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: a. On July 1, 2018. a two-year insurance premium on equipment in the amount of $792 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1 b. At the end of 2018, the unadjusted balance in the Supplies account was $1,000. A physical count of supplies on December 31, 2018 indicated supplies costing $380 were still on hand. c On December 31, 2018, YY's Garage completed repairs on one of Brokeback's trucks at a cost of $880. The amount is not yet recorded. It will be paid during January 2019. d. On December 31, 2018, the company completed a contract for an out-of-state company for $8,350 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction e On July 1, 2018, the company purchased a new hauling van. Depreciation for July-December 2018, estimated to total $3,150, has not been recorded. 1 As of December 31, the company owes Interest of $580 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. g. Assume the income after the preceding adjustments but before income taxes was $38,000. The company's federal income tax rate is 25%. Compute and record income tax expense.

Answer 1

1)

Date	Account title	Debit	credit
a	Insurance expense	198
	Prepaid insurance		198
	[Being insurance expired for 6 months (1July -31Dec )out of 24 months (2years):792 *6/24 = 198
b	supplies expense	620
	Supplies		620
	[Being supplies used :1000-380]
c	Accounts receivable	880
	repair service revenue		880
d	Accounts receivable	8350
	Fees Revenue earned		8350
e	Depreciation expense	3150
	Accumulated depreciation -vehicle (or equipment)		3150
f	Interest expense	580
	Interest payable		580
g	Income tax expense	9500
	Income taxes payable (38000*25%)		9500

2)

Total revenue is understated by : 8350 contract revenue +880 repair revenue=9230

Total expense is overstated by :198 insurance expense+620 supplies expense+3150depreciation expense +580 interest expense +9500 income tax expense = 14048

Net income = 9230 -14048

              =   - 4818

Net income is over stated by 4818      [negative sign represent overstatement of net income]