Hello, in this lecture, we're gonna work some more test type problems, smaller problems that could be in the format of multiple choice questions. So we have on July 1, a company paid 3008 40 premium on a one year insurance policy with benefits beginning on that date, what will be the insurance expense on the annual income statement for the current year ended December 31. So once again, I'm going to take a look at the trial balance. This won't be an unrelated trial balance, but I think a trial balance is a good cheat sheet to use. So when you're practicing problems, or if you can on a test, I would have one open. So here's the trial balance assets up top liabilities, and then we have the equity section, income and expense.

So I'm just going to try to think about the accounts that we are looking at here. So we're looking at insurance. So if I was to think of the balance sheet account, this is going to be an adjusting entry related to insurance. We're talking about prepaid insurance. And if we're thinking about the income statement account down here, we're talking about insurance expense. Insurance expense generally only go up the adjuster entry that we are going to have here is a debit to insurance expense and a credit to prepaid insurance.

Now, we might be saying, Well, how did we get prepaid insurance on the books? When does prepaid insurance be something that is on the books, and note that whenever we pay for insurance, we pay for it before we use it, meaning we don't have any coverage at the time we paid for it, we're going to get the coverage in the future. That's why when we pay for it, it goes into prepaid insurance. So if we think about that, then on July 1, a company paid 3008 40 premium. So what happened on that date, we paid cash went down. So we credited cash on that date.

I'll bring it down here credit to cash and that I'm going to make a negative for my credits are going to be negatives are bracketed. So we're going to say this is a credit. And then the debit is going to be to not insurance expense, but it was to prepaid insurance. That's how the insured that's how the prepaid insurance gets on the books. So now we have to Paid insurance on the books at 3008 40. That's what this number would be.

If we were using the same problem. We have prepaid insurance on the books. Now we need to determine how much should that go down by in order to record the insurance expense on the year how much of that has been consumed in the year? Well, if we took the amount of 3840, and we said that that's for one year or 12 months, we're going to say 12 months, how much is it per month, then it's going to be the 3840 divided by 12. So that means the monthly policy would be $320. So 320 per month, I'm going to go ahead and underline that.

So that was a calculation. And then we got to figure out well how many months have passed? Well, July 1 is the date we bought it. So remember, we bought it on the first I'm going to include July as I counted off on my fingers. Hey, July is included July, August, September, October, November, December six months. So we're going to say six months, times six, so 320 and underline that do this underline here times six months equals the 320 times the six months.

So that would give us the 1009 20. So that's going to be the adjusting entry, what the adjusting entry means that we consumed this month insurance. That's going to be the expense now that we have over the time period, that will be the debit for the adjusting entry. And the credit will then go to prepaid insurance reducing the prepaid insurance. So note what they could ask. They could ask how much was consumed how much was used, which in this case was the 1920 1009 20.

They could ask how much is still remaining. And if we had an original 3840, that's what's in the prepaid insurance, and then we decrease the prepaid insurance by expensing it That would be this debit minus this credit. That means that we have leftover in prepaid insurance the same in this case, because we took half of it, it happened to be half a year 1980 1009 20. If it was anything other than half a year, then these two numbers would not be the same. So this is how much is left. This is how much was consumed.

They could ask you either of those questions, so be careful in the multiple choice question on next one says that a company has 6009 70 in net income for the year its sales were 14 nine for the same period, calculate the profit margin. Alright, so the profit margin, that's going to be a percentage. And so in order to do this, we're going to take first our income statement type calculation, we have sales, sales is going to be 14 900. We're going to take all of our expenses, I'm just going to group them this is total expenses. We don't know what that number is. They gave us net income, net income.

Net income is the six nine seven zero. So this is basically our income statement, if I was to back into what expenses must be this minus this has to equal that. And therefore it's going to be a subtraction problem, this minus this must equal this, if we were to see that algebraically would just be 14 minus all the expenses, x basically equals the 6970. And then we would solve for the expenses by subtracting the 14 from each side. So we can do that here, I'm just say it's the 14 minus the six nine. So that's what we're gonna we're gonna pick that number up.

Now, we don't fully need that, but I think it gives us a better picture of what is going on here. So that's going to be basically our income statement. Now, to calculate the profit margin, we're going to take the net income divided by the 14 nine sales. So we just take the net income which is 697. zero divided by the 14 nine in sales. And if I select enter, it gives me zero. It's not zero.

Why is it zero because we have no decimal. So we got to go to the Home tab, we got to go to the numbers group, and we could add decimals, and notice the decimals go on. So it's not even if we select the percent that'll give us to two places. Now it depends on how the answer is formatted. If it only wants two places, it'd be 47. There was more than 240 7.8 more than that 40 I'm sorry 46.8.

More than that, it would be 46.78. So notice, excels rounding that need to be careful on the rounding and all these types of problems. Next one says company paid insurance premiums for the four months in advance on November 1. The balance in the prepaid insurance account for before adjustment at the end of the year is 5800. And no adjustments had been made previously. The adjusting entry required on December 31 So remember what's happening here, we're talking about insurance.

So this is an adjusting entry, if we look at our trial balance, or this is a different trial balance, but if we consider a trial balance, there's going to be one balance sheet account, one income statement account. We're talking about insurance. So we're talking about prepaid insurance on the balance sheet. It's an asset up here in the assets section, and we're talking on the income statement, insurance expense. It's an expense, it's down here in the expense, what's going to be the journal entry? Well, we know expenses generally only go up.

So the expense has a debit balance, we're going to make it go up by debiting. It expenses always go up with a debit. And that means that if we debit the expense, we must be crediting prepaid insurance, that's going to be the journal entry that we know that that's gonna happen. Even if we don't really understand the process. We know that Okay, we're going to debit insurance expense, and we're going to credit prepaid insurance just by thinking about what an adjusting entry is. And we can figure that out.

So that's gonna be debit, and credit. But now we got to figure out well, how much we're going to debit and credit and then we got to think about a bit deep more deeply on what happened. Here, we bought the policy, what happens when we buy the policy? Well, we're going to pay cash for it. Cash went down with a credit, and we debited to the account called prepaid insurance. Why didn't we just expense it when we paid for the insurance policy?

Because the insurance policy has not yet been used, it's going to be used when we consume it through the policy. So as the policy expires, it's going to be consumed. So prepaid insurance, then have the balance. If we put the prepaid insurance here, if we were to underline the prepaid insurance, or make it into a T accounts make it look like a T here, underline this and I'm going to put this on the left side, I have a left border. So there's our T prepaid insurance had five eight in it. And now the adjusting entry that that's what would be here on our trial balance.

The adjusting entry needs to bring that down for the amount that was consumed for the period. So how do we figure that out? That's going to be the amount that's in there? Or the amount that was paid five, eight. And then we're going to say, how many months does the policy cover, be careful, it's not a year, this time, it's four months. So four months is how much is covered.

So if we divide that out, I'm gonna go ahead and underline that. If we divide this out, then how much per month it'd be five, eight, divided by four. And that means that per month, the policy costs 1004 50. Now we have to decide, well, how many months have passed, we bought it in November 1, not November 30. Therefore, we're going to include November when I counted on my fingers, November 1, one and december two. So we're going to multiply that times to the amount of months that have expired to our financial statements date.

So we're going to say this is the 1450 per month times two, and there is the adjustment. So that's going to be what it's going to be debited to the expense consuming it Throughout the year recognizing the expense at the time period in which we consumed it in order to help us generate revenue matching principle, what happened to prepaid? Well, that means we just credited the prepaid. And I could just say that's the credit right here. And then what is the balance, then? Well, it's going to be a debit of this minus this.

That's the balance. That's what's left after this transaction have taken place. So remember, they could ask you either question they asked us for the journal entry this time, a question like this could ask you for what was expended what's left in prepaid insurance, once again, they happen to do it. So it was just half of the four month policy two months had expired, therefore, these two numbers are the same. But if it was only one month that had expired, then they would not be the same. So it's not always the case that this is going to be the same as the amount that expire.

Next one says that on November 1 company loans another company 260,000 at a 9% interest rate, the note receivable plus interest will not be collected until March. So that's the following year, the company's annual accounting period is December 31. The amount of interest revenue should be reported in the first year. Okay, so what happened here is we loaned some money out. And when we loan money out, just like we rented someone an apartment, they're gonna basically pay us rent on the money that they're using for that time period. That's called interest.

And the rent that's going to be due is not going to be paid to us until after the close. So we have this adjusting entry that we're going to have to enter here, as of the end of the accounting period, which is December 31. Just like if we had, you know, in this case, November, December, two months of rent that someone had lived in, or worked in our office building, and they had not yet paid us we'd say, Well, yeah, they owe us that money as of the end of the time period. So that's going to be our adjusting entry. If we trial balance on that. Now, we might not have this particular account there, but we can kind of think about what it would be if we have something that is owed to us.

That's gonna be similar to basically a receivable. Now it's not gonna be usually at accounts receivable, we usually break it out to something like interest receivable, we're gonna have some kind of interest receivable that is due to us as of the end of the time period, just like if we had rent that was receivable as of the end of the time period. And then what's going to be the income statement account, what you could say it's going to be like revenue and income, it's going to be similar to that because it's going to be a type of revenue and income, but we usually name it a certain type of revenue and income, and that will be interest revenue or interest income. So those would be the accounts that would be affected, we know that income has a credit balance, and therefore we need to make it go up.

So we would do the same thing to it. So it would be something like interest income would be credited would be credited to increase it and that would be the credit. And then the debit would would be to interest receivable. Because it's owed to us as of the end of the time period we loaned money out just like we rented something and they owe The money we haven't yet received it. So now we're going to figure out well, how much are we going to receive? Well, the loan amount was the 260,000, our interest rate rate was 9%.

Now I'm going to put it in there as a decimal point oh nine. So that's that 9%, move the decimal two places to the left point oh nine. When I hit Ctrl, enter, it makes it zero. Why? Because we need we need decimal. So I'm gonna go to the Home tab, going to go to the numbers going to make two decimals.

Now if you put it in a calculator, you want to put an F point oh nine, or you can put it in as 9%. Whichever you feel comfortable doing. I'm going to go ahead and underline that. And we're going to say then the the amount of interest then would be the 260 times 9%. Now, whenever I do that, we have to ask the question. Now what does it mean when we say 9% 9% is over a certain time period, that time period is usually interest per year.

So keep that in mind. Just like If we're talking about salary, if I said someone earns $60,000, well, we mean 60,000 a year when we say 9% interest, we mean, we mean basically 9% a year. That's what we're talking about. So, and that's the same with like mortgage interest or anything. So might 9% a year, but it hasn't been a year, how many years? How many months have passed only two months.

So we could say the month in a year or 12. And try to break this down to how much interest would be owed per month. So okay, there's 12 months in a year. And there's a couple different ways we could do this. But there's one way we could say, well, there's 12 months in a year. And so we're going to say that equals that 23 four divided by 12.

And that'll give us the interest per month. And then we're going to say okay, and then how many months have passed? Well, it was November November 1. That means I'm going to include November on my fingers when I count them out November and December. So that's two months have passed, and therefore the amount will be Go ahead and underline that the 1950 times two. So when we put this on the books, we're going to have to say that we have a receivable of 3900.

And we have interest income that we have earned of 3900 that have not yet been paid. I just want to point out that if you broke this out not into months, but days, we could take the same calculation 23 four, and say it's not if say that transaction didn't happen to be on November 1, but somewhere in the in the month that we wanted to break it out by the number of days, we could say there's about I'm gonna say 360 days in the year that usually there's really more like 365, including a leap year, but if we took the 30 times 12, made a nice round months, that's where the 360 often comes from many textbooks will use. And then if we divide that out, we're gonna say the 23 four divided by 360 days and then we're gonna say, Well, how many days have passed?

Well, it's still it's two months. So we're going to say that it equals two times 30. Again, rounding estimating all months being around 30 rather than rather than accounting for the differences in in that will give us the same 65 times the 60. So you'll see this calculated in similar ways. Key Point, you need to know that his interest means interest for a year generally. Alright, next one says the the correct adjusting entry to accrued and unpaid employee salaries of 9700 on December 31.

Okay, so we're going to make the adjusting entry for basically wages. So that means that if we'd have our trial balance, what's going to be the two accounts is going to be one balance sheet account above the blue line above equity related to wages or salaries or something like that? And we're going to say, Okay, well, that one's going to be how about wages expense or salaries expense, whatever the problem uses something related to payroll, of course, that's going to be the The income statement amount. So I think I did that for that the income statement, what's gonna be the balance sheet amount, something related to rent, wages salary, that's going to be wages payable, salaries payable, something like that. So we're gonna say, Okay, and then we know that the expenses only go one way they go up, they all have debit balances represented by the fact that they do not have brackets in this worksheet.

Therefore, to make something go up, we're gonna do the same thing to it in this case would be another debit. So I'm going to go ahead and debit the wages expense four, and then the credit, and then I'm going to credit What are we going to credit? Well, the other account that's effective, there's got to be a debit and it got to be a credit at least two accounts, and that's going to be this account will be the credit. And they gave us the number in this case, which is nine, seven. So even if we don't know exactly what's going off and kind of go through those rules for adjusting entries, meaning one balance sheet account, one income statement account, and the income statement accounts only go up, therefore this month must be a debit making this one credit credit, we can we can complete this one, and not even know really what's going on what is really going on.

It means that we have to record the liability for the fact that the cutoff date and the December 31 is not the same date as we paid the employees, it's not going to be it's almost never going to be the same day that we employ employees. Therefore we owe as of December 31 employees for wages that they have earned, and we have not yet paid them or recognized the fact that we owe them as an expense that we have consumed their work. And we don't owe it at we don't have it yet on the books as a liability, meaning we owe for that work being done and so we need to make that adjustment as of the cutoff date.