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 $15,000 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 11% b. Vito's depreciable equipment has a cost of $42.000, a six-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 $9,000 representing the first six months' rent and credited deferred rent revenue d. On April 1, 2021, the company paid $3,600 for a two-year fire and liability insurance policy and debited insurance expense. e. On October 1, 2021, the company borrowed $30,000 from a local bank and signed a note. Principal and interest at 11% will be paid on September 30, 2022 f. At year-end, there is a $2,300 debit balance in the supplies (asset) account. Only $800 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

Part 1

No.	Transaction	General journal	Debit	Credit
1	a	Interest receivable	825
		Interest revenue (15000*11%*6/12)		825
2	b	Depreciation expense (42000/6)	7000
		Accumulated depreciation		7000
3	c	Deferred rent revenue	3000
		Rent revenue (9000/6*2)		3000
4	d	Prepaid insurance	2250
		Insurance expense (3600*15/24)		2250
5	e	Interest expense (30000*11%*3/12)	825
		Interest payable		825
6	f	Supplies expense (2300-800)	1500
		Supplies		1500

Part 2

	Income Overstated (Understated)
Adjustments to revenues:
Understatement of interest revenue	(825)
Understatement of rent revenue	(3000)
Adjustments to expenses:
Overstatement of insurance expense	(2250)
Understatement of depreciation expense	7000
Understatement of interest expense	825
Understatement of supplies expense	1500
Overstatement of net income	$3250