Question

In: Accounting

You've been hired by ABC Company to review several transactions that were omitted as Adjusting Entries...

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)

$

$

$

$

Solutions

Expert Solution

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

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