Question

The information necessary for preparing the 2018 year-end adjusting entries for Vito’s Pizza Parlor appears below. Vito’s fiscal year-end is December 31.

1. On July 1, 2018, purchased $12,500 of IBM Corporation bonds at face value. The bonds pay interest twice a year on January 1 and July 1. The annual interest rate is 10%.
2. Vito’s depreciable equipment has a cost of $26,000, a four-year life, and no salvage value. The equipment was purchased in 2016. The straight-line depreciation method is used.
3. On November 1, 2018, the bar area was leased to Jack Donaldson for one year. Vito’s received $7,500 representing the first six months’ rent and credited deferred rent revenue.
4. On April 1, 2018, the company paid $3,000 for a two-year fire and liability insurance policy and debited insurance expense.
5. On October 1, 2018, the company borrowed $25,000 from a local bank and signed a note. Principal and interest at 10% will be paid on September 30, 2019.
6. At year-end, there is a $2,050 debit balance in the supplies (asset) account. Only $750 of supplies remain on hand.

Required:

1. Prepare the necessary adjusting journal entries at December 31, 2018.
2. Determine the amount by which net income would be misstated if Vito's failed to record these adjusting entries. (Ignore income tax expense.)

Prepare the necessary adjusting journal entries at December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

1. On July 1, 2018, purchased $12,500 of IBM Corporation bonds at face value. The bonds pay interest twice a year on January 1 and July 1. The annual interest rate is 10%.
2. Vito’s depreciable equipment has a cost of $26,000, a four-year life, and no salvage value. The equipment was purchased in 2016. The straight-line depreciation method is used.
3. On November 1, 2018, the bar area was leased to Jack Donaldson for one year. Vito’s received $7,500 representing the first six months’ rent and credited deferred rent revenue.
4. On April 1, 2018, the company paid $3,000 for a two-year fire and liability insurance policy and debited insurance expense.
5. On October 1, 2018, the company borrowed $25,000 from a local bank and signed a note. Principal and interest at 10% will be paid on September 30, 2019.
6. At year-end, there is a $2,050 debit balance in the supplies (asset) account. Only $750 of supplies remain on hand.

7. 	Transaction General Journal Debit Credit a.

Determine the amount by which net income would be misstated if Vito's failed to record these adjusting entries. (Ignore income tax expense.) (Amounts to be deducted should be indicated by a minus sign. Do not round intermediate calculations.)

	Income Overstated (Understated) Adjustments to revenues: Adjustments to expenses: $0

Answer 1

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Part1					Part 2
Event	Account	Debit	Credit		Adjustment to Revenue
					Rent Revenue		$   -2,500
1	Interest Expense	$           625			Adjustment to Expense
	Interest Payable		$             625		Interest Expense		$        625
	(To record bond interest) $12,500*10%*6/12				Depreciation Expense		$    6,500
					Insurance Expense		$   -1,875
2	Depreciation Expense	$        6,500			Interest Expense		$        625
	Accumulated Depreciation		$         6,500		Supplies Expense		$    1,300
	(To record depreciation expense) $26,000/4 Years
					Income overstated/(Understated)		$    7,175
3	Deferred Rent Revenue	$        2,500
	Rent Revenue		$         2,500
	(To record revenue earned) $7,500/6*2
4	Prepaid Insurance	$        1,875
	Insurance Expense		$         1,875
	(To record insurance as prepaid) $3,000/24*15
5	Interest Expense	$           625
	Interest Payable		$             625
	(To record Note interest) $25,000*10%*3/12
6	Supplies Expense	$        1,300
	Supplies		$         1,300
	(To record supplies used) $2,050-$750