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 $504 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 $260 were still on hand. c. On December 31, 2018, YY's Garage completed repairs on one of Brokeback's trucks at a cost of $760. 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 $7,750 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 $2,550, has not been recorded. f. As of December 31, the company owes interest of $460 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 $26,000. The company's federal income tax rate is 25%. Compute and record income tax expense. Required: 1. Give the adjusting journal entry required for each item at December 31, 2018. 2. If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Brokeback's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.

1. Record the entry for insurance expense if, on July 1, 2018, a two-year insurance premium on equipment in the amount of $504 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.

2. Record the entry for supplies expense if, 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 $260 were still on hand.

3. Record the entry for repairs if, on December 31, 2018, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $760. The amount is not yet recorded. It will be paid during January 2019.

4. Record the entry for the contract completed by the company on December 31 for an out-of-state company for $7,750 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction.

5. Record the entry for depreciation for a hauling van purchased by the company on July 2018. Depreciation for July-December 2018, estimated to total $2,550, has not been recorded.

6. Record the entry for $460 interest owed by the company as of December 31, 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.  Record the entry for income tax expense, the income after the preceding adjustments but before income taxes was $26,000. The company’s federal income tax rate is 25%.

Answer 1

	General Journal	Debit	Credit
a	Insurance expense	126		=504*6/24
	Prepaid Insurance		126
b	Supplies expense	740		=1000-260
	Supplies		740
c	Repairs and Maintenance expense	760
	Accrued Liabilities		760
d	Accounts Receivable	7750
	Service Revenue		7750
e	Depreciation expense	2550
	Accumulated Depreciation		2550
f	Interest expense	460
	Interest payable		460
g	Income tax expense	6500		=26000*25%
	Income tax payable		6500

2
Expenses not recorded	11136	=126+740+760+2550+460+6500
Less: Revenue not recorded	7750
Brokeback's net income overstated by	3386