Question

Karla Tanner opened a web consulting business called Linkworks and recorded the following transactions in its first month of operations.

Apr.		1		Tanner invests $80,000 cash along with office equipment valued at $26,000 in the company in exchange for common stock.
Apr.		2		The company prepaid $9,000 cash for twelve months’ rent for office space. The company's policy is record prepaid expenses in balance sheet accounts.
Apr.		3		The company made credit purchases for $8,000 in office equipment and $3,600 in office supplies. Payment is due within 10 days.
Apr.		6		The company completed services for a client and immediately received $4,000 cash.
Apr.		9		The company completed a $6,000 project for a client, who must pay within 30 days.
Apr.		13		The company paid $11,600 cash to settle the account payable created on April 3.
Apr.		19		The company paid $2,400 cash for the premium on a 12-month insurance policy. The company's policy is record prepaid expenses in balance sheet accounts.
Apr.		22		The company received $4,400 cash as partial payment for the work completed on April 9.
Apr.		25		The company completed work for another client for $2,890 on credit.
Apr.		28		The company paid $5,500 cash in dividends.
Apr.		29		The company purchased $600 of additional office supplies on credit.
Apr.		30		The company paid $435 cash for this month’s utility bill.

Descriptions of items that require adjusting entries on April 30, 2017, follow.

a) On April 2, the company prepaid $9,000 cash for twelve months' rent for office space.

b) The balance in Prepaid insurance represents the premium paid for a 12-month insurance policy the policy's coverage began on April 1.

c) Office supplies on hand as of April 30 total $1,200.

1. prepare the journal entries.

2. For each adjustment, indicate the income statement and balance sheet account affected, and the impact on net income. If an adjustment caused net income to decrease, enter the amount as a negative value.  Net income before adjustments can be found on the income statement tab. (Hint: Select unadjusted on the drop-down.)

Answer 1

Karla Tanner

1. Adjustment Entries:

Adjusting Entries:
Date	Account Titles and Explanations		Debit	Credit
30-Apr-17	Rent Expense		$750
	Prepaid Rent			$750
	(To record rent expense for April - $9,000 x 1/12 = $750)
30-Apr	Supplies Expense		$3,000
	Supplies			$3,000
	(To record cost of supplies used - 3,600 + 600 - 1,200 = 3,000)
30-Apr	Insurance Expense		$200
	Prepaid Insurance			$200
	(To record insurance expense for April - 2,400 x 1/12 = 200)

2a. Income statement and balance sheet account affected and the impact on net income:

Rent expense – income statement account/ causes decrease in equity

Prepaid rent – Current assets account – decreases prepaid rent account by $750 to show a balance of $8,250

2b. Insurance expense – income statement account/causes decrease in equity

Prepaid insurance – current assets account – decreases prepaid insurance by $200 to show a balance of $2,040

2c. Supplies expense – income statement account/decreases equity balance

Supplies – Asset account – the supplies on hand is $1,200

Impact on net income –

The rent expense ($750), insurance expense ($200) and supplies expense ($3,000) are expense accounts and hence cause a reduction in net income.

Note: net income before adjustments is not given in the question, hence actual decrease in net income cannot be calculated with the given information. However, all the three adjustment accounts dealt here tend to decrease the net income.