Question

Instructions Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities: a. On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance. b. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid. c. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31. d. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for 3 months' sponsorship—November 2019, December 2019, and January 2020—in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months' advertising has been used and 1 month remains unused. Required: 1. Prepare adjusting entries at December 31 for these four activities. 2. Conceptual Connection: What would be the effect on expenses if the adjusting entries were not made?

Answer 1

Advertising expense for 3 months = $4,350

Hence, advertising expense to be debited to December 31 (for two months) = 4,350 x 2/3

= $2,900

Hence, entry (d) will be made by $2,900

b)

If this entry were not made:

Expenses would	Be understated
Liabilities would	Be understated
Net income and stockholders' equity would	Be overstated

c)

If this entry were not made:

Expenses would	Be understated
Liabilities would	Be understated
Net income and stockholders' equity would	Be overstated

d)

If this entry were not made:

Expenses would	Be understated
Assets would	Be overstated
Net income and stockholders' equity would	Be overstated

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