Question

Instructions Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities: a. On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance, b. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid. C. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31. d. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station The station billed Faraday $4,350 for 3 months' sponsorship-November 2019, December 2019, and January 2020-in advance. When these payments were made, Faraday debited prepaid advertising At December 31, 2 months' advertising has been used and 1 month remains unused. Required: 1. Prepare adjusting entries at December 31 for these four activities 2. Conceptual Connection: What would be the effect on expenses if the adjusting entries were not made?

Answer 1

Faraday Electronic Service

Journal entries

General Journal

Balance Sheet

Income Statement

No.

Date

Account

Debit

Credit

Assets

Liabilities

Equity

Revenue

Expense

Net Income

Calculation

a

31-Dec

Insurance expense

$                  1,620

$ (1,620)

$   1,620

$       (1,620)

=4,860/12*4

Prepaid Insurance

$        1,620

$ (1,620)

b

31-Dec

Utility expense

$                  1,520

$ (1,520)

$   1,520

$       (1,520)

Accounts Payable

$        1,520

$     1,520

c

31-Dec

Equipment rent expense

$                  1,440

$ (1,440)

$   1,440

$       (1,440)

Accounts Payable

$        1,440

$     1,440

d

31-Dec

Advertising expense

$                  2,900

$ (2,900)

$   2,900

$       (2,900)

=4,350/3*2

Prepaid Advertising

$        2,900

$ (2,900)

Req 2

Effect if adjusting entries were not made

a

Expenses would be understated and assets would be overstated, net income and stockholders' equity would be overstated

Expenses

Understated

Assets

Overstated

Net Income & St Equity

Overstated

b

Expenses would be understated and liabilities would be understated, net income and stockholders' equity would be overstated.

Expenses

Understated

Liabilities

Understated

Net Income & St Equity

Overstated

c

Expenses would be understated and liabilities would be understated, net income and stockholders' equity would be overstated.

Expenses

Understated

Liabilities

Understated

Net Income & St Equity

Overstated

d

Expenses would be understated and assets would be overstated, net income and stockholders' equity would be overstated

Expenses

Understated

Assets

Overstated

Net Income & St Equity

Overstated

Cumulative effect on expenses

Understated by

$        7,480

Calculation

Insurance expense

$                  1,620

Utility expense

$                  1,520

Equipment rent expense

$                  1,440

Advertising expense

$                  2,900

Cumulative effect on expenses

$                  7,480