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 $900 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 $1,250. A physical count of supplies on December 31, 2017, indicated supplies costing $450 were still on hand.
3. On December 31, 2017, 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 2018.
4. In December, the 2017 property tax bill for $2,000 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 $10,400 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 $3,000, has not been recorded.
7. As of December 31, the company owes interest of $625 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 $35,000. 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.

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?

Answer 1

Answer-

1
Transaction	Account Title and Explanation	Debit	Credit
a	Insurance expense	150		=900*6/36
	Prepaid Insurance		150
	(To record insurance expenses)
b	Supplies expense	800		=1250-450
	Supplies		800
	(To record the supplies used)
c	Repairs and Maintenance expense	900
	Accrued Liabilities/Accounts Payable		900
	(To record the liability of repair expenses)
d	Property tax expenses	2,000
	Property tax payable		2,000
	(To record the liability of tax expense)
e	Accounts Receivable	10,400
	Service Revenue		10,400
	(To record the revenue earned)
f	Depreciation expense	3,000
	Accumulated depreciation		3,000
	(To record the depreciation charged)
g	Interest expense	625
	Interest payable		625
	(To record the interest expenses)
h	Income tax expense	10,500		=35000*30%
	Income tax payable		10,500
	(To record income tax expenses)
2
	Brokeback's net income would be overstated by	2,925		=(150+800+900+2000+3000+625)-$10,400