Question

Paula Judge owns Judge Creative Designs. The trial balance of the firm for January 31, 2019, the first month of operations, is shown below. End-of-the-month adjustments must account for the following items: $950 a. Supplies were purchased on January 1, 2019; inventory of supplies on January 31, 2019, b. The prepaid advertising contract was signed on January 1, 2019, and covers a four-month period. c. Rent of $1,450 expired during the month d. Depreciation is computed using the straight-line method. The equipment has an estimated useful life of 10 years with no salvage value Required: 1. Complete the worksheet for the month. 2. Prepare an income statement, statement of owner's equity, and balance sheet. No additional investments were made by the owner during the month 3. Journalize and post the adjusting entries. Analyze If the adjusting entries had not been made for the month, would net income be overstated or understated?

Answer 1

Unadjusted TB Adjusted TB Judge Creative Designs Adjustments Balance Sheet Income Statement Credit Debit Credit Debit Credit Debit Credit Debit Debit Credit Account Names Cash 35,200 35,200 35,200 Accounts Receivable 12,300 12,300 12,300 Supplies 7,150 6,200 950 950 Prepaid Advertising 7,200 1,800 5,400 5,400 Prepaid Rent 17,400 1,450 15,950 15,950 Equipment 37,200 37,200 37,200 Accumulated Depreciation-Equipment 310 310 310 Accounts Payable Paula Judge, Capital Paula Judge, Drawing 15,250 15,250 15,250 59,700 59,700 59,700 6,700 6,700 6,700 58,850 58,850 Fees Income 58,850 Advertising Expense 1,800 1,800 1,800 Depreciation expense-Equipment 310 310 310 Rent expense 1,450 1,450 1,450 Salaries expense 9,400 9,400 9,400 Supplies expense 6,200 6,200 6,200 Utilities expense 1,250 1,250 1,250 Sub-Totals 9,760 113,700 133,800 133,800 9,760 134,110 134,110 20,410 58,850 75,260 Net Income 38,440 38,440 Totals 58,850 58,850 113,700 113,700

Judge Creative Designs Income Statement For the Month Ended Jan 31, 2019 Revenues Fees Income 58,850 Expenses Advertising Expense 1,800 Depreciation expense-Equipment 310 Rent expense 1,450 Salaries expense 9,400 Supplies expense 6,200 Utilities expense 1,250 Total Expenses 20,410 Net Income 38,440 Statement of Owners Equity For the Month Ended Jan 31, 2019 Capital, Jan 1, 2019 59,700 Add: Net Income 38,440 (6,700) Less: Drawing Changes during the period 31,740 Capital, Jan 31, 2019 91,440

Judge Creative Designs Balance Sheet As of Jan 31, 2019 Assets Current Assets Cash 35,200 Accounts Receivable 12,300 Supplies 950 Prepaid Advertising 5,400 Prepaid Rent 15,950 Total Current Assets 69,800 Non-Current Assets Equipment 37,200 Accumulated Depreciation (310) Total Non-Current Assets 36,890 Total Assets 106,690 Liabilities & Owners Equity Current Liabilities Accounts Payable 15,250 Owners Equity Capital 91,440 Total Liabilities & Owners Equity 106,690

Judge Creative Designs Journal entries Debit Credit Calculation Date Account $6,200 a Supplies expense 7,150-950 $ Supplies 6,200 $ 1,800 7,200/4 b Advertising Expense $ Prepaid Advertising 1,800 Rent expense $ 1,450 C $ Prepaid Rent 1,450 37,200/10*1/12 d Depreciation expense-Equipment 310 Accumulated Depreciation-Equipment $ 310

Judge Creative Designs TАсcounts Debit Credit Debit Credit Date Date Date Date Supplies expense Supplies $ 7,150 Op bal Op bal $6,200 $6,200 a a Bal $6,200 Bal. 950 Prepaid Advertising $ 7,200 Advertising Expense Op bal Op bal $1,800 $1,800 b b $ 1,800 $5,400 Bal Bal Rent expense Prepaid Rent $17,400 Op bal Op bal $1,450 $1,450 C C $ 1,450 $15,950 Bal Bal. Accumulated Depreciation-Equipment Depreciation expense-Equipment Op bal $ $ Op bal $ 310 310 Bal. Bal 310 310

Analyze
If adjusting entries not passed, net income is		Overstated	by $9,760 as below
Workings
Supplies expense	$        6,200
Advertising Expense	$        1,800
Rent expense	$        1,450
Depreciation expense-Equipment	$           310
Expenses due to adjusting entries	$        9,760