Question

Chapter 4

Quinlan-Cohen, Inc., publishers of movie and song trivia books, made the following errors in adjusting the accounts at year-end (December 31):

Required information (The following information applies to the questions displayed below.) Quinlan-Cohen, Inc., publishers of movie and song trivia books, made the following errors in adjusting the accounts at year-end (December 31): a. Did not accrue $1,300 owed to the company by another company renting part of the building as a storage facility. b. Did not record $14,200 depreciation on the equipment costing $120,000. c. Failed to adjust the Unearned Fee Revenue account to reflect that $1,400 was earned by the end of the year. d. Recorded a full year of accrued interest expense on a $22,200, 10 percent note payable that has been outstanding only since November 1. e. Failed to adjust Prepaid Insurance to reflect that $720 of insurance coverage had been used. Required: 1-a. Prepare the adjusting journal entry that was made, if any at year-end. (If no entry is made for a transaction/event, select "No journal entry made" in the first account field.) 1-b. Prepare the adjusting journal entry that should have been made at year-end. (Do not round intermediate calculations. If no entry is made for a transaction/event, select "No journal entry made" in the first account field.) 2. Using the following headings, indicate the effect of each error and the amount of the effect (that is, the difference between the entry that was or was not made and the entry that should have been made). Use O if the effect overstates the item, U if the effect understates the item. (Reminder: Assets = Liabilities + Stockholders' Equity; Revenues - Expenses = Net Income, and Net Income accounts are closed to retained Earnings, a part of Stockholders' Equity.) (Select "NE" for no effect.) Balance Sheet Assets Liabilities Effect Amount Effect Amount Stockholders' Equity Effect Amount Revenues Effect Amount Income Statement Expenses Effect Amount Net Income Effect Amount Transaction

Answer 1

Ans:

2

Balance sheet

Income statement

Assets

Liabilities

Stockholder's equity

Revenues

Expenses

Net income

Transaction

Effect

Amount

Effect

Amount

Effect

Amount

Effect

Amount

Effect

Amount

Effect

Amount

a.

U

1300

NE

U

1300

U

1300

NE

U

1300

b.

O

14200

NE

O

14200

NE

U

14200

O

14200

c.

NE

O

1400

U

1400

U

1400

NE

U

1400

d.

NE

O

1850

U

1850

NE

O

1850

1850

e.

O

720

NE

O

720

U

720

O

720

Explanation

a.

Entry should be:

Debit

Credit

Rent receivable

(Asset)

1300

Rent revenue

(Revenues)

1300

Absence of this entry-

Asset will be understated by $ 1300 (Due to absence of rent receivable)

Revenue will be understated by $ 1300 (Due to absence of rent revenue).This will understate net income and stockholder's equity

b.

Entry should be:

Debit

Credit

Depreciation exp

(Expenses)

14200

Acc. Depreciation

(Asset)

14200

Absence of this entry-

Expenses will be understated by $ 14200 (Due to absence of depreciation expense).This will overstate net income and stockholder's equity.

Asset will be overstated by $ 14200 (Due to absence of acc.depreciation-It reduces assets)

c.

Entry should be:

Debit

Credit

Unearned revenue

(Liabilities)

1400

Revenue

(Revenues)

1400

Absence of this entry-

Liabilities will be overstated by $ 1400 (Due to absence of debiting unearned revenue)

Revenue will be understated by $ 1400 (Due to absence of revenue).This will understate net income and stockholder's equity

d.

Interest expense recognized=22200*10%=$ 2220

Interest expense to be recognized from Nov to Dec for 2 months=2220*(2/12)=$ 370

Here, Interest expense overstated by $ 1850 (2220-370).This will understate net income and stockholder's equity

Credit would have been given to interest payable

Hence, interest payable also overstated by $ 1850 (2220-370).This means liabilities overstated by $ 1160

e.

Entry should be:

Debit

Credit

Insurance expense

720

Prepaid insurance

720

Expenses will be understated by $ 720 (Due to absence of insurance expense).This will overstate net income and stockholder's equity.

Asset will be understated by $ 720 (Due to absence of credit to prepaid insurance)