 Hello, in this lecture, we're going to work some more test type problems, smaller problems that could be in the format of multiple choice questions. So we have on July 1st, a company paid $3840 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 into December 31st? So once again, I'm going to take a look at the trial balance. This will 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 a 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 adjusting 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 pay 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 1st, a company paid $3,840 premium. So what happened on that date? We paid cash. 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 credit. It's going to be negatives are bracketed. So we're going to say this is a credit. And then the debit is going to be two, not insurance expense, but it was to prepaid insurance. That's how the insurance, that's how the prepaid insurance gets on the books. So now we have prepaid insurance on the books at $3,840. 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 $3,840, 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 $3,840 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 1st is the date we bought it. So remember, we bought it on the 1st. So I'm going to include July as I counted off on my fingers. July is included. July, August, September, October, November, December, six months. So we're going to say six months times six. So $320, I'm going to underline that to this underline here, times six months equals the $320 times the six months. So that would give us the $1,920. 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 $1,920, $1,920. They could ask how much is still remaining. And if we had an original $3,840, that's what's in the prepaid insurance. And then we decreased the prepaid insurance by expensing it. That would be this debit minus this credit. That means that we have left over in prepaid insurance the same in this case because we took half of it. It happened to be half a year. $1,920. 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 on the multi-choice question on. Next one says that a company has $6,970 in net income for the year. Its sales were $14,940 for the same period. Calculate the profit margin. All right, 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 $6,970. 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, it would just be $14 minus all the expenses, x basically, equals the $6,970. And then we would solve for the expenses by subtracting the $14 from each side. So we can do that here. I'm just going to say it's the $14 minus the $6,9. So that's all we're going to 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 $14,9 sales. So we just take the net income, which is $6,970 divided by the $14,9 in sales. And if I select Enter, it gives me 0, it's not 0. Why is it 0? Because we have no decimals. So we've got to go to the Home tab. We've got to go to the Numbers group. And we can add decimals. And notice the decimals go on. So it's not even. If we select the percent, that'll give us two places. Now, it depends on how the answer is formatted. If it only wants two places, it would be 47. If it wants more than 2, 47.8, more than that 46.8, more than that it would be 46.78. So notice it sells 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 a before adjustment at the end of the year is 5,800. 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 gonna 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 asset section. And we're talking on the income statement, insurance expense. So the expense is down here in the expense. What's gonna be the journal entry? Well, we know expenses generally only go up. So the expense has a debit balance. We're gonna 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 gonna 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 gonna debit insurance expense and we're gonna 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 gotta figure out, well, how much are we gonna debit and credit? So then we gotta think about a bit more deeply on what happened here. We bought the policy. What happens when we buy the policy? Well, we're gonna pay cash for it. Cash went down with a credit and we debited it 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 gonna be used when we consume it through the policy. So as the policy expires, it's gonna be consumed. So prepaid insurance then has a balance. If we put the prepaid insurance here, if we were to underline the prepaid insurance or make it into a T account, let's make it look like a T here. Underline this and I'm gonna put this on the left side, have a left border. So there's our T. Prepaid insurance had five eight in it. And now the adjusting entry, 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 gonna be the amount that's in there or the amount that was paid, five eight. And then we're gonna 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 would be the five eight divided by four. And that means that per month, the policy costs 1,450. Now we have to decide how many months have passed. We bought it in November 1st, not November 30th. Therefore we're gonna include November when I count it on my fingers. November 1st, one, and December two. So we're gonna multiply that times two, the amount of months that have expired to our financial statements date. So we're gonna say this is the one, four, five, zero per month times two. And there is the adjustment. So that's gonna be what is gonna 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 happens to prepaid? Well that means we just credited the prepaid. And I can just say that's the credit right here. And then what is the balance then? Well it's gonna be a debit of this minus this. That's the balance. That's what's left after this transaction has 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 happened 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 gonna be the same as the amount that's expired. Next one says that on November 1st, the company loaned 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 31st. 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 loaned money out just like if we rented someone an apartment, they're gonna basically pay us a rent on the money that they're using for that time period. That's called interest and the rent that's gonna be due is not gonna be paid to us until after they close. So we have this adjusting entry that we're gonna have to enter here as of the end of the accounting period which is December 31st. Just like if we had, you know, in this case November and December two months of rent that someone had lived 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 gonna be our adjusting entry. The 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 an account receivable we'll 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 gonna be the income statement account? What you could say it's gonna be like revenue and income. It's gonna be similar to that cause it's gonna be a type of revenue and income but we'll usually name it a certain type of revenue and income and that will be interest revenue or interest income. So those would be the account 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 be to interest income. Receivable because it's owed to us as of the end of the time period. We loaned the money out just like we rented something and they owe us the money. We haven't yet received it. So now we gotta figure out well how much are we gonna receive? Well the loan amount was the 260,000. Our interest rate rate was 9%. Now I'm gonna put it in there as a decimal, 0.09. So that's that 9% move the decimal two places to the left 0.09 when I hit control enter, it makes it zero. Why? Because we need decimals. So I'm gonna go to the home tab, gonna go to the numbers, gonna make two decimals. Now if you put it in a calculator, you wanna put it in as 0.09 or you can put it in as 9%, whichever you feel comfortable doing. Gonna go ahead and underline that and we're gonna say then the amount of interest then would be the 260 times 9%. Now whenever I do that, we have to ask the question, 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 basically 9% a year. That's what we're talking about. So and that's the same with like mortgage interest or anything. So 9% a year, but it hasn't been a year. How many months have passed? Only two months. So we could say the months in a year are 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 of different ways we could do this, but this is one way we could do it. We say well it's 12 months in a year. And so we're gonna say that equals that 23.4 divided by 12. And that'll give us the interest per month. And then we're gonna say okay, and then how many months have passed? Well it was November, November 1st. That means I'm gonna 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, I'm gonna go ahead and underline that, the 1950 times two. So when we put this on the books, we're gonna have to say that we have a receivable of 3,900 and we have interest income that we have earned of 3,900 that have not yet been paid. Now I just wanna point out that if you broke this out, not into months, but days, we could take the same calculation 23.4 and say the transaction didn't happen to be on November 1st, but somewhere 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. There's 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 we'll use. And then if we divide that out, we're gonna say the 23.4 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 gonna say that it equals two times 30, again, rounding, estimating all months, being around 30 rather than accounting for the differences. And 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 is interest means interest for a year generally. All right, next one says the correct adjusting entry to accrued and unpaid employee salaries of 9,700 on December 31st. Okay, so we're gonna make the adjusting entry for basically wages. So that means that if we have our trial balance, what's gonna be the two accounts? There's gonna be one balance sheet account above the blue line, above equity related to wages or salaries or something like that. And we're gonna say, okay, well, that one's gonna be, how about wages expense or salaries expense, whatever the problem uses, something related to payroll, of course, that's gonna be the income statement amount. I'm sorry, I think I did that for that's the income statement amount. What's gonna be the balance sheet amount, something related to wages salary? That's gonna 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 gonna go ahead and debit the wages expense for, and then the credit. And then I'm gonna credit, what are we gonna credit? Well, the other account that's affected, it's gotta be a debit and there's gotta be a credit at least, two accounts. And that's gonna 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 on, if we can kind of go through those rules for adjusted entries, meaning one balance sheet account, one income statement account, and the income statement accounts only go up. Therefore, this one must be a debit making this one a credit. 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 31st is not the same date as we paid the employees. It's not going to be, it's almost never gonna be the same date that we employed the employees. Therefore, we owe, as of December 31st, 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, 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.