Q.7.

2
Adjusting Journal entries
Marilu Company
General Journal
December 31, 1994
Date Description Post Debit Credit
Ref
1 Depreciation expense 4800
Acc. Dep of equipment 4800
2 Prepaid Insurance expense 2000
Insurance expense 2000
3 Prepaid advertising expense 1800
Advertising expense 1800
4 Interest expense 400
Interest payable 400
5 Bad debt expense 1080
Allowance for bad debts 1080
6 Merchandise inventory 91000
Cost of goods sold 504700
Purchase discount 1800
Purchase Ret & All 400
Opening inventory of Merchandize 121000
Purchases 471500
Freight in 5400
Detail of Adjusting entries

2. On Sep 1, Insurance premium paid in advance 2400 for 2 years (i.e 2400/24= 100 per month). Thus
company is required to debit the prepaid insurance by 2400 and credit the cash account by 2400.
However, instead of debit prepaid insurance expense, the company debit the insurance expense
account by 2400. From 1 Sep to 31 Dec there are four months and the actual expense is of 400. Now
there is need to reduce insurance expense by 2000 and to recognize prepaid insurance by 2000.

3. Company paid 3600 in advance (for 6 monthly ads --- 3600/6 = 600 per ad) but instead of debit the
prepaid advertising expense the company has debit the advertisement expense by 3600. From Oct 1 to
31 December 3 ads appeared in the magazine (i.e. 600 x 3 =1800). So the actual expense is of 1800. Now
there is a need to reduce the expense by 1800 and to recognize the prepaid advertising expense by 1800

4. 16,000 x10/100=1600 x 90/360= 400

5. 88,000 x 1/100= 880 +200(Dr. balance of Allowances for bad debts) = 1080
 Marilu Company
Income Statement
For year ended on 31 December 1994
Sales 805000
Less: Sales Ret & Allowances 4800
Net Sales 800200
Less: Cost of goods sold
Opening inventory 121000
Add: Purchases 471500
Less Purchase Discount 1800
469700
Less: Purchased Ret & All 400
Net purchases 469300
Add: Fright In 5400
Delivered cost of purchases 474700 474700
Cost of goods available for
sales 595700
Less: Ending inventory 91000
Cost of goods sold 504700 504700
Gross profit 295500
Less: Operating Expenses
Salary expense 110000
Rent expense 16000
Insurance expense 12100
Less: Prepaid Insurance 2000
10100 10100
Advertising expense 16100
Less: Prepaid Advertisement 1800
14300 14300
Utilities expenses 6800
Interest expense 400
Bad debt expense 1080
Depreciation expense 4800
Total Operating Expenses 163480 163480
Net Profit 132020
 Marilu Company
Balance Sheet
As at 31st December 1994

Assets Amount Liab+O/E Amount

Cash 8000 Account payable 11000
Prepaid Insurance 2000 Bank loan payable 16000
Prepaid Advertising 1800 Interest payable 400
Account Receivable 88000
Less: Allow for Bad Debt 880
Net book value 87120 87120 Capital 57100
Merchandize Inventory 91000 Add: Net profit 132020
Equipment 40000 Subtotal 189120
Less: Acc. Dep of Equip 18400 Less: Drawings 5000
Net book value 21600 21600 Total 184120 184120
Total Assets 211520 Total Liabilities & O/E 211520

Closing Journal entries

Description Dr Cr
Sales 805000
Sales Ret & Allowance 4800
Cost of goods sold 504700
Salary expense 110000
Rent expense 16000
Insurance expense 10100
Advertising expense 14300
Utilities expenses 6800
Interest expense 400
Bad debt expense 1080
Depreciation expense 4800
Capital 132020

Description Post Debit Credit

Ref
Capital 5000
Drawings 5000
 MariLu Company
Post-Closing Trial Balance
For the year ended on 31 Dec 1994
Account Debit Credit
Cash 8000
Prepaid Insurance 2000
Prepaid Advertising 1800
Account Receivable 88000
Allow for Bad Debt 880
Merchandize Inventory 91000
Equipment 40000
Acc. Dep of Equipment 18400
Account payable 11000
Bank loan payable 16000
Interest payable 400
Capital 184120
Total 230800 230800