Question

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Exercise 3-06 Lei Company accumulates the following adjustment data at December 31. 1. Services performed but unbilled total $1,000. 2. Supplies of $300 have been used. 3. Utility expenses of $225 are unpaid. 4. Services performed of $260 collected in advance. 5. Salaries of $800 are unpaid. 6. Prepaid insurance totaling $350 has expired. For each of the above items indicate the following. (Enter answers in alphabetical order.) (a) The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). (b) The status of accounts before adjustment (overstatement or understatement).

Answer 1

Item	Type of Adjustment (a)	Accounts before Adjustment (b)	Explanation
1)	Accrued Revenue	Understatement	Service revenue is understated for not record the revenue.
2)	Accrued Expense	Understatement	Supplies Expense is understated for not record the expense.
3)	Accrued Expense	Understatement	Utilities Expense is understated for not record the expense.
4)	Unearned Revenue	Understatement	Unearned revenue is understated for not recording it even after collecting the cash.
5)	Accrued Expense	Understatement	Salaries Expense is understated for not record the expense.
6)	Prepaid Expense	Overstatement	Prepaid Insurance will be overstated for not recording the insurance expense.

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Adjusting Entries:

	Adjusting Entries
No	Date	Account Titles and Explanation	Debit	Credit
1)	Mar. 31	Depreciation Expense - Equipment ($400 * 3 months)	$1,200
		Accumulated Depreciation		$1,200
		(To record the depreciation on the equipment)
2)	Mar. 31	Unearned Rent Revenue ($10,200*1/3)	$3,400
		Rent Revenue		$3,400
		(To record the earning of rent revenue)
3)	Mar. 31	Interest Expense	$500
		Interest Payable		$500
		(To record the interest accrued on the note)
4)	Mar. 31	Supplies Expense	$1,900
		Supplies ($2,800 - $900)		$1,900
		(To record the usage of supplies)
5)	Mar. 31	Insurance Expense	$600
		Prepaid Insurance ($200 * 3 months)		$600
		(To record expiration of insurance expense)