Question

The information necessary for preparing the December 31, 2021 year-end adjusting entries for Vito’s Pizza Parlor appears below. Vito’s fiscal year-end is December 31.

1. On July 1, 2021, purchased $13,000 of IBM Corporation bonds at face value. The bonds pay interest twice a year on January 1 and July 1. The annual interest rate is 12%.
2. Vito’s depreciable equipment has a cost of $33,000, a five-year life, and no salvage value. The equipment was purchased in 2019. The straight-line depreciation method is used.
3. On November 1, 2021, the bar area was leased to Jack Donaldson for one year. Vito’s received $7,800 representing the first six months’ rent and credited deferred rent revenue.
4. On April 1, 2021, the company paid $3,120 for a two-year fire and liability insurance policy and debited insurance expense.
5. On October 1, 2021, the company borrowed $26,000 from a local bank and signed a note. Principal and interest at 12% will be paid on September 30, 2022.
6. At year-end, there is a $2,100 debit balance in the supplies (asset) account. Only $760 of supplies remain on hand.

Required:

1. Prepare the necessary adjusting journal entries at December 31, 2021.
2. Determine the amount by which net income would be misstated if Vito's failed to record these adjusting entries. (Ignore income tax expense.)

Answer 1

Adjusting entry

No	General Journal	Debit	Credit
1	Interest expense (13000*12%*6/12)	780
	Interest payable		780
2	Depreciation expense (33000/5)	6600
	Accumulated depreciation-equipment		6600
3	Deferred rent revenue (7800/6*2)	2600
	Rent revenue		2600
4	Prepaid insurance (3120/24*15)	1950
	Insurance expense		1950
5	Interest expense (26000*12%*3/12)	780
	Interest payable		780
6	Supplies expense (2100-760)	1340
	Supplies		1340

b) Amount :

Revenue	2600
Insurance expense	1950
Interest expense	-780
Interest expense	-780
Supplies expense	-1340
Depreciation expense	-6600
	-4950

Net income overstated by $4950