The Freddie Corp. pays its workers every Friday. This year, December 31 was a Wednesday. As of the end of the year, the employees had worked Monday, Tuesday, and Wednesday, and they had earned $3,000 for those three days. What adjustment, if any, is needed in this situation as of December 31?
A) A $3,000 increase to net assets and to owners' equity (salary expense is reduced by $3,000)
B) A $3,000 decrease in cash, and a $3,000 decrease to owners' equity (salary expense is increased by $3,000)
C) A $3,000 increase in salaries payable, and a $3,000 decrease in owners' equity (salary expense is increased by $3,000)
D) No adjustment is needed

Question

Quizplus · Accepted Answer

Since the Freddie Corp. pays its workers every Friday and December 31 was a Wednesday, the employees worked Monday, Tuesday, and Wednesday and their salaries for those three days ($3,000) are due. Therefore, on December 31, the company should increase its Salaries Payable account by $3,000 (a liability account). This will result in a decrease in Owners' Equity (retained earnings) by $3,000. There is no impact on cash or net assets, and salary expense will be recorded in the following year when the employees are paid on Friday.