Depreciation Expense for Equipment

To calculate the depreciation expense for the kayaks, paddleboards, and life vests (equipment), we will use the straight-line depreciation method. The cost of the equipment is $17,300, and it is expected to have a service life of five years with no salvage value.

First, we need to determine the annual depreciation expense: \text{Annual Depreciation Expense} = \frac{\text{Cost of Equipment}}{\text{Useful Life}} = \frac{17,300}{5} = $3,460 \text{ per year}

Since the business started on April 1, 2022, we need to calculate the depreciation expense for nine months (April to December).

\text{Depreciation Expense for Equipment} = \text{Annual Depreciation Expense} \times \left(\frac{9}{12}\right) = $3,460 \times 0.75 = $2,595

So, the depreciation expense for equipment for the nine months ending December 31, 2022, is $2,595.

I. Depreciation Expense for Computer Equipment

The computer equipment has a value of $3,745 and is expected to have a seven-year life with a salvage value of $385. We will also use the straight-line depreciation method to calculate the depreciation expense.

First, we determine the annual depreciation expense: \text{Annual Depreciation Expense} = \frac{\text{Cost of Equipment} – \text{Salvage Value}}{\text{Useful Life}} = \frac{3,745 – 385}{7} = $520 \text{ per year}

Since the business started on April 1, 2022, we need to calculate the depreciation expense for nine months.

\text{Depreciation Expense for Computer Equipment} = \text{Annual Depreciation Expense} \times \left(\frac{9}{12}\right) = $520 \times 0.75 = $390

The depreciation expense for computer equipment for the nine months ending December 31, 2022, is $390.

J. Uncollectible Accounts and Bad Debt Expense

Matt estimates that 5% of the accounts receivable balance at December 31 is uncollectible. Additionally, Matt wrote off a $945 account in November. To account for these uncollectible accounts and calculate bad debt expense:

1. Calculate the estimated uncollectible amount for accounts receivable at December 31, 2022: \text{Uncollectible Amount} = 5\% \times \text{Accounts Receivable} = 5\% \times $8,360 = $418
2. Add the previously written-off amount of $945 to the uncollectible amount: $418 + $945 = $1,363.

This $1,363 represents the total uncollectible accounts. To calculate bad debt expense, we recognize this expense in the income statement.

\text{Bad Debt Expense} = $1,363

K. Unearned Revenue Adjustment

CBKR received a check of $1,800 in December 2022 for a kayak tour scheduled for April 2023. Since the service has not been provided by December 31, 2022, this payment should not be recognized as revenue in the current year. Instead, it should be recorded as unearned revenue, representing a liability until the service is provided.

So, we need to make the following journal entry to adjust for unearned revenue: \text{Unearned Revenue} (Liability) \: $1,800 \text{Rental Revenue} (Reduce Revenue) \: $1,800

This entry ensures that the revenue is recognized when the service is provided in the following year, aligning with the accrual accounting principle.

In summary, these adjustments help ensure that Chesapeake Bay Kayak Rentals’ financial statements accurately reflect its financial position and performance for the nine months ending December 31, 2022, in accordance with generally accepted accounting principles (GAAP). It covers depreciation expenses for equipment and computer equipment, the recognition of bad debt expense, and the appropriate treatment of unearned revenue. These adjustments are crucial for providing a true and fair view of the business’s financial health.