Question

The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31, 2018:

Cash	$25,490
Equity Investments (trading)	$60,000
Accounts Receivable	$69,000
Allowance for Doubtful Accounts		$500
Inventory	$54,720
Prepaid Rent	$36,000
Plant Assets	$160,000
Accumulated Depreciation-Plant Assets		$14,740
Accounts Payable		$11,370
Bonds Payable		$90,000
Common Stock		$170,000
Retained Earnings		$97,180
Sales Revenue		$214,800
Cost of Goods Sold	$154,400
Freight-Out	$11,000
Salaries and Wages Expense	$32,000
Interest Expense	$2,040
Rent Revenue		$21,600
Miscellaneous Expense	$890
Insurance Expense	$14,650
	$620,190	$620,190

Additional Data:

The balance in the Insurance Expense account contains the premium costs of three policies:

Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2017;

Policy 2, original cost of $10,800, 3-yr. term, taken out on Oct. 1, 2018;

Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2018.

On September 30, 2018, Alt received $21,600 rent from its lessee for an eighteen month lease beginning on that date.

The regular rate of depreciation is 8% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2017, the balance of the Plant and Equipment account was $220,000.

On December 28, 2018, the bookkeeper incorrectly credited Sales Revenue for a receipt on account in the amount of $20,000.

At December 31, 2018, salaries and wages accrued but unpaid were $4,200.

Alt estimates that 2% of gross accounts receivable will become uncollectible.

On August 1, 2018, Alt purchased, as a short-term investment, 60 $1,000, 5% bonds of Allen Corp. at par. The bonds mature on August 1, 2019. Interest payment dates are July 31 and January 31.

On April 30, 2018, Alt rented a warehouse for $3,000 per month, paying $36,000 in advance.

Instructions

Record the necessary correcting and adjusting entries.

Indicate which of the adjusting entries may be reversed at the beginning of the next accounting period.

Answer 1

1.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2018
1	Prepaid insurance	9900
	Insurance expense		9900
	(To record prepaid insurance)
2	Rent revenue ($21600 x 15/18)	18000
	Unearned rent revenue		18000
	(To record unearned rent revenue)
3	Depreciation expense [(160000 x 8%)+($60000 x 4%)]	15200
	Accumulated depreciation-Plant assets		15200
	(To record depreciation on plant assets)
4	Sales revenue	20000
	Unearned revenue		20000
	(To record unearned revenue)
5	Salaries and wages expense	4200
	Salaries and wages payable		4200
	(To record salaries and wages accrued)
6	Bad debt expense [($69000 x 2%) - $500]	880
	Allowance for doubtful accounts		880
	(To record bad debt expense)
7	Interest receivable	1250
	Interest revenue ($60000 x 5% x 5/12)		1250
	(To record interest accrued on investment)
8	Rent expense ($3000 x 8)	24000
	Prepaid rent		24000
	(To record rent expense)

Working:

Policy	Insurance expense	Prepaid insurance	Balance in insurance expense
1	2550	0	2550
2	10800	9900	900
			($10800 x 3/36)
3	1300	0	1300
	14650	9900	4750

2. Adjusting entries for accrued revenues and expenses may be reversed at the beginning of the next accounting period. Adjusting entries numbered 1, 2, 4, 5, and 7 may be reversed. Entries 3 and 6 which pertain to depreciation and allowance respectively are never reversed. Entry 8 is also not reversed since the asset method was used for recording the same and not the expense method.