Question

Exercise 3-52 Adjusting Entries Allentown Services Inc. is preparing adjusting entries for the year ending December 31, 2019. The following data are available: a. Interest is owed at December 31, 2019, on a 6-month, 8% note. Allentown borrowed $120,000 from NBD on September 1, 2019. b. Allentown provides daily building maintenance services to Mack Trucks for a quarterly fee of $2,700 payable on the fifteenth of the month following the end of each quarter. No entries have been made for the services provided to Mack Trucks during the quarter ended December 31, and the related bill will not be sent until January 15, 2020. c. At the beginning of 2019, the cost of office supplies on hand was $1,220. During 2019, office supplies with a total cost of $6,480 were purchased from Office Depot and debited to office supplies inventory. On December 31, 2019, Allentown determined the cost of office supplies on hand to be $970. d. On September 23, 2019, Allentown received a $7,650 payment from Bethlehem Steel for 9 months of maintenance services beginning on October 1, 2019. The entire amount was credited to uneared service revenue when received. Required: 1. Prepare the appropriate adjusting entries at December 31, 2019. Dec. 31 - (Record accrued interest) Dec. 31 (Record earned revenue) Dec. 31 (Record use of supplies) Dec. 31 (Record earned revenue) 2. Conceptual Connection: What would be the effect on the balance sheet and the income statement if the accountant failed to make the above adjusting entries?

Answer 1

1)

a) 3200 Dec-31 Interest Expense ( 120000 x 8% x 4/12) Interest payable 3200 b) 2700 Dec-31 Accounts Receivable Service revenue 2700 c) 6730 Dec-31 Supplies Expense (1220 + 6480 - 970) Supplies 6730 d) 2550 Dec-31 Unearned Service Revenue (7650 x 3/9) Service revenue 2550

2)

a) Understate expenses and Understate liabilities

b) Understate revenues and Understate assets

c) Understate expenses and Overstate assets

d) Understate revenues and Overstate liabilities