Question

Buena Vista Social Club accumulates the following adjustment data at December 31.

1. Revenue of $5,000 collected in advance has been earned.

2. Salaries of $1,000 are unpaid.

3. Prepaid rent totaling $500 has expired.

4. Supplies of $450 have been used.

5. Revenue earned but unbilled total $1,000.

6. Utility expenses of $600 are unpaid.

7. InterestExpense of $300 has accrued on a note payable.

Instructions

1. For each of the above items indicate:

1.     The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).
2.     The account relationship (asset/liability, liability/revenue, etc.).
3.     The status of account balances before adjustment (understatement or overstatement).

4. The adjusting entry.

2. Assume net income before the adjustments listed above was $15,500. What is the adjusted net income?

Prepare your answer in the tabular form presented below and explain adjustments.

Before Adjustment

   Type of                            Account                             (Understatement                                          

Adjustment                  Relationship                       or Overstatement)                          Adjusting Entry

Codes:    A     =     Asset                                 R     =     Revenue

                    L      =     Liability                             O     =     Overstatement

                    E      =     Expense                           U     =     Understatement

Use these codes for simplicity

2.       Net income before adjustments........................................................                                  $15,500

            Add:      Unearned revenue (1)...........................................................                        

                            Accrued revenue (5)..............................................................                        

                                                                                                                                                                                                       

            Less:      Accrued salaries (2)...............................................................                        

                            Prepaid rent expired (3)........................................................                        

                            Supplies used (4)...................................................................                        

                            Accrued utilities (6)...............................................................                        

                            Accrued interest (7)...............................................................                                                

            Adjusted net income.........................................................................                                                

                                                     

Answer 1

Buena Vista Social Club a. 1 Dr. 2 E/L 3 Account Balances Before Adjustment Type of Account (Understatement Adjustment Relationship or Overstatement) Adjusting Entry Unearned revenue. L/R Liab. O Unearned Revenue a/c Rev. U To Service Revenue Accrued expense. Exp. U Salary Expense a/c Liab. U To Salaries Payable Prepaid expense. E/A Exp. U Rent Expense a/c Asset 0 To Prepaid Rent Prepaid expense. E/A Exp. U Supplies Expense a/c Asseto To Supplies Accrued revenue. A/R Asset U Accounts Receivable a/c Rev. U To Service Revenue Accrued expense. E/L Exp. U Utilities Expense a/c Liab. U To Accounts Payable Accrued expense. E/L Exp. U Interest Expense a/c Liab. U To Interest Payable 5 6 Dr. Codes: A = Asset L = Liability E = Expense R = Revenue O = Overstatement U = Understatement 15500 b.Net income before adjustments Add: Unearned revenue (1) Accrued revenue (5) 5000 1000 6000 21500 Less: Accrued salaries (2) Prepaid rent expired (3) Supplies used (4) Accrued utilities (6) Accrued interest (7) Adjusted net income 1000 500 450 600 300 2850 18650