Question

Ashley Judd Fine Motors, Inc. commenced operations on July 1 of the current year.Since Ashley is skilled in automotive matters but lacks any expertise in accounting, she hires a bookkeeper from a Facebook site. This bookkeeper has exaggerated his abilities and, on December 31 presented Ashley with financial statements fraught with errors and a stated net income of $96,000. When Ashley's banker examined these statements, he brought up the following issues: Why does the rent expense account have a balance of $48,000 when your rent is only $4,000 per month? You paid this rent on July 1. 1. 2. Why is there no insurance expense on the income statement? Your balance sheet shows a 3. You paid $66,000 for manufacturing equipment on September 1 and recorded it on your 4. On your balance sheet, you show $2,500 in office supplies were purchased on July 1 5. You borrowed $60,000 from our bank on October 1 at an interest rate of 12%. Why are 6. I noticed on your balance sheet that you have a liability of $8,400 that is listed as balance of $18,000 that comes from a payment to Acme Insurance Agency on October 1 for an annual policy balance sheet. Doesn't it need to have depreciation recorded? Have you used any of them? you not showing any interest expense on the income statement? unearned revenue. I asked the bookkeeper where it came from and she told me that it was payment for an annual service contract paid by a local mortuary to maintain their hearses on a monthly basis. The payment was made to you on December 1. 7. You loaned your destitute cousin $30,000 to start a dog grooming business on September I. The note is for nine months and has an interest rate of 14%. How much interest did you earn? When I was examining your payroll records, I noticed that you showed no payroll for the last three days of the month. Your weekly payroll is $2,400 and is earned equally each day Monday through Friday 8. The banker has instructed Ashley to prepare the necessary adjusting entries to errors. Assume that equipment has a useful life of 10 years and a salvage value of $6,000. Further, assume that there are $975 in office supplies on hand. correct these Required: 1. Record adjusting entries for each of the above events including explanations. If any event requires a reversing entry, please record it as well. Compute the correct net income for Ashley Judd Fine Motors. 2.

Answer 1

ANSWER:

A.First of all,We have to be create a Income Adjustment A/c for adjusting incomes & Expenses.

Adjusting Entries:

1 a. Rent Advance A/c Dr $ 24000

To Rent Expenses A/c $ 24000

(Being reversing the Previous booking entry of Rent Expense & Rent Advance)

b. Rent Expenses A/c Dr $ 24000

To Income Adjustment A/c $24000

(Being Transferring of adjustment amount to Income Adjustment A/c )

Explanation

In Previous ,the total Rent Advance( $48000) was booked as Rent Expense.

We Have to Pay only Rent for 6 months ( July-Dec)

Total Rent expense = $4000* 6 =$24000

So, Reverse the entry whatever booked excess Previously i.e $24000 ($48000-$24000).

2. a. Insurance Expense A/c Dr $4500

To Prepaid Insurance A/c $4500

( Insurance Expenses which was not previously not booked)

b. Income Adjustment A/c Dr $4500

To Insurance Expense A/c $4500

(Being Transferring of adjustment Insurance Expenses amount to Income Adjustment A/c )

Explanation

Insurance amount paid for Annual Policy = $ 18000 (on Oct)

Expired Months = 3 (Oct-Dec)

Insurance Expenses for Current Year = $18000*3/12 = $ 4500

3. a.Depreciation A/c Dr $2000

To Equipment A/c $2000

( Being depreciation for equipment is provided )

b.Income Adjustment A/c Dr $2000

To Depreciation A/c $2000

   (Being Transferring of Depreciation amount to Income Adjustment A/c )

Explanation

Depreciation  = ( Asset Value - Residual Value )/No of Years of Usage

= ($66000-$6000)/10

= $6000 p.a

Here , Equipment purchased on Sep-1

So, Depreciation to be calculated for usaged months of Equipment.

i.e Depreciation = $6000*4/12 = $ 2000.

4. a.Office Expenses A/c Dr $1525

To Office Supplies A/c $1525

(Being Expenses for Office Supplies Used is Provided)

b. .Income Adjustment A/c Dr $1525

To Office Expenses A/c    $1525

(Being Transferring of Office Expenses amount to Income Adjustment A/c )

Explanation

Office Supplies on 1 July = $ 2500

Less Office Supplies On 31 Dec   =   $975

     

Office Expenses $1525

       

5. a.Interest on Loan A/c Dr $1800

To O/S Interest on Loan A/c $1800

( ( Being Interest on Loan Expenses for equipment is provided)

b. Income Adjustment A/c Dr $1800

To Interest on Loan A/c $1800

  (Being Interest on Loan Expenses amount to Income Adjustment A/c )

Explanation

Borrowed from Bank = $60000 (1 Oct)

Interest Rate = 12%

Interest for current period = 3 months (Oct to Dec)

Interest = $60000*12% *3/12 = $1800

6. a.Unearned Revenue A/c Dr $8400

To Revenue Earned A/c $8400

( Being Unearned Revenue is Recorded as Revenue Earned)

b. Revenue Earned A/c Dr $8400

To Income Adjustment A/c $8400

   (Being Revenue Earned amount Transferred to Income Adjustment A/c )

Explanation

7.a.Accrued Interest on 14% Note A/c Dr $1400

To Interest on 14% Note A/c $1400

( Being Interest on Note is Provided)  

b. Interest on 14% Note A/c Dr $1400

To Income Adjustment A/c $1400

   (Being Interest on 14% Note A/c amount Transferred to Income Adjustment A/c )

8. a. Payroll A/c Dr $1440

TO O/S Payroll A/c $1440

b.Income Adjustment A/c Dr $1440

To   Payroll A/c $1440

B.Net Income As Given = $96000

Add: Adjustment account (Income) = $33800

Less :Adjustment account(expense) = $11265

     

   Net Income $118535