Question

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

On January 1 of the current year, the company purchased a new hauling van at a cash cost of $28,000. Depreciation estimated at $3,500 for the year has not been recorded for the current year.

During the current year, office supplies amounting to $1,000 were purchased for cash and debited in full to Supplies. At the end of last year, the count of supplies remaining on hand was $500. The inventory of supplies counted on hand at the end of the current year was $150.

On December 31 of the current year, Lanie’s Garage completed repairs on one of the company’s trucks at a cost of $2,600; the amount is not yet recorded by Martin and by agreement will be paid during January of next year.

On December 31 of the current year, property taxes on land owned during the current year were estimated at $1,800. The taxes have not been recorded and will be paid in the next year when billed.

On December 31 of the current year, the company completed towing service for an out-of-state company for $4,000 payable by the customer within 30 days. No cash has been collected, and no journal entry has been made for this transaction.

On July 1 of the current year, a three-year insurance premium on equipment in the amount of $900 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1 of the current year.

On October 1 of the current year, the company borrowed $13,000 from the local bank on a one-year, 12 percent note payable. The principal plus interest is payable at the end of 12 months.

The income before any of the adjustments or income taxes was $30,000. The company’s federal income tax rate is 30 percent. (Hint: Compute adjusted pre-tax income based on (a) through (g) to determine income tax expense.)

Required:

Indicate whether each transaction relates to a deferred revenue, deferred expense, accrued revenue, or accrued expense.

Prepare the adjusting entry required for each transaction at December 31 of the current year.

Answer 1

	Transactions	Debit	Credit
1	Deferred Expense
	Depreciation Expense	$3,500
	To Acummulated Depreciation		$3,500
	(Being depreciation recorded on van)
2	Deferred Expense
	Supplies Expense	$1,350
	To Supplies		$1,350
	(500+1000-150)
	(Being adjustment made to supplies)
3	Accrued Expense
	Repair Expense	$2,600
	To Accounts Payable		$2,600
	(Being repairs undertaken on truck on account)
4	Accrued Expense
	Property Taxes	$1,800
	To Property taxes payable		$1,800
	(Being property taxes on land payable)
5	Accrued Revenue
	Accounts Receivable	$4,000
	To Service Revenue		$4,000
	(Being towing service provided on account)
6	Deferred Expense
	Insurance Expense	$150
	To Prepaid Insurance		$150
	(900/36)*6
	(Being insurance premium paid)
7	Accrued Expense
	Interest Expense	$390
	To Interest payable		$390
	(13000*12%*3/12)
	(Being interest on loan payable)
8	Accrued Expense
	Income Tax Expense	$7,263
	To Income tax Payable		$7,263
	(Being Income tax expense recorded)
	Income Before Tax	30000	100%
	Less : Adjustment of Expense/Revenue
	Interest Expense	($390)
	Insurance	($150)
	Service Revenue	$4,000
	Property Taxes	($1,800)
	Repair Expense	($2,600)
	Supplies Expense	($1,350)
	Depreciation	($3,500)
	Income before tax and after adjustments	24210
	Tax @ 30%	7263
		16947