Using Financial Reports: Analyzing the Effects of Adjustments

Carey Land Company, a closely held corporation, invests in commercial rental properties. Carey’s annual accounting period ends on December 31. At the end of each year, numerous adjusting entries must be made because many transactions completed during current and prior years have economic effects on the financial statements of the current and future years. Assume that the current year is 2013.

Required:

This case concerns four transactions that have been selected for your analysis. Answer the questions for each.

Transaction (a): On January 1, 2011, the company purchased office equipment costing $14,000 for use in the business. The company estimates that the equipment’s cost should be allocated at $1,000 annually.

1. Over how many accounting periods will this transaction directly affect Carey’s financial statements? Explain.

2. How much depreciation expense was reported on the 2011 and 2012 income statements?

3. How should the office equipment be reported on the 2013 balance sheet?

4. Would Carey make an adjusting entry at the end of each year during the life of the equipment?

Explain your answer.

Transaction (b): On September 1, 2013, Carey collected $30,000 rent on office space. This amount represented the monthly rent in advance for the six-month period, September 1, 2013, through February 28, 2014. Unearned Rent Revenue was increased (credited) and Cash was increased (debited) for $30,000.

1. Over how many accounting periods will this transaction affect Carey’s financial statements? Explain.

2. How much rent revenue on this office space should Carey report on the 2013 income statement? Explain.

3. Did this transaction create a liability for Carey as of the end of 2013? Explain. If yes, how much?

4. Should Carey make an adjusting entry on December 31, 2014? Explain why. If your answer is yes, give the adjusting entry.

Transaction (c): On December 31, 2013, Carey owed employees unpaid and unrecorded wages of $7,500 because the employees worked the last three days in December 2013. The next payroll date is January 5, 2014.

1. Over how many accounting periods will this transaction affect Carey’s financial statements?

Explain.

2. How will this $7,500 affect Carey’s 2013 income statement and balance sheet?

3. Should Carey make an adjusting entry on December 31, 2013? Explain why. If your answer is yes, give the adjusting entry.

Transaction ( d ): On January 1, 2013, Carey agreed to supervise the planning and subdivision of a large tract of land for a customer, J. Signanini. This service job that Carey will perform involves four separate phases. By December 31, 2013, three phases had been completed to Signanini’s satisfaction. The remaining phase will be performed during 2014. The total price for the four phases (agreed on in advance by both parties) was $60,000. Each phase involves about the same amount of services. On December 31, 2013, Carey had collected no cash for the services already performed.

1. Should Carey record any service revenue on this job for 2013? Explain why. If yes, how much?

2. If your answer to part (1) is yes, should Carey make an adjusting entry on December 31, 2013? If yes, give the entry. Explain.

3. What entry will Carey make when it completes the last phase, assuming that the full contract price is collected on the completion date, February 15, 2014?