Question

For each situation below, record the ADJUSTING ENTRY required at December 31, 2010 in the records of Dee's Design, Inc., prior to the company's preparation of annual financial statements. Then, by UNDERLINING your responses, indicate the type of entry and if it is reversible. a. On December 1, 2010, Dee's received $2,700 payment in advance for consulting services to be performed over the next three months. Assuming that the $2,700 was put in a liability account, what adjustment would be required on December 31, 2010? Dec. 31 WHAT TYPE? Accrual Deferral REVERSIBLE? Yes No b. On November 1, 2010. Dee's Design, Inc. paid $2,500 to cover five months' rent of additional storage space. At that time, the payment was recorded in an expense account. sni What adjustment would be required on December 31, 2010? Dec. 31 WHAT TYPE? Accrual Deferral REVERSIBLE? Yes No c. On August 1, 2010. Dee's Design, Inc. made a 10%, 4-year loan to another business. Record the necessary adjusting entry related to interest on the $15,000 loan. Dec. 31 WHAT TYPE? Accrual Deferral REVERSIBLE? Yes No Omitting each entry ABOVE does what to the items below? Net Income Total Assets Total Liabilities Owners' Equity a. USE THIS KEY Overstates o Understates U No Effect NE b.

Answer 1

1. Journal Entries, Nature and Reversing or Not -

Type Reversible Credit Journal Entries Date Accounts Title Debit Dec 31 Unearned Revenue $ 900 Consulting Service (Being Advance received) Deferral No $ 900 Deferral No Dec 31 Rent Expense $ 500 Prepaid Rent (Being rent Expense incurred) $ 500 Accrual Yes Dec 31 Interest Expense $ 625 Interest Payable (Being Interest Expenses incurred) $ 625

2. Over / Understatement -

a Net Income Total Assets Total Liabilities Owner's Equity U NE o 0 0 NE o U b с 0 NE O O

Explanation -

a. If Income not booked then Net Income will be understated and at the same time liabilities will be overstated. Owner's Equity portion will get understated due to Net income transferred to retained earnings will be understated.

b. If Expense not booked then income will be overstated as the less expense posted then income will be overstated also Total Assets will be overstated and due to higher net income Owner's Equity will get overstated.

c. If Expense not booked then income will be overstated as the less expense posted then income will be overstated. Also liabilities not booked then it will also be overstated and due to higher net income Owner's Equity will get overstated.