Problem

Ken Hensley Enterprises, Inc., is a small recording studio in St. Louis. Rock bands use th...

Ken Hensley Enterprises, Inc., is a small recording studio in St. Louis. Rock bands use the studio to mix high-quality demo recordings distributed to talent agents. New clients are required to pay in advance for studio services. Bands with established credit are billed for studio services at the end of each month. Adjusting entries are performed on a monthly basis. An unadjusted trial balance dated December 31, 2011, follows. (Bear in mind that adjusting entries already have been made for the first eleven months of 2011, but not for December.)

KEN HENSLEY ENTERPRISES, INC. UNADJUSTED TRIAL BALANCE DECEMBER 31, 2011
Cash	$ 43,170
Accounts receivable	81,400
Studio supplies	7,600
Unexpired insurance	500
Prepaid studio rent	4,000
Recording equipment	90,000
Accumulated depreciation: recording equipment		$ 52,500
Notes payable		16,000
Interest payable		840
Income taxes payable		3,200
Unearned studio revenue		9,600
Capital stock		80,000
Retained earnings		38,000
Studio revenue earned		107,000
Salaries expense	18,000
Supplies expense	1,200
Insurance expense	2,680
Depreciation expense: recording equipment	16,500
Studio rent expense	21,000
Interest expense	840
Utilities expense	2,350
Income taxes expense	17,900	______
	$307,140	$307,140

Other Data

1. Records show that $4,400 in studio revenue had not yet been billed or recorded as of December 31.

2. Studio supplies on hand at December 31 amount to $6,900.

3. On August 1, 2011, the studio purchased a six-month insurance policy for $1,500. The entire premium was initially debited to Unexpired Insurance.

4. The studio is located in a rented building. On November 1, 2011, the studio paid $6,000 rent in advance for November, December, and January. The entire amount was debited to Prepaid Studio Rent.

5. The useful life of the studio’s recording equipment is estimated to be five years (or 60 months). The straight-line method of depreciation is used.

6. On May 1, 2011, the studio borrowed $16,000 by signing a 12-month, 9 percent note payable to First Federal Bank of St. Louis. The entire $16,000 plus 12 months’ interest is due in full on April 30, 2012.

7. Records show that $3,600 of cash receipts originally recorded as Unearned Studio Revenue had been earned as of December 31.

8. Salaries earned by recording technicians that remain unpaid at December 31 amount to $540.

9. The studio’s accountant estimates that income taxes expense for the entire year ended December 31, 2011, is $19,600. (Note that $17,900 of this amount has already been recorded.)

Instructions

a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).

b. Using figures from the company’s unadjusted trial balance in conjunction with the adjusting entries made in part a, compute net income for the year ended December 31, 2011.

c. Was the studio’s monthly rent for the last 2 months of 2011 more or less than during the first 10 months of the year? Explain your answer.

d. Was the studio’s monthly insurance expense for the last five months of2011 more or less than the average monthly expense for the first seven months of the year? Explain your answer.

e. If the studio purchased all of its equipment when it first began operations, for how many months has it been in business? Explain your answer.

f. Indicate the effect of each adjusting entry prepared in part a on the major elements of the company’s income statement and balance sheet. Organize your answer in tabular form using the column headings shown. Use the symbols I for increase, D for decrease, and NE for no effect. The answer for the adjusting entry number 1 is provided as an example.