Question

0.57 2 pts You've been hired by Desert Company to review several transactions that were omitted as Adjusting Entries at December 31, 2019, as the bookkeeper was new and uncertain on how to record them. For each of the transactions listed below, record the appropriate AJE that would have been required at December 31st. Transactions: A. On May 1st, 2019, Desert paid $180,000 in advance for 18 months rent on its new warehouse. At the time, Desert debited a Nominal Account. B. On August 1st, 2019, Desert received $120,000 cash in advance for services to be provided over the next 6 months. At the time, Desert credited a Rea/account. For your account titles, choose from: Unearned Rent Prepaid Rent Revenue Prepaid Services Revenue Rent Expense Revenue Service Expense Revenue Unearned Service

cannot figure out how to solve for the cumulative effects. any help/answers with steps would be appreciated

Answer 1

Hey, I am giving complete answer for the question posted above

Also for cumulative effect, refer the journal entries and try to understand impact if not recorded in the books. I am giving effect for each missed transaction and the total cumulative effect, so that you can undersntand how cumulative effect is coming.

Refer workings for additional help :)

Adjustment Journal Entry		Debit in $	Credit in $
Prepaid Rent	Dr	100000
Rent Expense	Cr		100000
(Being entire amount debited to Rent expense at the time of payment now adjusted)
Unearned Revenue	Dr	100000
Service Revenue	Cr		100000
(Being entire amount credited to Unearned Revenue at the time of receiving advance now adjusted)

	Assets	Liabilities	Equity	Net Income
Effect of non recording Prepaid Rent	U 100,000	NE	NE	U 100,000
Effect of non recording Service income	NE	O 100,000	NE	U 100,000
Cumulative Effect	U 100,000	O 100,000	NE	U 200,000

Workings
1. Computation of Prepaid Rent
Rent paid	$	180000
Rent paid for	months	18
Rent pertaining to 2019 (1 May to 31 Dec)	months	8
Prepaid Rent in months	months	10
Prepaid Rent in $	$	100000
Rent expense was overstated by $100,000 if transaction was omittied which means net income was understated by $100,000
Prepaid Rent (Asset) was understated by $100,000
2. Computation of Service Income
Advance for Services Received	$	120000
Services received for	months	6
Service Pertaining to 2020 (Jan 2020)	months	1
Service income Pertaining to 2019 (1 Aug to 31 Dec)	months	5
Service income to be reported in $	$	100000
Service income was understated by $100,000 if transaction was omittied which means net income was understated by $100,000
Unearned Revenue was overstated by $100,000