A review of the ledger of Hashmi Company at December 31, 2014, produces the following data for the preparation of annual adjusting entries:
1. Notes Receivable, December 31, 2014, unadjusted balance, $25,000. Hashmi has a 7% note receivable issued on October 1, 2014, maturing on June 1, 2015. Interest and principal are to be paid in full on the maturity date.
2. Prepaid Insurance, December 31, 2014, unadjusted balance, $14,100. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the buildings was purchased on September 1, 2013, for $10,440. The policy has a term of two years. Policy A2958 on the vehicles was purchased on March 1, 2014, for $5,400. This policy also has a term of one year.
3. Prepaid Rent, December 31, 2014, unadjusted balance, $3,135. The company has prepaid rental agreements for two pieces of equipment. The first one costs $335 per month and is for September 30, 2014, to March 31, 2015.
The other costs $375 per month and is for December 1, 2014, to March 1, 2015. The company paid the full amount for each rental agreement at the start of the rental period.
4. Buildings, December 31, 2014, unadjusted balance, $291,960. The first, purchased for $127,800 on September 1, 2001, has an estimated 30-year useful life. The second, purchased for $164,160 on May 1, 2003, has an estimated 40-year useful life.
5. Unearned Revenue, December 31, 2014, unadjusted balance, $46,550. The company began selling magazine subscriptions in 2014. The selling price of a subscription is $35 for 12 monthly issues. Customers start receiving the magazine in the month the subscription is purchased. A review of subscription contracts that customers have paid for prior to December 31 reveals the following:
Subscription Date3..................................Number of Subscriptions
October 1.......................................................................325
November 1....................................................................450
December 1....................................................................555
6. Salaries Payable, December 31, 2014, unadjusted balance, $0. There are nine salaried employees, each of whom is paid every Monday for the previous week (Monday to Friday). Six employees receive a salary of $650 each per week, and three employees earn $850 each per week. December 31 is a Wednesday.
Instructions
(a) Prepare calculations to show why the balance (before adjustments) in the Prepaid Insurance account is $14,100 and why the balance (before adjustments) in the Unearned Subscription Revenue account is $46,550.
(b) Prepare the adjusting entries at December 31, 2014. Show all your calculations.
(c) For item 4, calculate the accumulated depreciation and carrying amount of each building on December 31,
2014.
TAKING IT FURTHER What is the purpose of recording depreciation? Why is land not depreciated?