Question

Fortress Company paid $1200 on October 1, 2009 for one year of virus protection. The following journal entry was made:

   10/1/09     Prepaid Software Service     1,200

                                Cash                                                      1,200

The December 31, 2009 adjusting entry is

	A.	debit Prepaid Software Service and credit Software Service Expense. $900
	B.	debit Software Service Expense and credit Prepaid Software Service, $300.
	C.	debit Software Service Expense and credit Prepaid Software Service, $900.
	D.	debit Prepaid Software Service and credit Software Service Expense, $300.

rchased equipment on credit.  Which of the following describes the effect of the transaction on the elements of the accounting equation.

	A.	it decreases total assets but not stockholders’ equity
	B.	it decreases total assets and stockholders’ equity
	C.	it increases total assets and stockholders’ equity
	D.	it increases total assets but not stockholders’ equity

Answer 1

1. The December 31, 2009 adjusting entry is debit Software Service Expense and credit Prepaid Software Service, $300 ( option B ).

Explanation : On October 1, 2009 Fortress company paid $1200 for 1 year in advance. The financial year ends on December 31, 2009. So in the year 2009 only 3 month's expense needs to recorded in the income statement and the rest will be shown as an asset ( prepaid expense ) in the balance sheet.

So, $1200 is paid for 12 months, then $300 [ ( $1200 / 12 ) * 3 ] will be for 3 months.

Thus, by debiting software service expense by $300 in the adjusting entry the expenses for 3 months are getting recorded in the income statement of the year 2009 and by crediting prepaid software service by $300, the balance of prepaid software service account has come down to $900 ( $1200 - $300 ) which will be shown as an asset in the balance sheet.

2. Purchased equipment on credit.

Answer : It increases total assets but not stockholder's equity. ( option D )

Explanation : journal entry for purchase of equipment on credit is : debit equipment and credit accounts payable.

So, in this case by debiting equipment, total aseets will increase and by crediting accounts payable, outsider's liability will increase and thus it has nothing to do with stockholder's equity.