Question

Required information For each of the following transactions for the Sky Blue Corporation: Collected $5,100 rent for the period October 1 to December 31, which was credited to Deferred Revenue on October 1. Paid $3,360 for a two-year insurance premium on October 1 and debited Prepaid Insurance for that amount. Used a machine purchased on October 1 for $58,800. The company estimates annual depreciation of $5,880. rev: 09_26_2018_QC_CS-140420 Give the accounting equation effects of the adjustments required at the end of the month on October 31. (Enter any decreases to Assets, Liabilities, or Stockholders' Equity with a minus sign.)

Answer 1

The accounting equation with adjustments are given below:

	Asset	Amount	=	Liabilities	Amount	+	Stockholders’ equity	Amount
1.				Unearned Revenue	-1700		Rent Revenue	1700
2.	Prepaid insurance	-140					Insurance expense	-140
3.	Accumulated depreciation- Equipment	-490					Depreciation expense	-490

Explanation:

1. The entry has been recorded in advance for Oct month. Now it has to be accrued. Deferred revenue needs to be debited and rent is to be credited as income.

Rent for month of Oct = 5100/3 = $ 1700 per month

2. The insurance is being paid on advance. The insurance for month of Oct becomes accrued on Oct 31. Hence, Insurance expense has to be debited which decreases the net income i.e. stockholders’ equity and prepaid insurance to be credited which decreases the asset side.

Insurance expense to be debited = 3360/24 = $ 140

3. The company needs to recognized depreciation for the month of Oct as = 5880/12 = $ 490

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