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Question: USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (5) QUESTIONS: Magic Cleaning Services has a...

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USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (5) QUESTIONS:

Magic Cleaning Services has a fiscal year end of December 31st. It is in its first year of operations. As of December 31, Magic has the following unadjusted trial balance:

Account Debit Credit
Cash $ 430,900
Accounts Receivable $158,000
Supplies $111,000
Equipment $120,000
Accounts Payable $ 45,900
Unearned Service Revenue $ 113,600
Common Stock $ 100,000
Retained Earnings -0-
Service Revenue $ 649,200
Wage Expense $ 48,600
Rent Expense $ 18,000
Utilities Expense $ 6,200
Administrative Expense $ 16,000 ___________
TOTALS $ 908,700 $ 908,700

In addition, Magic has not yet adjusted for the following:

1. The equipment was purchased on March 1 of the current year. It has a 10-year life, 10% salvage value and Magic uses the double declining balance method for depreciation. Magic records depreciation to the nearest full month.

2. On March 1, Magic prepaid $18,000 for 12 months of rent on an office/warehouse. The original entry was recorded as Rent Expense.

3. By December 31st, 60% of the services related to the Unearned Revenues had been performed.

4. Wages of $5,700 should be accrued and are scheduled to be paid on January 2.

5. Supplies of $33,000 were still on hand at year end.

6. Based on industry averages, it is estimated that 3% of the accounts receivable will prove to be uncollectible.

Part A:

To record AJE #2, Magic should do which of the following to record the correct adjustment:

A credit Prepaid Rent for $3,000
B debit Rent Expense for $15,000
C Debit Prepaid Rent for $15,000
D credit Rent Expense for $3,000

Part B:

Using the information presented above for Magic Cleaning Services, determine Net Income AFTER all adjustments have been recorded: $_____________________________

(*Note:  When recording your answer, do not use a dollar sign or comma.  Example: If your answer is $452,000, enter your answer as 452000.)

Part C:

Using the information presented for Magic Cleaning Services, IF none of the (6) adjusting journal entries had been recorded, determine the effect on Total Assets.

ASSETS LIABILITIES EQUITY
[BLANK_A]

(*NOTE: When recording your answer, use O for Overstated, U for Understated, or NE for No Effect. Do not space between your O/U/NE and the dollar amount of the error. Example: If your answer for the effect on Assets is Understated by $10,500, enter your answer as U10500. Do not use dollar signs or commas when recording your answer.)

Part D:

Using the information presented for Magic Cleaning Services, IF none of the (6) adjusting journal entries had been recorded, determine the effect on Total EQUITY.

ASSETS LIABILITIES EQUITY
[BLANK_C]

(*NOTE: When recording your answer, use O for Overstated, U for Understated, or NE for No Effect. Do not space between your O/U/NE and the dollar amount of the error. Example: If your answer for the effect on Assets is Understated by $10,500, enter your answer as U10500. Do not use dollar signs or commas when recording your answer.)

Part E:

Using the information presented for Magic Cleaning Services, IF none of the (6) adjusting journal entries had been recorded, determine the effect on Total Liabilities.

ASSETS LIABILITIES EQUITY

[Blank_B]

(*NOTE: When recording your answer, use O for Overstated, U for Understated, or NE for No Effect. Do not space between your O/U/NE and the dollar amount of the error. Example: If your answer for the effect on Assets is Understated by $10,500, enter your answer as U10500. Do not use dollar signs or commas when recording your answer.)

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Answer #1

Part A Answer:

PART A The correct answer option D Explanation #81 But we have recorded entire 12 months of expense, so we will need to credit the rent expense account while debiting prepaid rent Amount of credit to Rent expense = (l8000/12)*2 = $ 3000

Part B Answer and Workings:

PART B Working:s Magic Cleaning Services Income Statement For the year ended December 31, 20X7 Service Revenue Less: Expenses Depreciation expense $ 20,000 Rent expense (18000 3000) Wage expense S 7,17,360 $ 15,000 (48600 5700) $ 54,300 Utilities expense Supplies expense (111,000 -33,000 Administrative expense16,000 Bad debts expense Net Income $ 6,200 $ 78,000 4,740 S 5,23,120 Net Income after all adjustments523120

Part B Workings and Explanations:

Workings & Explanation for Adjustment 1: Steps for calculation of double declining balance rate: I. We have to calculate the annual depreciation rate which is 100%/useful life which in this case will be 100%/10years-10% 2, we will multiply this rate by 2 to get the double declining depreciation rate-10 X 2-20% 3. We will multiply divide the depreciation expense by 12 months to get monthly depreciation and then multiply by 10 months Calculation of Depreciation Expense: Depreciation Expense $ Book Value Rate Calculation Ending Carrying value $ Year 1 $1,20,000 20% 20,000 ((120,000*20%)/12)*10 1,00,000 (120,000-20,000)

Part B Workings and Explanations:

Workings & Explanation for Adjustment 2: March to December is only 10 months of expense incurred, which means 2 months will be prepaid But we have recorded entire 12 months of expense, so we will need to credit the rent expense account while debiting prepaid rent Amount of credit to Rent expense (18000/12)*2 $ 3000 Workings & Explanation for Adjustment 3: 60% of unearned revenue has been performed, which means it can be recognized as revenue now Hence 60% of 113,600-68,160 Total Revenue 649,20068,160 717,360 Workings & Explanation for Adjustment 4: Wages accrued of $ 5700 will be added to the Wages expense account. Workings & Explanation for Adjustment 5: Supplies of $ 33000 on hand from the opening balance of $ 111,000 indicates that 78,000 (111,000 33,000) were used and hence it needs to be recorded as expens Workings & Explanation for Adjustment 6: The 3% of accounts receivable that is being estimated as uncollectible is to be recorded as bad debts expense Bad debts expense (158,000*3%-$ 4740

Part C Final Answer:

PART C Adjustment Number ASSETS (If depreciation is not recorded, our assets will be overstated) (If prepaid rent is not shown, our assets are understated) (Unearned revenue has no effect on assets) (Wages accrued has no effect on assets) (If supplies expense is not recorded, our supplies asset account will be overstated) (If allowance for doubtful debts is not made, then our accounts receivable will be overstated) LIABILITIES EQUITY 1 020000 2 U3000 3 NE 4 NE 5 078000 6 04740

Part D Final Answer:

PART D Adjustment Number ASSETS (Net Income will be overstated, hence Retained earnings will be overstated if depreciation expense is not recorded) (If rent expense is entirely recorded, net income will be understated) (If revenue is not recorded correctly, then net income will be understated) (If wages expense which is accrued is not recorded, net income will be overstatd) (If supplies expense is not accounted for, net income will be understated) (If bad debts expense if not accounted for, net income will be overstated) LIABILITIES EQUITY 020000 U3000 U68160 4 05700 078000 6 04740

Part E Final Answer:

PART E Adjustment Number ASSETS (Depreciation does not affect liabilities) (Rent expense or prepaid rent does not affect liabilities) (If the unearned revenue is not recorded as revenue, liabilities will be overstated) (If wages accrued are not shown as payable, liabilities will be understated) (Supplies on hand does not affect liabilities) (Bad debts expense does not affect liabilities) LIABILITIES EQUITY NE NE 068160 4 U5700 NE 6 NE

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