Hay and Barnabas Company: Financial Statements

Financial Statements: Hay and Barnabas Company

There are five adjustments that need to be made before the financial statements of Hay and Barnabas Company are prepared at year end. Show the effect of each of the following (a -- e) on the accounting equation

The accounting equation is essentially indicative of the relationship between assets, liabilities, and the owner's equity in a particular business. According to Clarke (2011), the three components reflect the company's financial position. Assets are the resources owned by the business and liabilities are the claims other parties, such as creditors, have in the business. Investors also contribute to a business and buy ownership hence have a claim in the business. The following are the adjustments deemed necessary and the effect they had on the components of the accounting equation:

a) Equipment purchased on January 1, 2003 with a useful life of 12 years and no salvage value

This will increase assets in the amount of $840,000 and will also increase the liabilities with a depreciation and amortization expense of $70,000 (840000/12) on a straight line basis.

b) Interest accrued on the bonds payable is $20,000 as of December 31, 2003

The interest accrued on bonds will increase the owner's equity with the full amount of the bond and increase expenses with the interest expense of $20,110.

c) Unexpired insurance at December 31, 2003 is $7,000

The unexpired insurance is an asset to the company. It is categorized as a prepaid expense. Assets will therefore increase with an amount of $7,000.

d) The rent payment of $140,000 covered the four months from December 1, 2003 through March 31, 2004.

Since cash had already been deducted to pay the rent in 2003, it will not be deducted in 2004. The prepaid rent falls in the category of prepaid expenses. Therefore, assets will increase with a prepaid expense of $35,000 (140000/4) in the months of January, February and March.

e) Salaries and wages of $28,000 were earned but unpaid at December 31, 2003

These salaries and wages were unpaid at the end of the year and hence will be classified as expenses to be paid in 2014. They are categorized as salaries payable and they will increase the liabilities with an amount of $28,000. They will thus reduce the income in that period.

Indicate the proper balance sheet classification of each of the preceding 12 financial statement items on the December 31, 2003, balance sheet. If the account title would not appear on the balance sheet, indicate the financial statement on which it would be found.

The major financial statements in a company are the balance sheet, the income statement, the statement of owner's equity and the cash flow statement (Warren, Reeve and Duchac, 2013). The following are the classifications of the 12 items:

Current assets

Cash

Prepaid insurance

Inventories

Prepaid rent

a) Property, plant, and equipment

Equipment

b) Current liabilities

Wages payable as at 31st December 2003 (In the adjustments)

c) Long-term liabilities