Question

Brokeback Towing Company is at the end of its accounting year, December 31, 2018. The following data that must be considered were developed from the company’s records and related documents:

1. On July 1, 2018, a two-year insurance premium on equipment in the amount of $800 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.
2. At the end of 2018, the unadjusted balance in the Supplies account was $1,200. A physical count of supplies on December 31, 2018, indicated supplies costing $400 were still on hand.
3. On December 31, 2018, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $900. The amount is not yet recorded. It will be paid during January 2019.
4. On December 31, 2018, the company completed a contract for an out-of-state company for $8,050 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction.
5. On July 1, 2018, the company purchased a new hauling van. Depreciation for July–December 2018, estimated to total $2,850, has not been recorded.
6. As of December 31, the company owes interest of $600 on a bank loan taken out on October 1, 2018. The interest will be paid when the loan is repaid on September 30, 2019. No interest has been recorded yet.
7. Assume the income after the preceding adjustments but before income taxes was $40,000. The company’s federal income tax rate is 15%. Compute and record income tax expense.

Required:

Indicate the accounting equation effects (amount and direction) of each adjusting journal entry. Provide an appropriate account name for any revenue and expense effects. (Enter any decreases to Assets, Liabilities, or Stockholders' Equity with a minus sign.)

Answer 1

Notes-

1 Prepaid insurance recorded on july 1 paid for two years. Now adjusting entry recorded is to record insurance for 6 months (July to december)

Insurance for 6 months=800*6/24

=$200

Insurance is an expense recorded increasing the expense and decreaseing stockholder equity as net income is decreased and ultimately stockholder equity decreased

Prepaid insurance also reduced which is an asset decreased so accounting equation matched.Asset and equity reduced by 200

2 Supplies on hand are only 400 so supplies expenses is to be recorded for supplies reduced

Supplies expense=$1200-$400=$800

$800 supplies expenses is recorded and equity decreased as expense decrease net income and equity reduced.

Now asset also reduced as supplies is reduced by the amount of supplies expenses. Assest and equity reduced by $800

3 Repair is done for which amount is not yet paid so liability increased accounts payable by $900 and repair expense incurred and increased which decrease the equity.

Liability increased and equity decreased by $900so accounting equation matched.

4 Revenue earned but not received yet so accounts receivable increased by $8,050 also revenue increased which increases equity by $8050.

So equity increased and asset increased by $8050 accounting equation matched

5 Depreciation is recorded for $2850 , so asset decreased as accumulated depreciation recorded, aslo equity reduced as depreciation expenses recorded.

Asset is reduced and equity increased so accounting equation matched.

6 Interest payable recorded of $600 for interest payable on loan so liability increased and also interest expense increased which reduced the equity.

So liability increased and equity decreased by $6oo so accounting equation match.

7 Income tax expense=40,000*15%=$6,000

SO income tax expense increased and income tax payable recorded as income tax liability increased.Income tax expenses is recorded so equity decreased.