Question

Use the following information to answer questions 1-5. The Aggie Graphics Company was organized on January 1, 2018. The trial balance before adjustment at December 31, 2019 contained the following account balances: Cash $9,500 Accounts Receivable 4,000 Prepaid Insurance 1,800 Equipment 45,000 Accumulated Depreciation 4,500 Accounts Payable 3,500 Notes Payable 18,000 Common Stock 5,000 Retained Earnings 12,000 Dividend 2,000 Graphic Fees Earned 52,100 Consulting Fees Earned 5,000 Salaries Expense 30,000 Supplies Expense 2,700 Advertising Expense 1,900 Rent Expense 1,500 Utilities Expense 1,700 $100,100 $100,100 Analysis reveals the following additional data: (Assume the books are only closed at year end) (A) The $2,700 balance in Supplies Expense represents supplies purchased in January. At December 31, there was $1,200 of supplies on hand. (B) The note payable was issued on September 1. It is a 3% 6-month note. (C) The balance in Prepaid Insurance is the premium paid on a one-year policy, dated March 1, 2019. (D) Consulting Fees are credited to revenue when received. At December 31, consulting fees of $1,000 contracted for January, 2020 have yet to be performed. (E) The equipment was purchased on January 1, 2018. It has a 10-year useful life and no salvage value.

Hi, I'm stuck on two adjusting entries. The problem gives me an unadjusted trial balance and I have to calculate net income using the additional data they give me. I figured out the AJEs for transactions A, B, and E, but I need help with transactions B and C. I'm confused because for transaction C I debited insurance expense of 1,800 and credited prepaid insurance of 1,800 (which seems to be a deferred expense) and for transaction D I debited cash of 1,000 and credited unearned revenue of 1,000 (a deferred revenue). Am I supposed to debit a liability and credit a revenue instead? I still get a wrong answer when I do that. When I calculate my net income, I keep on getting 14,720 which isn't an answer.

Just a brief overview, this chapter is over income measurement and accrual accounting, and I have a test approaching real soon so I would really appreciate it if you could get back to me as soon as possible!

Also, for the second question, as long as I know the AJE for transaction D I'll be able to answer the question.

Answer 1

(B) $13,320

(A) Supplies is wrongly recorded as Supplies expense.

Supplies expense = Purchase - Supplies in hand

= 2700 - 1200

= 1500

(B) Interest expense = 18,000 x 3% x 4/12 (Sep to Dec)

= 180

(C) Insurance expense = 1,800 x 10/12 (Mar to Dec)

= 1,500

When cash is paid for insuranse, Debit Prepaid expense and credit Cash

At the end of the period we need to expense that part which occurs in that year. Debit Insurance expense and credit Prepaid Insurance. Insuranse expense is of 10 months (Mar to Dec).

(D) At the end of the period $1,000 is included in revenue which is actually an unearned revenue. We need to reduce revenue by 1,000

New Consulting fee = 5,000 - 1,000

= 4,000

(E) Depreciation expense = (Asset value - scrap value ) / useful lives

= 45,000 / 10

= 4,500

Revenue
Graphic fees	52,100
Consulting fees	4,000	56,100
Expenses
Salaries expense	30,000
Supplies expense	1,500
Advertising expense	1,900
Rent expense	1,500
Utilities expense	1,700
Interest expense	180
Insurance expanse	1,500
Depreciation expense	4,500	42,780
Net Income		13,320

5. Option D

For that error in (D) Liablities will decrease as unearned revenue is not recorded and Equity will increase as revenue has increases due to failure to record