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The following information is available for BlueStar Company for the month ending December 31, 2006:
1. Supplies used during the month totaled \$1,596.
2. BlueStar paid the annual premium of \$6,000 on their insurance on December 1.
3. BlueStar performed services valued at \$14,000 during the last week of December. Their clients have not yet been billed.
4. BlueStar pays their staff for a 5-day workweek each Friday. The weekly payroll totals \$3,450. December 31 falls on a Wednesday.
5. BlueStar has a 5-year note payable to SouthTrust Bank for \$40,000 due on July 31, 2009. Interest is payable annually on July 31 and is accrued monthly at the annual rate of 7.5%.

Students must include supporting calculations for the adjusted balance amounts for all of the accounts below. Use the information to determine the balance to be reported on the December 31 financial statements for the following accounts:

#### Solution Preview

The following information is available for BlueStar Company for the month ending December 31, 2006:
1. Supplies used during the month totaled \$1,596.
2. BlueStar paid the annual premium of \$6,000 on their insurance on December 1.
3. BlueStar performed services valued at \$14,000 during the last week of December. Their clients have not yet been billed.
4. BlueStar pays their staff for a 5-day workweek each Friday. The weekly payroll totals \$3,450. ...

#### Solution Summary

The solution explains how adjusting entries are to be calculated given the initial details.

\$2.19

## This problem set explores the difference between cash basis and accrual basis as well as calculating and recording adjusting entries.

Example (also attached):

E2-1 On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially.
(a) What is the difference between accrual-basis accounting and cash-basis accounting?
(b) Why would politicians prefer the cash basis over the accrual basis?
(c) Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting.

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