Adjusting J3 2,500 1,500ACCOUNT Prepaid Insurance ACCOUNT NO. 131Post. BalanceDate Description Ref. Debit Credit Debit Credit2007Dec. 1 J1 10,800 10,80031 Adjusting J3 1,800 9,000ACCOUNT Accumulated Depreciation—Equipment ACCOUNT NO. 142Post. BalanceDate Description Ref. Debit Credit Debit Credit2007Dec. 31 Adjusting J3 1,200 1,200ACCOUNT Depreciation Expense—Equipment ACCOUNT NO. 517Post. BalanceDate Description Ref. Debit Credit Debit Credit2007Dec. 31 Adjusting J3 1,200 1,200ACCOUNT Insurance Expense ACCOUNT NO. 521Post. BalanceDate Description Ref. Debit Credit