Question

PA4-2 Analyzing and Recording Adjusting Journal Entries (LO 4-1, LO 4-6] Brokeback Towing Company is at the end of its accounting year, December 31, 2018. The following data that must be considered were developed from the company's records and related documents: a. On July 1, 2018, a two-year insurance premium on equipment in the amount of $744 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1. b. At the end of 2018, the unadjusted balance in the Supplies account was $1,000. A physical count of supplies on December 31, 2018, indicated supplies costing $360 were still on hand. c. On December 31, 2018, YY's Garage completed repairs on one of Brokeback's trucks at a cost of $860. The amount is not yet recorded. It will be paid during January 2019. d. On December 31, 2018, the company completed a contract for an out-of-state company for $8,250 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction. e. On July 1, 2018, the company purchased a new hauling van. Depreciation for July-December 2018, estimated to total $3,050, has not been recorded. f. As of December 31, the company owes interest of $560 on a bank loan taken out on October 1, 2018. The interest will be paid when the loan is repaid on September 30, 2019. No interest has been recorded yet. g. Assume the income after the preceding adjustments but before income taxes was $36,000. The company's federal income tax rate is 25%. Compute and record income tax expense. Required: 1. Give the adjusting journal entry required for each item at December 31, 2018. 2. If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Brokeback's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.

Answer 1

46 1) 47 Transactions 48 a Debit Credit Adjusting Journal Entries General Journal Insurance expense (744/2*6/12) Prepaid insurance (To record expired insurance) 186 49 186 50 51 52 b 640 53 Supplies expense (1000 - 360) Supplies (To record supplies consumed during the Year) 640 54 55 56 C 860 57 Repairs and Maintenance Expense Accounts Payable (To record accrued expense) 860 58 59 8,250 60 d) 61 Accounts receivable Service Revenue (To record services provided during the year) 8,250 62 63 64 e) 3,050 65 Depreciation Expense Accumulated Depreciation - Equipment (To record depreciation expense) 3,050 66

68 f) 560 69 Interest Expense Interest Payable (To record accrued interest expense) 560 9,000 70 71 72 g) 73 74 75 76 2) 77 78 79 Income Tax Expense (36000*25%) Income Tax Payable (To record accrued income taxes) 9,000 If adjustments were not made each period, the financial results could be materially misstated. Det Net Income would have been Overrstated by $6,046 80 186 81 640 82 860 83 84 Insurance expense Supplies expense Repairs and Maintenance Expense Depreciation Expense Interest Expense Income Tax Expense Total expenses Less Service Revenue Overstated by 3,050 560 9,000 85 86 87 14,296 8,250 6,046 88

90 Brokeback's net income overstated by $6,046 91 92 93