Question

PB4-2 Recording Adjusting Journal Entries LO 4-1, 4-2, 4-6 Cactus Company's annual accounting year ends on June 30. Assume it is now June 30 and all of the entries except the following adjusting journal entries have been made: a. The company earned service revenue of $2,000 on a special job that was completed June 29. Collection will be made during July, no entry has been recorded. b. On March 31, Cactus paid a six-month premium for property insurance in the amount of $3,200 for coverage starting on that date. Cash was credited and Prepaid Insurance was debited for this amount. c. At June 30, wages of $900 were earned by employees but not yet paid. The employees will be paid on the next payroll date, which is July 15. d. On June 1, Cactus collected two months' revenue of $450. At that date, Cactus debited Cash and credited Deferred Revenue for $450. One-half of it has now been earned but not yet recorded. e. Depreciation of $1,500 must be recognized on equipment purchased on July 1 of the previous year. f. Cash of $4,200 was collected on May 1 for services to be rendered evenly over the next year beginning on May 1. Deferred Revenue was credited when the cash was received. Two months of this performance obligation have now been fulfilled but not yet recorded. 8. The company owes interest of $600 on a bank loan taken out on February 1. The interest will be paid when the loan is repaid next year on January 31. h. The income after all adjustments except income taxes was $20,000. The company's federal income tax rate is 30%. Compute and record income tax expense. Required: 1. Give the adjusting journal entry required for each transaction at June 30. 2. If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Cactus Company's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.

Answer 1

a. Preparation of Adjusting Journal Entries for given transactions at June 30: Journal Entries Date Account Title and Explaination Post. Ref. Debit $ Credit $ a $ 2,000.00 Accounts Receivable Service Revenue (To record adjusting entry for service provided ) $ 2,000.00 b 07 1,600.00 $ 1,600.00 Insurance Expense ($3200/6 x 3) Prepaid Insurance (To record adjusting entry for expired portion of prepaid insurance) с $ 900.00 TA 900.00 Salaries and Wages Expense Salaries and Wages Payable (To record adjusting entry for salaries and wages expenses incurred)

d $ 225.00 $ 225.00 Deferred Revenue ($450/2) Service Revenue (To record adjusting entry for earned portion of deferred revenue) Depreciation Expense Accumulated Depreciation - Equipment (To record adjusting entry for Depreciation Expense on Equipment) e $ 1,500.00 $ 1,500.00 f $ 700.00 $ 700.00 Deferred Revenue ($4200/12 x 2) Service Revenue (To record adjusting entry for earned portion of deferred revenue) 8 $ 600.00 $ 600.00 Interest Expense Interest Payable (To record adjusting entry for accrued interest expense) h $ 6,000.00 Income Tax Expense ($20000 x 30%) Income Tax Payable (To record adjusting entry for income tax expense) $ 6,000.00

a (2). Calculation of Amount by which Net Income would have understated or overstated if adjusting entries in requirement 1 not been made: Impact on Net Adjustment Income $ 2,000.00 b $ (1,600.00) (900.00) d $ 225.00 (1,500.00) f $ 700.00 g (600.00) h (6,000.00) Total Impact $ (7,675.00) с e Մ Մ Մ Մ Մ Մ| If Adjusting Entries not made, Net Income of the company is Overstated by $7675.00