Solutions For Financial Accounting Chapter 4 Problem 3BE

Requirement (1) and (2)

Indicate the adjustment type and accounts status before adjustment for Company C’s data:

Justification:

(a)

Prepaid expenses:

Supplies account (asset) balance is $1,600, but the supplies on hand were $400. Hence, the asset is overstated by $1,200 and expense is understated by $1,200.

(b)

Accrued Revenues:

Rendered services were not recorded. While recording the services provided, the accounts receivable account (asset) should be debited, and service revenue (Revenue) account should be credited. Hence, the entries were not made, both asset and revenue account were understated.

(c)

Accrued Expenses:

Accrued interest on notes payable supposed to be recorded in adjusting entry. Interest expense account (expense) should be debited and interest payable (liabilities) should be credited. Hence, before adjustment both the expenses and liabilities were understated.

(d)

Unearned Revenues:

Rent collected in advance has been earned. Here, unearned revenue (liability) account was supposed to be debited and revenue account supposed be credited to record the earned revenue. Hence, before adjustment the liabilities account was overstated, and revenue account was understated.