Question

Below are 4 adjusting journal entries (AJEs) that another firm, Wolverine, failed to make at year end. For each entry NOT MADE indicate the effect that each omitted AJE would have on the Wolverine’s financial statements for the year ended December 31, 2018. Use O for overstated, U for understated, and NE for no effect. Organize your answer in tabular form, using the column headings shown below and provided in the worksheet titled “Part A, Question B.”

Example 0: At year end, employees earned $4,000 in wages which will be paid on the next payroll date in January 2019. The adjusting journal entry would have been:

Compensation Expense (+E, -NI, -R/E, -SE) 4,000 Salaries Payable (+L)

4,000
If that adjustment was not made expenses and liabilities would be understated by $4,000. If

expenses are understated, then Net Income and Stockholders’ Equity will be overstated.

Income Statement Balance Sheet

Adjusting Revenue - Expense = Net Income Assets = Liabilities + Stockholders’ Equity entry
Example 0 NE U O NE U O

AJE #1: At year end, Wolverine failed to make the below journal entry to record depreciation of $1,000.

Depreciation Expense 1,000
Accumulated Depreciation 1,000

AJE #2: At year end, Wolverine failed to make a journal entry to record that Wolverine performed $3,000 in services that had been paid for in advance by the customer.

Unearned Revenue 3,000
Service Revenue 3,000

AJE #3: At year end, Wolverine failed to make a journal entry to record that Wolverine had some debt that had accrued interest of $800.

Interest Expense 800
Interest Payable 800

AJE #4: At year end, Wolverine failed to make a journal entry to recognize that a tenant owed Wolverine rent for the month of December. The rent is due to Wolverine in January of 2019.

Rent Receivable 800 Rent Revenue

800

Answer 1

The table will be created in the following manner:

Revenue	Expense	Net Income	Assets	Liabilities	Stockholders' Equity	Entry Amount in $
NE	U	O	O	NE	O	Dr. Depreciation Expense 1,000 Cr. Accumulated Depreciation 1,000
U	NE	U	NE	O	U	Dr. Unearned Revenue 3,000 Cr. Service Revenue 3,000
NE	U	O	NE	U	O	Dr. Interest Expense 800 Cr. Interest Payable 800
U	NE	U	U	NE	U	Dr. Rent Receivable 800 Cr. Rent Revenue 800

Notes

1. When AJE #1 is not booked, depreciation expense is understated resulting in net income & shareholders' equity overstated. Accumulated depreciation not booked will result in overstatement of assets.

2. If AJE #2 is not booked, revenue is understated resulting in net income & shareholders' equity understated. Also the Unearned Revenue liability will be overstated if the entry is not booked.

3. If AJE #3 is not booked, : At year end, interest expense is understated resulting in net income & shareholders' equity overstated. Liabilities in the form on interest payable will be understated too if the adjustment is not booked.

4. If AJE #4 is not booked,revenue is understated resulting in net income & shareholders' equity understated. Also the receivable assets will be understated in case the adjustment is not booked.