Question

Service Pro Corp (SPC) is preparing adjustments for its September 30 year-end. For the following transactions and events, show the September 30 adjusting entries that SPC would make. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

a. Prepaid Insurance shows a balance of zero at September 30, but Insurance Expense shows a debit balance of $2,448, representing the cost of a three-year fire insurance policy that was purchased on September 1 of the current year.

b. On August 31 of this year, Cash was debited and Service Revenue was credited for $1,590. The $1,590 related to fees for a three-month period beginning September 1 of the current year.

c. The company’s income tax rate is 35%. After making the above adjustments, SPC's net income before tax is $10,000. No income tax has been paid or recorded.


Transaction General Journal Debit Credit

a
b
c

Answer 1

• Adjustment ‘a’

Insurance expense has been debited by $ 2,448 representing a 3 year (36 months) insurance policy purchased on Sept 1.

Since only 1 month has expired from 1 Sept to 30 Sept, Insurance expenses should have a balance of insurance policy amount equivalent to 1 month’s amount.

$ 2,448 = for 36 months.
For 1 month = 2448/36 = $ 68 = Insurance expired during September.

Unexpired insurance for 35 remaining months = 2448 – 68 = $ 2,380 = Prepaid Insurance balance.

Adjusting entry:

Date	Accounts title	Debit	Credit	Working/Explanation
30-Sep	Prepaid Insurance	$          2,380.00		Unexpired insurance for remaining 35 months
	Insurance expense		$                  2,380.00	Excess Insurance expense debited now credited.

• Adjustment ‘b’

Service revenue was credited by $1,590 which represent 3 months period from 1 Sept to 30 Nov.

Months expired till 30 Sept = 1 month only.

Hence, only 1 month revenue have to be recognised.

One month revenue = 1590 / 3 months = $ 530

Unearned Revenue balance = $ 1590 - $ 530 = $ 1,060 for remaining 2 months

Adjusting Entry:

Date	Accounts title	Debit	Credit	Working/Explanation
30-Sep	Service Revenue	$          1,060.00		Excess Service revenue credited now debited.
	Unearned revenue		$                  1,060.00	Unearned revenue balance for remaining 2 months

• Adjustment ‘c’

Net Income before Tax = $ 10,000

Tax Rate = 35%

Income Tax expense = 10000 x 35% = $ 3,500

Adjusting Entry:

Date	Accounts title	Debit	Credit	Working/Explanation
30-Sep	Income Tax expense	$          3,500.00		Expenses recorded
	Income Taxes payable		$                  3,500.00	Liabilities recognised as taxes not yet paid