Question

Lamorte Towing Company is at the end of its fiscal year, December 31, 2017. The following data that must be considered were developed from the company’s records and related documents: a. On January 1, 2017, the company purchased a new hauling van at a cash cost of $24,600. Depreciation estimated at $4,000 for the year has not been recorded for 2017. b. During 2017, office supplies amounting to $1,000 were purchased for cash and debited to supplies inventory. At the end of 2013, the inventory of supplies remaining on hand (unused) was $400. The inventory of supplies on hand at December 31, 2017, was $250. c. On December 31, 2017, the company completed repairs on one of its trucks at a cost of $1,200; the amount is not yet recorded and, by agreement, will be paid during January 2018. d. On December 31, 2017, property taxes on land owned during 2017 were estimated at $1,500. The taxes have not been recorded, and will be paid in 2018 when billed. e. On December 31, 2017, the company completed a contract for another company for $6,000 payable by the customer within 30 days. No cash has been collected, and no journal entry has been made for this transaction. f. On July 1, 2017, a one-year insurance premium on equipment in the amount of $1,200 was paid and debited in full to prepaid insurance on that date. Coverage began on July 1. g. On October 1, 2017, the company borrowed $11,000 from the local bank on a one-year, 6 percent note payable. The principal plus interest is payable on September 30, 2018. h. Earnings before any of the adjustments or income taxes equalled $30,000. The company’s income tax rate is 40 percent. (Hint: Compute adjusted pretax earnings based on transactions (a) through (g) to determine the income tax expense for 2017.) Required:

1. Indicate whether each transaction relates to a deferred revenue, a deferred expense, an accrued revenue, or an accrued expense.

2. Prepare the adjusting entry required for each transaction at December 31, 2017. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Q.1 & 2 : Journal Entry and nature of transaction both are given below :

Transactions	Account	Debit	Credit	Nature of Transaction
a	Depreciation	4,000		Deferred expenses
	New Hauling Van		4,000
	(Being depreciation for the year)
b	Office Supplies	1,250		Accrued Expenses
	Inventory Office Supplies		1,250
	(Being Office supplies used during the year)
c	Repair & Maintenance	1,200		Accrued Expenses
	Accounts Payable		1,200
	(Being repairing of Truck which is payable in Jan-18)
d	Property Taxes	1,500		Accrued Expenses
	Accounts Payable		1,500
	(Being Property taxes on Land for 2017 accrued)
e	Account Receivable	6,000		Accrued Revenue
	Revenue from Contract		6,000
	(Being revenue recognised for contact)
f	Insurance Expenses	600		Accrued Expenses
	Prepaid Insurance		600
	(6 Month insruance expense transferred from prepaid insurance)
g	Interest Expense	165		Accrued Expenses
	Interest Payable		165
	(Being accured interest for 3 month on principal of 11000 @ 6%)
h	Income tax	10,914		Accrued Expenses
	Income tax Payable		10,914
	(Being accrual of Income tax on taxable income of 27285 @ 40%)

Calculation of Income Tax Expense :

	Earning before Adjustment	30,000
Less	Depreciation	(4,000)
Less	Office Supllies	(1,250)
Less	Repair & Maintenance	(1,200)
Less	Property Taxes	(1,500)
Add	Revenue	6,000
Less	Insurance Expenses	(600)
Less	Interest Expense	(165)
	Taxable Income	27,285
	Tax @ 40%	10,914