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 $16,000 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 12%. b. Vito's depreciable equipment has a cost of $9.000, a five-year life, and no salvage value. The equipment was purchased in 2019. c. On November 1, 2021, the bar area was leased to Jack Donaldson for one year. Vito's received $6,600 representing the first six months' rent and credited deferred rent revenue. d. On April 1, 2021, the company pald $2,160 for a two-year fire and liability Insurance policy and debited insurance expense. e. On October 1, 2021, the company borrowed $18,000 from a local bank and signed a note. Principal and interest at 12% will be paid on September 30, 2022 f. At year-end, there is a $1,550 debit balance in the supplies (asset) account. Only $680 of supplles 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.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the necessary adjusting journal entries at December 31, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

Answer 1

1.

a. Interest receivable ................................................ 960

Interest revenue ($16,000 x 12% x 1/2)................... 960

b.  Depreciation expense ($9,000 x 1/5)....................... 1,800

Accumulated depreciation................................ 1,800

c.  Deferred rent revenue...........................................   2,200

Rent revenue ($6,600 x 2/6)..................................     2,200

d.  Prepaid insurance ................................................   1,350

Insurance expense ($2,160 x 15/24).......................     1,350

e.  Interest expense ($18,000 x 12% x 3/12)..................... 540

Interest payable................................................ 540

f.  Supplies expense ($1,550 – $680)............................ 870

Supplies............................................................ 870

2.

Income overstated

(understated)

  Adjustments to revenues:

  Understatement of interest revenue $ (960)

  Understatement of rent revenue (2,200)

  Adjustments to expenses:

  Overstatement of insurance expense (1,350)

  Understatement of depreciation expense 1,800

  Understatement of interest expense 540

  Understatement of supplies expense    870

Understatement of net income ( $1,300 )