Explain why an adjusting entry is needed and calculate the amount of the adjustment [15-25 min]
Descriptions of transactions and how they were recorded follows for October, 2012 for Ashley Acoustics, Inc.
a. | Received $3,600 cash from customer for three months of service beginning October 1, 2012 and ending December 31, 2012. The company recorded a $3,600 debit to Cash and a $3,600 credit to Unearned service revenue. |
b. | Employees are paid $1,500 every Friday for the five-day work week. October 31, 2012 is on Wednesday. |
c. | The company pays $420 on October 1 for their six-month auto insurance policy. The company recorded a $420 debit to Prepaid insurance and a $420 credit to Cash. |
d. | The company purchased office furniture for $6,000 on January 2, 2012. The company recorded a $6,000 debit to Office furniture and a $6,000 credit to Accounts payable. Annual depreciation for the furniture is $1,200. |
e. | The company began October with $55 of supplies on hand. On October 10 the company purchased supplies on account of $115. The company recorded a $115 debit to Supplies and a $115 credit to Accounts payable. The company used $80 of supplies during October. |
f. | The company received their electric bill on October 30 for $205, but did not pay it until November 10. On November 10 they recorded a $205 debit to Utilities expense and a $205 credit to Cash. |
g. | The company paid November’s rent on October 30 of $550. On October 30 the company recorded a $550 debit to Rent expense and a $550 credit to Cash. |
Requirement
1. Indicate if an adjusting entry is needed for each item on October 31 and why the entry is needed (i.e., an asset or liability account is over/understated). Indicate which specific account on the balance sheet is misstated. Finally, indicate the correct balance that should appear in the balance sheet account after the adjustment is made. Use the table guide below. Item a is completed as an example:
Item
Adjustment needed?
Asset/Liability
Over-/Understated?
Balance sheet account
Correct balance on October 31
a.
Yes
Liability
Overstated
Unearned service revenue
$2,400
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