The following information is also available — USA Car Rental Service was organized provide airport has just completed its

USA Car Rental Service was organized to provide car rental service at the airport. It has just completed its second year of business. Its trial balance follows.

.:.

The following information is also available:

a. To obtain space at the airport, USA paid two years’ rent in advance when it began the business.

b. An examination of insurance policies reveals that $2,000 expired during the year.

c. To provide regular maintenance for the vehicles, USA deposited $13,620 with a local garage. An examination of maintenance invoices reveals charges of $7,890 against the deposit.

d. An inventory of spare parts shows $2,170 on hand.

e. USA depreciates all of its cars at the rate of 12.5 percent per year. No cars were purchased during the year.

f. A payment of $2,000 for one full year’s interest on notes payable is now due.

g. Unearned Rental Service Revenue on June 30 includes $20,325 for cars that customers prepaid but have not yet been rented.

REQUIRED

1. Determine the adjusting entries and enter them in the general journal (Page 14).

2. Open ledger accounts for the accounts in the trial balance plus the following: Interest Payable (213); Rent Expense (514); Insurance Expense (515); Spare Parts Expense (516); Depreciation Expense—Cars (517); Maintenance Expense (518); and Interest Expense (519). Record the balances shown in the trial balance.

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3. Post the adjusting entries from the general journal to the ledger accounts, showing proper references.

4. Prepare an adjusted trial balance, an income statement, a statement of owner’s equity, and a balance sheet. The owner made no investments during the period.

5. What effect do the adjusting entries have on the income statement?

SOLUTION:

									General Journal	General Journal	General Journal	General Journal	General Journal		Page 14
													Post.
Date	Date					Description	Description	Description	Description				Ref.	Debit	Credit
2014
June		30	Rent Expense	Rent Expense	Rent Expense								514	18,000
				Prepaid Rent	Prepaid Rent								117		18,000
					To expense two years' rent paid	To expense two years' rent paid	To expense two years' rent paid	To expense two years' rent paid	To expense two years' rent paid	To expense two years' rent paid	To expense two years' rent paid
					in advance
		30	Insurance Expense	Insurance Expense	Insurance Expense	Insurance Expense	Insurance Expense	Insurance Expense					515	2,000
				Prepaid Insurance	Prepaid Insurance	Prepaid Insurance	Prepaid Insurance	Prepaid Insurance					118		2,000
					To record insurance that expired	To record insurance that expired	To record insurance that expired	To record insurance that expired	To record insurance that expired	To record insurance that expired	To record insurance that expired	To record insurance that expired
					during the year	during the year	during the year	during the year
		30	Maintenance Expense	Maintenance Expense	Maintenance Expense	Maintenance Expense	Maintenance Expense	Maintenance Expense					518	7,890
				Prepaid Maintenance	Prepaid Maintenance	Prepaid Maintenance	Prepaid Maintenance	Prepaid Maintenance					119		7,890
					To record amount of deposit used	To record amount of deposit used	To record amount of deposit used	To record amount of deposit used	To record amount of deposit used	To record amount of deposit used	To record amount of deposit used	To record amount of deposit used
					during the year	during the year	during the year	during the year
		30	Spare Parts Expense	Spare Parts Expense	Spare Parts Expense	Spare Parts Expense	Spare Parts Expense	Spare Parts Expense					516	10,030
				Spare Parts	Spare Parts								140		10,030
					To record spare parts used	To record spare parts used	To record spare parts used	To record spare parts used	To record spare parts used
					during the year	during the year	during the year	during the year
					$12,200		−		$2,170	=		$10,030
		30	Depreciation Expense—Cars	Depreciation Expense—Cars	Depreciation Expense—Cars	Depreciation Expense—Cars	Depreciation Expense—Cars	Depreciation Expense—Cars	Depreciation Expense—Cars				517	33,750
				Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars		149		33,750
					To record depreciation on the cars	To record depreciation on the cars	To record depreciation on the cars	To record depreciation on the cars	To record depreciation on the cars	To record depreciation on the cars	To record depreciation on the cars	To record depreciation on the cars
					for the year	for the year	for the year	for the year
					$270,000		×		12.5%	=		$33,750
		30	Interest Expense	Interest Expense	Interest Expense								519	2,000
				Interest Payable	Interest Payable	Interest Payable	Interest Payable	Interest Payable					213		2,000
					To record accrued interest	To record accrued interest	To record accrued interest	To record accrued interest	To record accrued interest
		30	Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue				212	21,675
				Rental Service Revenue	Rental Service Revenue	Rental Service Revenue	Rental Service Revenue	Rental Service Revenue	Rental Service Revenue				411		21,675
					To recognize rental service revenue	To recognize rental service revenue	To recognize rental service revenue	To recognize rental service revenue	To recognize rental service revenue	To recognize rental service revenue	To recognize rental service revenue	To recognize rental service revenue
					earned
					$42,000		−		$20,325	=		$21,675

2. and 3.

Cash	Cash						Account No. 111	Account No. 111
				Post.			Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit	Credit
2014
June		30	Balance				15,708
Accounts Receivable	Accounts Receivable	Accounts Receivable	Accounts Receivable				Account No. 113	Account No. 113
				Post.			Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit	Credit
2014
June		30	Balance				19,830
Prepaid Rent	Prepaid Rent	Prepaid Rent					Account No. 117	Account No. 117
				Post.			Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit	Credit
2014
June		30	Balance				18,000
		30	Adjustment	J14		18,000	—
Prepaid Insurance	Prepaid Insurance	Prepaid Insurance	Prepaid Insurance				Account No. 118	Account No. 118
				Post.			Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit	Credit
2014
June		30	Balance				6,400
		30	Adjustment	J14		2,000	4,400
Prepaid Maintenance	Prepaid Maintenance	Prepaid Maintenance	Prepaid Maintenance				Account No. 119	Account No. 119
				Post.			Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit	Credit
2014
June		30	Balance				13,620
		30	Adjustment	J14		7,890	5,730
Spare Parts	Spare Parts	Spare Parts					Account No. 140	Account No. 140
				Post.			Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit	Credit
2014
June		30	Balance				12,200
		30	Adjustment	J14		10,030	2,170

Cars	Cars							Account No. 148	Account No. 148	Account No. 148	Account No. 148	Account No. 148	Account No. 148
					Post.				Balance	Balance	Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit					Credit
2014
June		30		Balance				270,000	270,000	270,000	270,000	270,000
Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars	Accumulated Depreciation—Cars				Account No. 149	Account No. 149	Account No. 149	Account No. 149	Account No. 149	Account No. 149
					Post.					Balance	Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit				Credit
2014
June		30		Balance									35,000
		30		Adjustment	J14		33,750						68,750
Notes Payable	Notes Payable	Notes Payable	Notes Payable					Account No. 211	Account No. 211	Account No. 211	Account No. 211	Account No. 211	Account No. 211
					Post.						Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit	Debit			Credit
2014
June		30		Balance									78,000
Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue	Unearned Rental Service Revenue				Account No. 212	Account No. 212	Account No. 212	Account No. 212	Account No. 212	Account No. 212
					Post.						Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit	Debit			Credit
2014
June		30		Balance									42,000
		30		Adjustment	J14	21,675							20,325
Interest Payable	Interest Payable	Interest Payable	Interest Payable	Interest Payable				Account No. 213	Account No. 213	Account No. 213	Account No. 213	Account No. 213	Account No. 213
					Post.					Balance	Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit				Credit
2014
June		30		Adjustment	J14		2,000						2,000
S. Navarro, Capital	S. Navarro, Capital	S. Navarro, Capital	S. Navarro, Capital	S. Navarro, Capital				Account No. 311	Account No. 311	Account No. 311	Account No. 311	Account No. 311	Account No. 311
					Post.							Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit	Debit	Debit		Credit
2014
June		30		Balance									66,567

S. Navarro, Withdrawals	S. Navarro, Withdrawals	S. Navarro, Withdrawals	S. Navarro, Withdrawals	S. Navarro, Withdrawals				Account No. 313	Account No. 313	Account No. 313	Account No. 313	Account No. 313	Account No. 313
					Post.					Balance	Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit				Credit
2014
June		30		Balance				30,000	30,000	30,000	30,000	30,000
Rental Service Revenue	Rental Service Revenue	Rental Service Revenue	Rental Service Revenue	Rental Service Revenue				Account No. 411	Account No. 411	Account No. 411	Account No. 411	Account No. 411	Account No. 411
					Post.					Balance	Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit				Credit
2014
June		30		Balance									492,151
		30		Adjustment	J14		21,675						513,826
Gas and Oil Expense	Gas and Oil Expense	Gas and Oil Expense	Gas and Oil Expense	Gas and Oil Expense				Account No. 510	Account No. 510	Account No. 510	Account No. 510	Account No. 510	Account No. 510
					Post.						Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit	Debit			Credit
2014
June		30		Balance				104,900	104,900	104,900	104,900	104,900
Salaries Expense	Salaries Expense	Salaries Expense	Salaries Expense	Salaries Expense				Account No. 511	Account No. 511	Account No. 511	Account No. 511	Account No. 511	Account No. 511
					Post.						Balance	Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit	Debit			Credit
2014
June		30		Balance				206,360	206,360	206,360	206,360	206,360
Advertising Expense	Advertising Expense	Advertising Expense	Advertising Expense	Advertising Expense				Account No. 513	Account No. 513	Account No. 513	Account No. 513	Account No. 513	Account No. 513
					Post.							Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit	Debit	Debit		Credit
2014
June		30		Balance				16,700	16,700	16,700	16,700	16,700
Rent Expense	Rent Expense	Rent Expense	Rent Expense					Account No. 514	Account No. 514	Account No. 514	Account No. 514	Account No. 514	Account No. 514
					Post.							Balance	Balance
Date	Date			Item	Ref.	Debit	Credit	Debit	Debit	Debit	Debit		Credit
2014
June		30		Adjustment	J14	18,000		18,000	18,000	18,000	18,000	18,000

Insurance Expense	Insurance Expense	Insurance Expense	Insurance Expense				Account No. 515	Account No. 515	Account No. 515
				Post.				Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit		Credit
2014
June		30	Adjustment	J14	2,000		2,000	2,000
Spare Parts Expense	Spare Parts Expense	Spare Parts Expense	Spare Parts Expense				Account No. 516	Account No. 516	Account No. 516
				Post.				Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit		Credit
2014
June		30	Adjustment	J14	10,030		10,030	10,030
Depreciation Expense—Cars	Depreciation Expense—Cars	Depreciation Expense—Cars	Depreciation Expense—Cars				Account No. 517	Account No. 517	Account No. 517
				Post.				Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit		Credit
2014
June		30	Adjustment	J14	33,750		33,750	33,750
Maintenance Expense	Maintenance Expense	Maintenance Expense	Maintenance Expense				Account No. 518	Account No. 518	Account No. 518
				Post.				Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit		Credit
2014
June		30	Adjustment	J14	7,890		7,890	7,890
Interest Expense	Interest Expense	Interest Expense	Interest Expense				Account No. 519	Account No. 519	Account No. 519
				Post.				Balance	Balance
Date	Date		Item	Ref.	Debit	Credit	Debit		Credit
2014
June		30	Adjustment	J14	2,000		2,000	2,000

	USA Car Rental Service	USA Car Rental Service	USA Car Rental Service	USA Car Rental Service
	Adjusted Trial Balance	Adjusted Trial Balance	Adjusted Trial Balance	Adjusted Trial Balance
	June 30, 2014	June 30, 2014	June 30, 2014	June 30, 2014
Cash			15,708	15,708
Accounts Receivable			19,830	19,830
Prepaid Insurance			4,400	4,400
Prepaid Maintenance			5,730	5,730
Spare Parts			2,170	2,170
Cars			270,000	270,000
Accumulated Depreciation—Cars					68,750	68,750
Notes Payable					78,000	78,000
Unearned Rental Service Revenue					20,325	20,325
Interest Payable					2,000	2,000
S. Navarro, Capital					66,567	66,567
S. Navarro, Withdrawals			30,000	30,000
Rental Service Revenue					513,826	513,826
Gas and Oil Expense			104,900	104,900
Salaries Expense			206,360	206,360
Advertising Expense			16,700	16,700
Rent Expense			18,000	18,000
Insurance Expense			2,000	2,000
Spare Parts Expense			10,030	10,030
Depreciation Expense—Cars			33,750	33,750
Maintenance Expense			7,890	7,890
Interest Expense				2,000
			749,468	749,468	749,468	749,468

	USA Car Rental Service	USA Car Rental Service	USA Car Rental Service
	Income Statement	Income Statement	Income Statement
	For the Year Ended June 30, 2014	For the Year Ended June 30, 2014	For the Year Ended June 30, 2014
Revenues:	Revenues:
	Rental service revenue				$	$	513,826
Expenses:	Expenses:
	Gas and oil expense			$104,900
	Salaries expense			206,360
	Advertising expense			16,700
	Rent expense			18,000
	Insurance expense			2,000
	Spare parts expense			10,030
	Depreciation expense—cars			33,750
	Maintenance expense			7,890
	Interest expense			2,000
	Total expenses						401,630
Net income	Net income				$	$	112,196
	USA Car Rental Service	USA Car Rental Service	USA Car Rental Service
	Statement of Owner's Equity	Statement of Owner's Equity	Statement of Owner's Equity
	For the Year Ended June 30, 2014	For the Year Ended June 30, 2014	For the Year Ended June 30, 2014
S. Navarro, capital, June 30, 2013	S. Navarro, capital, June 30, 2013				$	$	66,567
Net income	Net income						112,196
Subtotal	Subtotal				$	$	178,763
Less withdrawals	Less withdrawals						30,000
S. Navarro, capital, June 30, 2014	S. Navarro, capital, June 30, 2014				$	$	148,763

			USA Car Rental Service	USA Car Rental Service
			Balance Sheet	Balance Sheet
			June 30, 2014	June 30, 2014
			Assets	Assets
		Cash	Cash				$	$	15,708
		Accounts receivable	Accounts receivable						19,830
		Prepaid insurance	Prepaid insurance						4,400
		Prepaid maintenance	Prepaid maintenance						5,730
		Spare parts	Spare parts						2,170
		Cars	Cars		$	270,000
			Less accumulated depreciation			68,750			201,250
		Total assets	Total assets				$	$	249,088
			Liabilities	Liabilities
		Notes payable	Notes payable		$	78,000
		Unearned rental service revenue	Unearned rental service revenue			20,325
		Interest payable	Interest payable			2,000
		Total liabilities	Total liabilities				$	$	100,325
			Owner's Equity	Owner's Equity
		S. Navarro, capital	S. Navarro, capital						148,763
		Total liabilities and owner's equity	Total liabilities and owner's equity				$	$	249,088
5.	Adjusting entries affect net income on the income statement. After the adjustments have been posted in the previous parts of the problem, the net income for the year has decreased because the additional expenses recorded exceeded the additional revenues.