Question

Brokeback Towing Company is at the end of its accounting year, December 31, 2017. The following data that must be considered were developed from the company’s records and related documents:

1. On July 1, 2017, a three-year insurance premium on equipment in the amount of $1,140 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.
2. At the end of 2017, the unadjusted balance in the Office Supplies account was $1,450. A physical count of supplies on December 31, 2017, indicated supplies costing $570 were still on hand.
3. On December 31, 2017, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $980. The amount is not yet recorded. It will be paid during January 2018.
4. In December, the 2017 property tax bill for $2,320 was received from the city. The taxes, which have not been recorded, will be paid on February 15, 2018.
5. On December 31, 2017, the company completed the work on a contract for an out-of-province company for $12,400 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction.
6. On July 1, 2017, the company purchased a new hauling van. Depreciation for July to December 2017, estimated to total $3,200, has not been recorded.
7. As of December 31, the company owes interest of $725 on a bank loan taken out on October 1, 2017. The interest will be paid on September 30, 2018, when the loan is repaid. No interest has been recorded yet.
8. The income before any of the adjustments or income taxes was $39,000. The company’s federal income tax rate is 30 percent. Compute adjusted income based on all of the preceding information, and then determine and record income tax expense.

Required:
1. Give the adjusting journal entry required for each transaction at December 31, 2017. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Without the adjustments made in requirement 1, by what amount would Brokeback’s net income have been understated or overstated?

• $8,827 Overstated

• $8,827 Understated

Answer 1

1.

Date	General Journal	Debit	Credit
Dec. 31	Insurance expense ($1140 x 6/36)	190
	Prepaid insurance		190
	(To record expired prepaid insurance)
Dec. 31	Supplies expense ($1450 - $570)	880
	Office Supplies		880
	(To record supplies used)
Dec. 31	Repairs and maintenance expense	980
	Accounts payable		980
	(To record repairs expense accrued)
Dec. 31	Property tax expense	2320
	Property tax payable/Accounts payable		2320
	(To record property taxes accrued)
Dec. 31	Accounts receivable	12400
	Service revenue		12400
	(To record revenue earned but not received)
Dec. 31	Depreciation expense	3200
	Accumulated depreciation-equipment		3200
	(To record depreciation on hauling van)
Dec. 31	Interest expense	725
	Interest payable		725
	(To record interest accrued on bank loan)
Dec. 31	Income tax expense	12932
	Income tax payable		12932
	(To record income taxes payable)

2. Answer: $8,827 Overstated

Working:

Income before adjustments or income taxes	39000
Adjustments:
Insurance expense	-190
Supplies expense	-880
Repairs and maintenance expense	-980
Property tax expense	-2320
Service revenue	12400
Depreciation expense	-3200
Interest expense	-725
Net income before income tax	43105
Income tax expense (30% x $43105)	-12932
Net income	30173

Overstatement of net income = $39000 - $30173 = $8827