A review of the ledger of Terrell Company at December 31, 2012, produces these data pertaining to the preparation of annual adjusting entries.
1. Prepaid Insurance $18,279. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on July 1, 2011, for $11,610. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on January 1, 2012, for $8,604. This policy has a term of 18 months.
2. Unearned Sales Revenue $27,168: The company began selling magazine subscriptions on October 1, 2012, on an annual basis. The selling price of a subscription is $24. A review of subscription contracts reveals the following.
Subscription Start Date
Number of Subscriptions
October 1 250
November 1 312
December 1
570
1,132
3. Notes Payable, $46,400: This balance consists of a note for 6 months at an annual interest rate of 7%, dated October 1.
4. Salaries Payable $0: There are 12 salaried employees. Salaries are paid every Friday for the current week. 5 employees receive a salary of $630 each per week, and 7 employees earn $740 each per week. Assume December 31 is a Wednesday. Employees do not work weekends. All employees worked the last 3 days of December.
Calculate the following amounts.
1. Insurance expense
2. Sales revenue
3. Interest expense
4. Salaries and wages expense
11422
4572
812
4518
yes
To calculate the following amounts, we need to analyze the given data and apply the relevant accounting principles. Let's go through each question step-by-step.
1. Insurance expense:
To determine the insurance expense, we need to determine the portion of the prepaid insurance that has been used up at December 31, 2012.
For the building insurance policy (Policy B4564), it was purchased on July 1, 2011, for $11,610 with a term of 3 years. As of December 31, 2012, the policy has been in effect for 1.5 years (18 months). Therefore, the portion used up at December 31, 2012, is calculated as follows:
Portion used up = (1.5 years / 3 years) * $11,610
For the vehicle insurance policy (Policy A2958), it was purchased on January 1, 2012, for $8,604 with a term of 18 months. As of December 31, 2012, the policy has been in effect for 12 months. Therefore, the portion used up at December 31, 2012, is calculated as follows:
Portion used up = (12 months / 18 months) * $8,604
Now, add the portions used up for both policies to get the total insurance expense.
Insurance expense = Portion used up for building insurance + Portion used up for vehicle insurance
2. Sales revenue:
To calculate the sales revenue, we need to multiply the number of subscriptions by the selling price per subscription. Since the subscriptions started on October 1, 2012, we only need to consider the subscriptions from October to December.
Sales revenue = (Number of subscriptions in October * Selling price per subscription) + (Number of subscriptions in November * Selling price per subscription) + (Number of subscriptions in December * Selling price per subscription)
3. Interest expense:
To calculate the interest expense on the notes payable, we need to determine the interest accrued for the 3-month period from October 1 to December 31, 2012.
Interest expense = (Principal amount * Interest rate * Time period) / 12
Note that we divide by 12 to convert the annual interest rate to a monthly rate since the note is for 6 months.
4. Salaries and wages expense:
To calculate the salaries and wages expense, we need to determine the total salaries earned by the employees for the last 3 days of December.
The number of employees earning $630 each is 5, and the number of employees earning $740 each is 7. Since the employees do not work weekends, we need to determine how many weekdays (excluding weekends) are in the last 3 days of December. Assuming December 31, 2012, is a Wednesday, there are 3 weekdays.
Salaries and wages expense = Total number of employees * (Salary per week / Number of weekdays in the week) * Number of weekdays in the last 3 days of December
By following these steps, you should be able to calculate the requested amounts.