Question

Brokeback Towing Company is at the end of its accounting year, December 31, 2018. The following data that must be considered were developed from the company’s records and related documents:

1. On July 1, 2018, a two-year insurance premium on equipment in the amount of $980 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.
2. At the end of 2018, the unadjusted balance in the Supplies account was $1,380. A physical count of supplies on December 31, 2018, indicated supplies costing $490 were still on hand.
3. On December 31, 2018, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $990. The amount is not yet recorded. It will be paid during January 2019.
4. On December 31, 2018, the company completed a contract for an out-of-state company for $8,140 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction.
5. On July 1, 2018, the company purchased a new hauling van. Depreciation for July–December 2018, estimated to total $2,940, has not been recorded.
6. As of December 31, the company owes interest of $690 on a bank loan taken out on October 1, 2018. The interest will be paid when the loan is repaid on September 30, 2019. No interest has been recorded yet.
7. Assume the income after the preceding adjustments but before income taxes was $49,000. The company’s federal income tax rate is 20%. Compute and record income tax expense.

Required:

Indicate the accounting equation effects (amount and direction) of each adjusting journal entry. Provide an appropriate account name for any revenue and expense effects. (Enter any decreases to Assets, Liabilities, or Stockholders' Equity with a minus sign.)

Transaction Assets = Liabilities Stockholders' Equity

Answer 1

(a) we will expense 6 months of prepaid insurance which is related to period July 2018-December 2018

=$980/24 months * 6 months

=$245

we ill debit insurance expense and credit prepaid insurance

(b) $1380-$490=$890 of supplies has been used up in 2018 so we will expense it.

Debit supplies expense and credit supplies

(C) repairing cost is an expense for brokeback company. as it is not yet paid account payable will be credited.

(d) service revenue is an income and as it has not yet been received account receivable would be debited.

(e) depreciation is an expense and it will reduce asset's value by crediting accumulated depreciation.

(F) interest is an expense for the company which will reduce shareholder's equity and as the interest is yet to be paid it will be credited to interest payable.

(g) Income tax expense = $49,000*20%=$9,800 will reduce shareholder's equity and a the tax is yet to be paid it will be credited to income tax payable.

Transaction	Assets	=	Liabilities	+	Shareholder's equity
a	prepaid insurance -$245	=	0	+	Insurance expense -$245
b	Supplies -$890	=	0	+	Supplies expense -$890
c	0	=	Account payable $990	+	Repairs and maintenance expense -$990
d	Account receivable $8,140	=	0	+	Service revenue $8,140
e	0	=	Accumulated depreciation $2,940	+	Depreciation expense -$2,940
f	0	=	Interest payable $690	+	Interest expense -$690
g	0	=	Income tax payable $9,800	+	Income tax expense -$9800