Service Pro Corp (SPC) is preparing adjustments for its September 30 year-end. F
ID: 2411160 • Letter: S
Question
Service Pro Corp (SPC) is preparing adjustments for its September 30 year-end. For the following transactions and events, show the September 30 adjusting entries that SPC would make. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
a. Prepaid Insurance shows a balance of zero at September 30, but Insurance Expense shows a debit balance of $2,448, representing the cost of a three-year fire insurance policy that was purchased on September 1 of the current year.
b. On August 31 of this year, Cash was debited and Service Revenue was credited for $1,590. The $1,590 related to fees for a three-month period beginning September 1 of the current year.
c. The company’s income tax rate is 35%. After making the above adjustments, SPC's net income before tax is $10,000. No income tax has been paid or recorded.
Transaction General Journal Debit Credit
Explanation / Answer
Answer
Insurance expense has been debited by $ 2,448 representing a 3 year (36 months) insurance policy purchased on Sept 1.
Since only 1 month has expired from 1 Sept to 30 Sept, Insurance expenses should have a balance of insurance policy amount equivalent to 1 month’s amount.
$ 2,448 = for 36 months.
For 1 month = 2448/36 = $ 68 = Insurance expired during September.
Unexpired insurance for 35 remaining months = 2448 – 68 = $ 2,380 = Prepaid Insurance balance.
Adjusting entry:
Date
Accounts title
Debit
Credit
Working/Explanation
30-Sep
Prepaid Insurance
$ 2,380.00
Unexpired insurance for remaining 35 months
Insurance expense
$ 2,380.00
Excess Insurance expense debited now credited.
Service revenue was credited by $1,590 which represent 3 months period from 1 Sept to 30 Nov.
Months expired till 30 Sept = 1 month only.
Hence, only 1 month revenue have to be recognised.
One month revenue = 1590 / 3 months = $ 530
Unearned Revenue balance = $ 1590 - $ 530 = $ 1,060 for remaining 2 months
Adjusting Entry:
Date
Accounts title
Debit
Credit
Working/Explanation
30-Sep
Service Revenue
$ 1,060.00
Excess Service revenue credited now debited.
Unearned revenue
$ 1,060.00
Unearned revenue balance for remaining 2 months
Net Income before Tax = $ 10,000
Tax Rate = 35%
Income Tax expense = 10000 x 35% = $ 3,500
Adjusting Entry:
Date
Accounts title
Debit
Credit
Working/Explanation
30-Sep
Income Tax expense
$ 3,500.00
Expenses recorded
Income Taxes payable
$ 3,500.00
Liabilities recognised as taxes not yet paid
Date
Accounts title
Debit
Credit
Working/Explanation
30-Sep
Prepaid Insurance
$ 2,380.00
Unexpired insurance for remaining 35 months
Insurance expense
$ 2,380.00
Excess Insurance expense debited now credited.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.