Chapter 4 Adjustments, Financial Statements, and Financial Results

Chapter 4: Adjustments, Financial Statements, and Financial Results

1. Why Adjustments Are Needed ($4.1$)

• Purpose of Accounting Systems: Primarily designed to record most recurring daily transactions, especially those involving cash.

• The Problem with Cash Basis: Cash is not always received or paid in the same period that the related revenue is generated or the expense is incurred.

• The Solution: Adjustments: These are entries made to the accounting records at the end of an accounting period to ensure that assets, liabilities, revenues, and expenses are reported at their appropriate amounts.

• Impact on Financial Statements:

  • Income Statement: Revenues are recorded when (or as) the seller fulfills its performance obligation to the customer. Expenses are recorded at the costs incurred when using up assets or incurring liabilities to generate revenues.

  • Balance Sheet: Assets are reported at amounts representing the economic benefits that remain at the end of the current period. Liabilities are reported at amounts owed at the end of the current period that obligate the company to transfer resources.

1.1 Deferral Adjustments

• Definition: An expense or revenue is deemed "deferred" if its reporting on the income statement has been postponed until a later period.

• Mechanism: Deferral adjustments are used to:

  • Decrease balance sheet accounts.

  • Increase corresponding income statement accounts.

• Account Relationships: Each deferral adjustment involves either:

  • One asset account and one expense account (e.g., prepaid expenses like rent, supplies).

  • One liability account and one revenue account (e.g., deferred revenue/unearned revenue).

1.2 Accrual Adjustments

• Definition: Accrual adjustments are necessary when a company has generated revenue or incurred an expense in the current period, but has not yet recorded it because the related cash will not be received or paid until a later period.

• Mechanism: Accrual adjustments are used to:

  • Record revenue or expenses when they occur prior to receiving or paying cash.

  • Adjust corresponding balance sheet accounts.

• Account Relationships: Each accrual adjustment involves either:

  • One asset account and one revenue account (e.g., accrued revenue).

  • One liability account and one expense account (e.g., accrued expense like wages or interest).

2. Preparing Adjustments Needed at the End of the Period ($4.2$)

• Timing: Adjustments are typically not made daily; it is more efficient to perform them all at once at the end of each accounting period.

• Process: The adjustment process involves analyzing and determining the necessary adjustments.

• Key Characteristics of Adjusting Journal Entries:

  • They never involve cash.

  • Each adjusting entry always affects one balance sheet account (asset or liability) and one income statement account (revenue or expense).

Noodlecake Studios, Inc. Example: Unadjusted Trial Balance and Adjustments for September 30, 2024

• Key Accounts and Explanations for Adjustments:

  • Accounts Receivable: Need to increase for the right to collect for services given on account to game developers.

  • Supplies: Need to decrease for supplies used during September.

  • Prepaid Rent: Need to decrease for prepaid September rent benefits now used up.

  • Equipment: Need to adjust for equipment benefits used up in September (depreciation).

  • Software: Need to adjust for software benefits used up in September (amortization).

  • Deferred Revenue: Need to decrease for gift card obligations fulfilled in September.

  • Salaries and Wages Payable: Need to increase for September wages incurred but not yet paid.

  • Income Tax Payable: Need to increase for tax owed on income generated in September.

  • Interest Payable: Need to increase for interest owed on unpaid notes in September.

  • Sales Revenue: Need to increase for revenues generated by accepting gift cards for sales.

  • Service Revenue: Need to increase for revenues generated by providing services to game developers.

  • Salaries and Wages Expense: Need to increase for employees’ September wages not yet recorded.

  • Rent Expense: Need to increase for expense incurred for September rent.

  • Depreciation Expense: Need to increase for expense incurred by using equipment in September.

  • Supplies Expense: Need to increase for supplies used in September.

  • Amortization Expense: Need to increase for expense incurred by using software in September.

  • Interest Expense: Need to increase for September interest incurred on unpaid notes.

  • Income Tax Expense: Need to increase for taxes on income generated in September.

Deferral Adjustments Examples for Noodlecake Studios, Inc.

• (a) Supplies Used during the Period:

  • Scenario: Initially, $600$ in supplies were purchased. At September 30, only $250$ are on hand.

  • Calculation: Supplies used = $600 - 250 = 350$.

  • Adjusting Entry:

    • Debit Supplies Expense ($350$)

    • Credit Supplies ($350$)

• (b) Rent Benefits Expired during the Period:

  • Scenario: $7,200$ was prepaid on September 1 for three months of rent. One month has expired by September 30.

  • Calculation: Monthly rent expense = $7,200 ext{ (total prepaid)} ext{ / } 3 ext{ months} = 2,400 ext{ per month}$.

  • Adjusting Entry:

    • Debit Rent Expense ($2,400$)

    • Credit Prepaid Rent ($2,400$)

• (c) Depreciation Is Recorded for Use of Equipment:

  • Scenario: Computer equipment costing $9,600$ was estimated to last two years. One month has passed, resulting in an estimated expense of $400$.

  • Definition: Depreciation: The process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method of allocation.

  • Definition: Contra-Account: An account that is an offset to, or reduction of, another account (e.g., Accumulated Depreciation reduces Equipment).

  • Balance Sheet Impact: Equipment original cost ($9,600$) minus Accumulated Depreciation ($400$) equals Equipment, Net of Accumulated Depreciation (Carrying Value or Book Value) of $9,200$.

  • Adjusting Entry:

    • Debit Depreciation Expense ($400$)

    • Credit Accumulated Depreciation ($400$)

• (d) Amortization Is Recorded for Use of Software:

  • Scenario: Software developed for Noodlecake, with an estimated usefulness of three years, has been used for one month, incurring an estimated expense of $250$.

  • Adjusting Entry:

    • Debit Amortization Expense ($250$)

    • Credit Accumulated Amortization ($250$)

• (e) Gift Cards Redeemed:

  • Scenario: Noodlecake accepted $100$ of gift cards as payment for game downloads.

  • Adjusting Entry:

    • Debit Deferred Revenue ($100$)

    • Credit Sales Revenue ($100$)

Accrual Adjustments Examples for Noodlecake Studios, Inc.

• (f) Services Given but Revenue Not Yet Recorded:

  • Scenario: Noodlecake provided $3,250$ of consulting services to game developers in September, with payment to be received in October.

  • Adjusting Entry:

    • Debit Accounts Receivable ($3,250$)

    • Credit Service Revenue ($3,250$)

• (g) Wages Expense Incurred but Not Yet Recorded:

  • Scenario: Noodlecake owes $1,950$ of wages to employees for work done in the last part of September.

  • Adjusting Entry:

    • Debit Salaries and Wages Expense ($1,950$)

    • Credit Salaries and Wages Payable ($1,950$)

• (h) Interest Expense Incurred but Not Yet Recorded:

  • Scenario: Noodlecake has not paid or recorded the $100$ interest owed for this month on its note payable.

  • Adjusting Entry:

    • Debit Interest Expense ($100$)

    • Credit Interest Payable ($100$)

• (i) Income Taxes Incurred but Not Yet Recorded:

  • Scenario: Noodlecake pays income tax at an average rate of $20$ percent of income before taxes.

  • Calculation of Income Before Tax:

    • Unadjusted Revenues: Sales Revenue $12,000$ + Adjustments (e) Gift Cards $100$ + (f) Services Given $3,250$ = $15,350$.

    • Unadjusted Expenses: Salaries & Wages Expense $7,800$ + Utilities Expense $600$ + Advertising Expense $500$ = $8,900$.

    • Expenses from Adjustments: (a) Supplies Used $350$ + (b) Rent Expired $2,400$ + (c) Depreciation $400$ + (d) Amortization $250$ + (g) Wages Incurred $1,950$ + (h) Interest Incurred $100$ = $5,450$.

    • Total Adjusted Expenses: $8,900 ext{ (unadjusted)} + 5,450 ext{ (adjustments)} = 14,350$.

    • Adjusted Income Before Income Tax Expense: $15,350 ext{ (revenues)} - 14,350 ext{ (expenses)} = 1,000$.

  • Calculation of Income Tax Expense: $1,000 ext{ (income before tax)} imes 0.20 ext{ (tax rate)} = 200$.

  • Adjusting Entry:

    • Debit Income Tax Expense ($200$)

    • Credit Income Tax Payable ($200$)

3. Prepare an Adjusted Trial Balance ($4.3$)

• Purpose: After all adjusting entries have been posted to the respective T-accounts, an adjusted trial balance is prepared. This lists all accounts with their post-adjustment balances.

• Noodlecake Studios, Inc. Adjusted Trial Balance (September 30, 2024 - Summary of Adjusted Balances):

  • Cash: $16,900$ (DR)

  • Accounts Receivable: $3,750$ (DR)

  • Supplies: $250$ (DR)

  • Prepaid Rent: $4,800$ (DR)

  • Equipment: $9,600$ (DR)

  • Accumulated Depreciation: $400$ (CR)

  • Software: $9,000$ (DR)

  • Accumulated Amortization: $250$ (CR)

  • Logo and Trademarks: $300$ (DR)

  • Accounts Payable: $10,700$ (CR)

  • Deferred Revenue: $200$ (CR)

  • Salaries and Wages Payable: $1,950$ (CR)

  • Income Tax Payable: $200$ (CR)

  • Interest Payable: $100$ (CR)

  • Notes Payable (long-term): $20,000$ (CR)

  • Common Stock: $10,000$ (CR)

  • Retained Earnings: $0$ (CR)

  • Dividends: $0$ (DR)

  • Sales Revenue: $12,100$ (CR)

  • Service Revenue: $3,250$ (CR)

  • Salaries and Wages Expense: $9,750$ (DR)

  • Rent Expense: $2,400$ (DR)

  • Utilities Expense: $600$ (DR)

  • Advertising Expense: $500$ (DR)

  • Depreciation Expense: $400$ (DR)

  • Supplies Expense: $350$ (DR)

  • Amortization Expense: $250$ (DR)

  • Interest Expense: $100$ (DR)

  • Income Tax Expense: $200$ (DR)

  • Total Debits = Total Credits: $59,150$

4. Prepare Financial Statements ($4.4$)

Financial statements are prepared using the balances from the adjusted trial balance.

Noodlecake Studios, Inc. Income Statement (For the Month Ended September 30, 2024)

• Revenues:

  • Sales Revenue: $12,100$

  • Service Revenue: $3,250$

  • Total Revenues: $15,350$

• Expenses:

  • Salaries and Wages Expense: $9,750$

  • Rent Expense: $2,400$

  • Utilities Expense: $600$

  • Advertising Expense: $500$

  • Depreciation Expense: $400$

  • Supplies Expense: $350$

  • Amortization Expense: $250$

  • Interest Expense: $100$

  • Income Tax Expense: $200$

  • Total Expenses: $14,550$

• Net Income: $15,350 ext{ (Total Revenues)} - 14,550 ext{ (Total Expenses)} = 800$

Noodlecake Studios, Inc. Statement of Retained Earnings (For the Month Ended September 30, 2024)

• Retained Earnings, September 1: $0$

• Add: Net Income: $800$

• Subtract: Dividends: $(0)$

• Retained Earnings, September 30: $800$

Noodlecake Studios, Inc. Balance Sheet (At September 30, 2024)

• Assets:

  • Current Assets:

    • Cash: $16,900$

    • Accounts Receivable: $3,750$

    • Supplies: $250$

    • Prepaid Rent: $4,800$

    • Total Current Assets: $25,700$

  • Non-Current Assets:

    • Equipment: $9,600$ less Accumulated Depreciation $(400)$ = Equipment, net: $9,200$

    • Software: $9,000$ less Accumulated Amortization $(250)$ = Software, net: $8,750$

    • Logo and Trademarks: $300$

  • Total Assets: $43,950$

• Liabilities and Stockholders' Equity:

  • Liabilities:

    • Current Liabilities:

      • Accounts Payable: $10,700$

      • Deferred Revenue: $200$

      • Salaries and Wages Payable: $1,950$

      • Income Tax Payable: $200$

      • Interest Payable: $100$

      • Total Current Liabilities: $13,150$

    • Non-Current Liabilities:

      • Note Payable (long-term): $20,000$

    • Total Liabilities: $33,150$

  • Stockholders' Equity:

    • Common Stock: $10,000$

    • Retained Earnings: $800$

    • Total Stockholders' Equity: $10,800$

  • Total Liabilities and Stockholders' Equity: $43,950$

5. Explain the Closing Process ($4.5$)

• Purpose: The closing process is a critical step in the accounting cycle that occurs at the end of the accounting period.

• Temporary vs. Permanent Accounts:

  • Temporary Accounts: Track financial results for a limited period of time, typically one year or less. These include all Income Statement accounts (Revenues and Expenses) and the Dividends account. They are closed (zeroed out) at the end of each period.

  • Permanent Accounts: Track financial results from year to year. These include all Balance Sheet accounts (Assets, Liabilities, and Equity). Their balances carry forward to the next accounting period.

• Two Closing Journal Entries:

  1. Close Revenue and Expense Accounts to Retained Earnings: Debit each Revenue account and credit each Expense account. The difference (representing net income or loss) is then debited or credited to Retained Earnings.

  2. Close Dividends to Retained Earnings: Credit the Dividends account and debit Retained Earnings.

• Effect of Closing Entries: After posting, all income statement accounts and the dividend account will have a zero balance, ready for the next accounting period.

Noodlecake Studios, Inc. Closing Entries Example (September 30, 2024)

• Entry 1 (Closing Revenues and Expenses):

  • Debit Sales Revenue ($12,100$)

  • Debit Service Revenue ($3,250$)

  • Credit Salaries and Wages Expense ($9,750$)

  • Credit Rent Expense ($2,400$)

  • Credit Utilities Expense ($600$)

  • Credit Advertising Expense ($500$)

  • Credit Depreciation Expense ($400$)

  • Credit Supplies Expense ($350$)

  • Credit Amortization Expense ($250$)

  • Credit Interest Expense ($100$)

  • Credit Income Tax Expense ($200$)

  • Credit Retained Earnings ($800$) (This credits Net Income: $15,350 ext{ (Revenues)} - 14,550 ext{ (Expenses)} = 800$)

• Entry 2 (Closing Dividends):

  • (Assuming no dividends were declared or paid by Noodlecake for September, this entry would not be performed for this specific example, or it would be a $0$ entry, as shown in the Retained Earnings statement.)

Post-Closing Trial Balance

• Purpose: The post-closing trial balance is the final step in the accounting process. It provides a final check that total debits still equal total credits and confirms that all temporary accounts have been closed (i.e., have zero balances).

• Content: Contains balances only for permanent accounts (Assets, Liabilities, and permanent Equity accounts like Common Stock and Retained Earnings).

• Noodlecake Studios, Inc. Post-Closing Trial Balance (September 30, 2024 - Summary):

  • Cash: $16,900$ (DR)

  • Accounts Receivable: $3,750$ (DR)

  • Supplies: $250$ (DR)

  • Prepaid Rent: $4,800$ (DR)

  • Equipment: $9,600$ (DR)

  • Accumulated Depreciation: $400$ (CR)

  • Software: $9,000$ (DR)

  • Accumulated Amortization: $250$ (CR)

  • Logo and Trademarks: $300$ (DR)

  • Accounts Payable: $10,700$ (CR)

  • Deferred Revenue: $200$ (CR)

  • Salaries and Wages Payable: $1,950$ (CR)

  • Income Tax Payable: $200$ (CR)

  • Interest Payable: $100$ (CR)

  • Note Payable: $20,000$ (CR)

  • Common Stock: $10,000$ (CR)

  • Retained Earnings: $800$ (CR)

  • All temporary accounts (Dividends, Sales Revenue, Service Revenue, all Expenses) show $0$ balance.

  • Total Debits = Total Credits: $44,600$

6. How Adjustments Affect Financial Results ($4.6$)

• Ensuring Accuracy: Adjustments are crucial for ensuring that all revenues and expenses are reported in the period in which they are generated and incurred, adhering to the matching principle and revenue recognition principle.

• Consequences of Omitting Adjustments: Without adjustments, the financial statements would present an incomplete and misleading picture of a company’s financial performance and position.

• Impact on Net Income: Adjustments directly impact the reported net income by properly recognizing all revenues earned and expenses incurred within the period.

7. Solved Exercises (Application)

M4.5 & M4.6: Determine Accounting Equation Effects and Record Adjusting Journal Entries for Deferral Adjustments

• Scenario (a) Deferred Rent Revenue: Collected $2,400$ rent for Oct 1 - Dec 31, credited to Deferred Revenue. At Oct 31, one month has passed.

  • Calculation: Monthly rent earned = $2,400 ext{ (total)} ext{ / } 3 ext{ months} = 800$

  • AJE: Debit Deferred Revenue (L) $800$; Credit Rent Revenue (R, +NI) $800$

• Scenario (b) Prepaid Insurance: Paid $1,200$ for a two-year insurance premium on Oct 1. At Oct 31, one month has passed.

  • Calculation: Monthly insurance expense = $1,200 ext{ (total)} ext{ / } 24 ext{ months} = 50$

  • AJE: Debit Insurance Expense (E, -NI) $50$; Credit Prepaid Insurance (A) $50$

• Scenario (c) Depreciation: Machine purchased Oct 1 for $48,000$, annual depreciation $4,800$. At Oct 31, one month has passed.

  • Calculation: Monthly depreciation expense = $4,800 ext{ (annual)} ext{ / } 12 ext{ months} = 400$

  • AJE: Debit Depreciation Expense (E, -NI) $400$; Credit Accumulated Depreciation (xA, -A) $400$

M4.9: Preparing Journal Entries for Deferral Transactions and Adjustments

• Scenario (a) Prepaid Rent: Hockey Helpers paid $4,000$ on Sep 30 for Oct & Nov rent. At Oct 31, one month has passed.

  • Initial Transaction (Sep 30): Debit Prepaid Rent (A) $4,000$; Credit Cash (A) $4,000$

  • Calculation: Monthly rent expense = $4,000 ext{ / } 2 ext{ months} = 2,000$

  • AJE (Oct 31): Debit Rent Expense (E, -NI) $2,000$; Credit Prepaid Rent (A) $2,000$

• Scenario (b) Deferred Revenue (Season Tickets): Super Stage Shows received $16,000$ on Sep 30 for two theatre events (Oct 31 & Nov 30). At Oct 31, one event occurred.

  • Initial Transaction (Sep 30): Debit Cash (A) $16,000$; Credit Deferred Revenue (L) $16,000$

  • Calculation: Revenue per event = $16,000 ext{ / } 2 ext{ events} = 8,000$

  • AJE (Oct 31): Debit Deferred Revenue (L) $8,000$; Credit Service Revenue (R, +NI) $8,000$

• Scenario (c) Prepaid Insurance: Risky Ventures paid $3,000$ on Sep 30 for Oct, Nov, & Dec insurance. At Oct 31, one month has passed.

  • Initial Transaction (Sep 30): Debit Prepaid Insurance (A) $3,000$; Credit Cash (A) $3,000$

  • Calculation: Monthly insurance expense = $3,000 ext{ / } 3 ext{ months} = 1,000$

  • AJE (Oct 31): Debit Insurance Expense (E, -NI) $1,000$; Credit Prepaid Insurance (A) $1,000$

M4.10: Preparing Journal Entries for Deferral Transactions and Adjustments

• Scenario (a) Deferred Revenue (Subscriptions): Magnificent Magazines received $12,000$ on Dec 31, 2024, for 12 months (Jan-Dec 2025) subscriptions. At Jan 31, 2025, one month has passed.

  • Initial Transaction (Dec 31, 2024): Debit Cash (A) $12,000$; Credit Deferred Revenue (L) $12,000$

  • Calculation: Monthly revenue = $12,000 ext{ / } 12 ext{ months} = 1,000$

  • AJE (Jan 31, 2025): Debit Deferred Revenue (L) $1,000$; Credit Service Revenue (R, +NI) $1,000$

• Scenario (b) Supplies Used: Walker Window Washing paid $1,200$ cash for supplies on Dec 31, 2024. As of Jan 31, 2025, $200$ of these supplies had been used.

  • Initial Transaction (Dec 31, 2024): Debit Supplies (A) $1,200$; Credit Cash (A) $1,200$

  • AJE (Jan 31, 2025): Debit Supplies Expense (E, -NI) $200$; Credit Supplies (A) $200$

• Scenario (c) Deferred Revenue (Race Services): Indoor Raceway received $3,000$ on Dec 31, 2024, for three races (Jan 31, Mar, Mar). At Jan 31, 2025, one race occurred.

  • Initial Transaction (Dec 31, 2024): Debit Cash (A) $3,000$; Credit Deferred Revenue (L) $3,000$

  • Calculation: Revenue per race = $3,000 ext{ / } 3 ext{ races} = 1,000$

  • AJE (Jan 31, 2025): Debit Deferred Revenue (L) $1,000$; Credit Service Revenue (R, +NI) $1,000$

M4.20: Preparing and Posting Adjusting Journal Entries (Prepaid Insurance)

• Scenario: Unadjusted trial balance reports Prepaid Insurance $7,200$ and Insurance Expense $0$. Insurance purchased July 1 for 24 months. Adjusting entry needed on Dec 31.

• Calculation: Insurance used from July 1 to Dec 31 is $6$ months.

  • Expense = $7,200 ext{ (total)} imes rac{6 ext{ months (used)}}{ ext{24 months (total)}} = 1,800$

• AJE (Dec 31): Debit Insurance Expense (E, -NI) $1,800$; Credit Prepaid Insurance (A) $1,800$

• T-accounts after posting AJE (conceptual):

  • Prepaid Insurance: Unadjusted Balance $7,200$ (DR), AJE Credit $1,800$ -> Adjusted Balance $5,400$ (DR)

  • Insurance Expense: Unadjusted Balance $0$ (DR), AJE Debit $1,800$ -> Adjusted Balance $1,800$ (DR)

E4.19: Preparing Adjusting Entries and Adjusted Trial Balance (Daily Driver, Inc.)

• Unadjusted Balances (December 31):

  • Cash: $1,000$; Supplies: $50$; Prepaid Insurance: $1,200$; Equipment: $40,000$; Accumulated Depreciation: $2,400$; Service Revenue: $19,570$; Salaries and Wages Expense: $8,800$; Supplies Expense: $100$; Fuel Expense: $1,250$

• Required Adjusting Entries (December 31):

  • (a) Supplies Used Up:

    • Notes: Supplies on hand $50$. Only $30$ remain at Dec 31. Supplies Expense of $100$ is for used up to Nov 30.

    • Calculation: Supplies used in December = $50 ext{ (on hand unadjusted)} - 30 ext{ (remaining)} = 20$

    • AJE: Debit Supplies Expense (E, -NI) $20$; Credit Supplies (A) $20$

  • (b) Insurance Costs:

    • Notes: Prepaid Insurance $1,200$ paid Jan 2 for Jan 1-Dec 31 of this year. No insurance paid for next year.

    • Calculation: Entire prepaid amount has expired = $1,200$

    • AJE: Debit Insurance Expense (E, -NI) $1,200$; Credit Prepaid Insurance (A) $1,200$

  • (c) Using Up the Car's Benefit (Depreciation):

    • Notes: Car is two years old at end of Dec. Car's benefit used up about $2,400$ per year. Accumulated Depreciation $2,400$ (from first year). Depreciation Expense $0$ (unadjusted).

    • Calculation: Annual depreciation for current year = $2,400$

    • AJE: Debit Depreciation Expense (E, -NI) $2,400$; Credit Accumulated Depreciation (xA, -A) $2,400$

  • (d) Salaries Not Yet Accounted For:

    • Notes: Owe $800$ salary for December. Employee receives $800$ monthly salary up to Dec 31 (Salaries and Wages Expense $8,800$ already recorded for 11 months).

    • Calculation: Accrued salary for December = $800$

    • AJE: Debit Salaries and Wages Expense (E, -NI) $800$; Credit Salaries and Wages Payable (L) $800$

  • (e) Income Taxes for the Year:

    • Notes: Tax rate $20$% of income before tax. Income Tax Expense $0$ (unadjusted).

    • Calculation of Income Before Tax:

      • Service Revenue: $19,570$

      • Unadjusted Expenses: Salaries & Wages Expense $8,800$ + Supplies Expense $100$ + Fuel Expense $1,250$ = $10,150$

      • Expenses from Adjustments: (a) Supplies Used $20$ + (b) Insurance $1,200$ + (c) Depreciation $2,400$ + (d) Salaries & Wages $800$ = $4,420$

      • Total Adjusted Expenses: $10,150 ext{ (unadjusted)} + 4,420 ext{ (adjustments)} = 14,570$

      • Income Before Tax = $19,570 ext{ (Revenue)} - 14,570 ext{ (Expenses)} = 5,000$

    • Calculation of Income Tax Expense: $5,000 ext{ (Income Before Tax)} imes 0.20 = 1,000$

    • AJE: Debit Income Tax Expense (E, -NI) $1,000$; Credit Income Tax Payable (L) $1,000$

• Adjusted Trial Balance (Daily Driver, Inc. - At December 31):

  • Cash: $1,000$ (DR)

  • Supplies: $30$ (DR) (Initial $50$ - used $20$)

  • Prepaid Insurance: $0$ (DR) (Initial $1,200$ - used $1,200$)

  • Equipment: $40,000$ (DR)

  • Accumulated Depreciation: $4,800$ (CR) (Initial $2,400$ + AJE $2,400$)

  • Salaries and Wages Payable: $800$ (CR)

  • Income Tax Payable: $1,000$ (CR)

  • Common Stock: $25,000$ (CR)

  • Retained Earnings: $5,430$ (CR)

  • Service Revenue: $19,570$ (CR)

  • Salaries and Wages Expense: $9,600$ (DR) (Initial $8,800$ + AJE $800$)

  • Supplies Expense: $120$ (DR) (Initial $100$ + AJE $20$)

  • Depreciation Expense: $2,400$ (DR)

  • Insurance Expense: $1,200$ (DR)

  • Fuel Expense: $1,250$ (DR)

  • Income Tax Expense: $1,000$ (DR)

  • Totals: Debits $56,600$; Credits $56,600$