In each of the following transactions (a) through (c) for Romney\'s Marketing Co

Question

In each of the following transactions (a) through (c) for Romney's Marketing Company, use the three-step process given below to record the adjusting entry at year-end December 31, 2015. Indicate the amounts and direction of effects of the adjusting entry on the elements of the balance sheet and income statement. Indicate + for increase, - for decrease. Collected $1,600 rent for the period December 1, 2015, to April 1, 2016, which was credited to Unearned Rent Revenue on December 1, 2015. Purchased a machine for $37,000 cash on January 1, 2011. The company estimates annual depreciation at $4,300. Paid $4,100 for a two-year insurance premium on July 1, 2015; debited Prepaid Insurance for that amount.

Explanation / Answer

Stockholder's Equity

Explaination :

a) Unearned rent received is treated as a liablity in Balance sheet initially after 1 month liablity is debited. And Rent services provided revenue is added in Income statement. Effect of the same is reflected as Increase in Net Income and Stockholder Equity. 1600/4 = 400 per month

b) Depreciation reduces the Asset in Balancesheet. and It is charged as expense in Income Statement.

c) Prepaid Insurance was initially debited. So adjusting entry at end of the year , company will amortize prepaid Insurance based on period = 4100*(6/24) = 1025. Insurance expenses debit and prepaid insurance credit.

Balance Sheet Income Statement Transaction Assets Liablities

Stockholder's Equity

Revenues Expenses Net Income a. 0 -400 +400 +400 0 +400 b. -4300 0 -4300 0 +4300 -4300 c. -1025 0 -1025 0 +1025 -1025

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