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. a. On July 1, 2021, purchased $14,000 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 10%. b. Vito's depreciable equipment has a cost of $27,200, a four-year life, and no salvage value. The equipment was purchased in 2019. The straight-line depreciation method is used. c. On November 1, 2021, the bar area was leased to Jack Donaldson for one year. Vito's received $8,400 representing the first six months' rent and credited deferred rent revenue. d. On April 1, 2021, the company paid $3,360 for a two-year fire and liability Insurance policy and debited Insurance expense. e. On October 1, 2021, the company borrowed $28,000 from a local bank and signed a note. Principal and Interest at 10% will be paid on September 30, 2022. At year-end, there is a $2,200 debit balance in the supplies (asset) account. Only $780 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.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the necessary adjusting journal entries at December 31, 2021. (If no entry is required for a transaction event, select "No journal entry required in the first account field. Do not round intermediate calculations.) View transaction list Journal entry worksheet

Answer 1

Solutions:

Adjusting Entries
S.No	Particulars	Debit	Credit
a	Interest Receivable	700
	Interest Revenue		700
	To record interest income accrued but not received $14000*10%)/2
b	Depreciation Expense	6800
	Accumulated Depreciation		6800
	To record the deoreciation exoense for the year 27200/4
c	Deferred Rent Revenue	2800
	Rent Revenue		2800
	To record the rent earned for two months 8400*2/6
d	Prepaid Insurance	3360
	Insurance Expense		3360
	Crediting back Insurance expense that was wrongly debited in place of Prepaid Insurance
	Insurance Expense	1260
	Prepaid Insurance		1260
	To record the Insurance used up for the period 3360*9/12
e	Interest Expense	700
	Interest Payable		700
	To record the interest incurred during the period 28000*10%*3/12
f	Supplies Expense	1420
	Supplies		1420
	TO record the supplies used up during the period 2200-780

Requirement 2:

	Income Overstated / (Understated)
Adjustment to Revenues
Interest Revenue	700
Rent Revenue	2800
Adjustment to Expenses
Depreciation Expense	6800
Insurance Expense	-2100
Interest Expense	700
Supplies Expense	1420
Income Overstated by	3320