Financial Accounting I – IV
BBA | BBA-BI | BBA-TT | BCIS 1st
PU 2011 Fall Q. No. 1a
A review of accounting records of Mohan Company on July 31, 2007, reveals the following information relevant to the preparation of year-end adjusting entries.
i. The three-month bill for Rs. 10,000 signed on July 1, 2007, carries interest at 12 percent per annum. Interest is payable at the time of maturity of the bills.
ii. Insurance policies cover fire risk for two years and were taken on September 1, 2006, by paying a premium of Rs. 12,000.
iii. The Unearned Service account shows a balance ofRs. 6,000. It represents advance one-year retainer fee received on March 1, 2007, from a client for services to be performed starting that date.
iv. Salaries are disbursed on the third day of the following month. Five employees receive a salary of Rs. 3,200 per month.
v. The computer was bought on March 1, 2007, for Rs.18,000 and was estimated to be useful for three years with the salvage value of Rs.3,000.
Required: Adjusting entries for each item as at 31, 2007. 
Solution to this question:
In the book of Mohan Company
As on July 31, 2007
Interest expenses a/c Dr. Rs. 100
Interest payable a/c Rs. 100
(To record the interest expenses on the bill for the month)
Insurance expenses a/c Dr. Rs. 5,500
Insurance premium a/c Rs. 5,500
(To record the expired insurance till July 31, 2007)
Unearned revenue a/c Dr. Rs. 2,500
Service revenue a/c Rs. 2,500
(To record the service revenue earned for five-month)
Salary expenses a/c Dr. Rs. 16,000
Salary payable a/c Rs. 16,000
(To record the salary expenses for the month)
Depreciation expenses – Computer a/c Dr. Rs. 2,083.33
Accumulated depreciation a/c Rs. 2,083.33
(To record the depreciation expenses on Computer for five-month)
Interest expenses = Rs. 10,000 ×0.12 ×1/ 12 = Rs. 100
Insurance expenses = Rs. 12,000 / 24 ×11 = Rs. 5,500
Unearned revenue = Rs. 6,000 × 5/ 12 = Rs. 2,500
Salary expenses = Rs. 3,200 × 5= Rs. 16,000
Depreciation expenses on Computer = Rs. 18,000 –3,000 / 3 = Rs. 5,000, For five months = 5,000 × 5/ 12 = Rs. 2,803