Question

North Star prepared the following unadjusted trial balance at the end of its second year of operations ending December 31.

Account Titles	Debit			Credit
Cash	$	12,000
Accounts Receivable		6,000
Prepaid Rent		2,400
Equipment		21,000
Accumulated Depreciation				$	1,000
Accounts Payable					1,000
Income Tax Payable					0
Common Stock					24,800
Retained Earnings					2,100
Sales Revenue					50,000
Salaries and Wages Expense		25,000
Utilities Expense		12,500
Rent Expense		0
Depreciation Expense		0
Income Tax Expense		0
Totals	$	78,900		$	78,900

Other data not yet recorded at December 31:

1. Rent expired during the year, $1,200.
2. Depreciation expense for the year, $1,000.
3. Utilities used and unpaid, $9,000.
4. Income tax expense, $390.

Required:

1. Indicate the accounting equation effects of each required adjustment. (Enter any decreases to Assets, Liabilities, or Stockholders' Equity with a minus sign.)

2. Prepare the adjusting journal entries required at December 31. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

3. Summarize the adjusting journal entries in T-accounts. After entering the beginning balances and computing the adjusted ending balances, prepare an adjusted trial balance as of December 31.

4. Compute the amount of net income using (a) the preliminary (unadjusted) numbers and (b) the final (adjusted) numbers. Had the adjusting entries not been recorded, would net income have been overstated or understated, and by what amount?

Answer 1

Transaction Liabilities It estock holders Equity Expense ($11,200) Rent a. Assets Prepaid Reut $1,200) Accumulated depreciation - $ (1,000) = Equipment + bi + Depreciation B (1,000) Expense Accounts Utilities $19,000) Payable Income $9,000 + Expense Income $390 + lat $(390) Expense d. = Tax payable Transaction credit Debit $ 1,200 General Journal Rent Expense Peepaid Rent to second rent expenses $1,200 b. Depreciation Expense $1,000 Accumulated depreciation - Equipment (to record depreciation expenses $1,000 $9,000 Utilities Expense Accounts Payable lolo second utilities unpaidy $9,000 $ 390 Income tax Expense Income Tax Payable 1 to become income tax expenses $390

113 as Prepaid Rent Rent Expense | - Beg Bal. $2,400 Beg Balo $ 1,200 (as cas End. Bat. 1$ 1,200 End Bal $1,200 Depreciation Expense Alcumulated depreciation-Byepoeng Beg Bal $1,000 $1,000 b, Bego Bal. 16 $1,000 End. Bali $2,000 End. Bal- $1,600 Accounts payable $1,000 Beg Bal. Utilities Expense Bega Bet $12,500 ☺ $9,000 $9,000 (c) End. Bel- $ 10,000 End. But $21,5ool Income tax payable Income tax Ro Expense . Beg Bal. Beg Bal. $390 $ 390 id ids End. Bal. 1 $390 End.Bal. $390

Credit 3 b NORTH STAR Adjusted trial Balance As of December 31 Account litles Debit Cash $ 12,000 Accounts Receivable Prepaid Rent $ 1,200 Equipment $ 21,000 Acumulated depreciations Accounts Payable Income tax Payable Common stock Retained Earnings sales Revenue Salaries and wages Expense $ 25,000 Utilities Expense $ 21,500 Rent Expense $ 1,200 Depreciation Expense $ 1,000 Income tax Expense $ 2,000 $10,000 $ 390 $ 24,800 $ 2,100 $ 50,000 $ 390 Totals $ 89,290 $ 89,290

( has ii Preliminary Net Income Adjusted Net Income $ 12,500 $ 910 Salaries and Calculation: tº prelimán ary Net Income =(Sales Revenue – wages Expense Utilies Expense =($ 50,000 - $25,000 - $12,500) $ 12,500 ("Adjusted Net Income = Sales Revenue Salaries and wages Expense Utilities Exp adjusted - Reat expense adjusted Adjusted Depreciation Expense Adjusted Income Tax Expense) = ($50,000 - $25,000 - $ 21,900 – $1,200 - $1,000 - $390) $ 910 رطل Net Income overstated by $11,590 Calculation Overstated Net Income (Preliminary Net Income Adjusted Net Income $12,500 - $910 $11,590 without adjustments, preliminary net income would have been overstated by $ 11,890