Question

You've been hired by ABC Company to review several transactions that were omitted as Adjusting Entries at December 31, 2015 as the bookkeeper was new and uncertain on how to record them. For each of the transactions listed below, record the appropriate AJE that would have been required at December 31st.

Transactions:                                               

A. On September 1, 2015, ABC received a $15,000 advance payment from a customer for services to be performed evenly over the next 15 months. The original entry was credited to a realaccount.

B. On March 1, 2015, ABC paid $12,720 for a four-year insurance policy. ABC debited a nominal account at that time.

For your account titles, choose from:  

Service Revenue

Unearned Revenue

Insurance Expense

Prepaid Insurance

（2）If ABC did not do either of the adjusting entries associated with Transactions A and B (from the above information) on December 31, 2015, determine the cumulative effect of all errors on assets, liabilities and equity at December 31, 2015.

Answer Format: Use O for overstated, U for understated, and NE for No Effect. Do not space between the O/U/NE and the dollar amount of the error. (Example: If Assets are Over by $2,000, record your answer as O2000)

Assets	Liabilities	Equity	Net Income ('15)
$	$	$	$

Answer 1

Account	Debit	Credit
Unearned revenue	4000
Service revenue		4000
Insurance expense	2650
Prepaid insurance		2650

Workings:

Ref	Particulars	Amount
a	Insurance premium paid	12720
b	coverage period	4 years
c=a/b	Insurance expense per year	3180
d= c/12	Insurance expense per month	265
e	Number of months policy expired in current year	10
f= d*e	Insurance expense	2650
Unearned revenue
a	Amount received	15000
b	Service period	15
c= a/b	Revenue per month	1000
d	Number of months service performed	4
e= c*d	Revenue recognised	4000

Transaction	Assets	Liabilities	Equity	Net income
A unearned revenue	NE	O4000	U4000	U4000
B Insurance	O2650	NE	O2650	O2650