Brokeback Towing Company is at the end of its accounting year, December 31, 2015
ID: 2613561 • Letter: B
Question
Brokeback Towing Company is at the end of its accounting year, December 31, 2015. The following data that must be considered were developed from the company’s records and related documents:
On July 1, 2015, a two-year insurance premium on equipment in the amount of $648 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.
At the end of 2015, the unadjusted balance in the Supplies account was $1,000. A physical count of supplies on December 31, 2015, indicated supplies costing $320 were still on hand.
On December 31, 2015, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $820. The amount is not yet recorded. It will be paid during January 2016.
On December 31, 2015, the company completed a contract for an out-of-state company for $8,050 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, 2015, the company purchased a new hauling van. Depreciation for July–December 2015, estimated to total $2,850, has not been recorded.
As of December 31, the company owes interest of $520 on a bank loan taken out on October 1, 2015. The interest will be paid when the loan is repaid on September 30, 2016. No interest has been recorded yet.
Assume the income after the preceding adjustments but before income taxes was $32,000. The company’s federal income tax rate is 25%. Compute and record income tax expense
Give the adjusting journal entry required for each item at December 31, 2015. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Brokeback's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.
a.On July 1, 2015, a two-year insurance premium on equipment in the amount of $648 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.
b.At the end of 2015, the unadjusted balance in the Supplies account was $1,000. A physical count of supplies on December 31, 2015, indicated supplies costing $320 were still on hand.
c.On December 31, 2015, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $820. The amount is not yet recorded. It will be paid during January 2016.
d.On December 31, 2015, the company completed a contract for an out-of-state company for $8,050 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction.
e.On July 1, 2015, the company purchased a new hauling van. Depreciation for July–December 2015, estimated to total $2,850, has not been recorded.
f.As of December 31, the company owes interest of $520 on a bank loan taken out on October 1, 2015. The interest will be paid when the loan is repaid on September 30, 2016. No interest has been recorded yet.
g.Assume the income after the preceding adjustments but before income taxes was $32,000. The company’s federal income tax rate is 25%. Compute and record income tax expense
Required: 1.Give the adjusting journal entry required for each item at December 31, 2015. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
2.If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Brokeback's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.
Explanation / Answer
Answers
Date
General Journal
Debit
Credit
a. 31 Dec 2015
Insurance expense
$ 162.00
Prepaid Insurance
$ 162.00
(insurance expired recorded: 648 x 6/24): 648 is paid for 24 months, Jul to Dec = 6 months only
b. 31 Dec 2015
Supplies expense
$ 680.00
Supplies
$ 680.00
(supplies used recorded: Unadjusted balance (-) balance in hand)
c. 31 Dec 2015
Repair expenses
$ 820.00
Expenses payable
$ 820.00
(expenses outstanding recorded)
d. 31 Dec 2015
Accounts receivables
$ 8,050.00
Service Revenue
$ 8,050.00
(revenue earned recorded)
e. 31 Dec 2015
Depreciation expense
$ 2,850.00
Accumulated Depreciation
$ 2,850.00
(depreciation expense recorded)
f. 31 Dec 2015
Interest expense
$ 520.00
Interest payable
$ 520.00
(Interest due to be paid)
g. 31 Dec 2015
Income Tax expense
$ 8,000.00
Income Tax Payable
$ 8,000.00
(income tax recorded on $32000 income)
Working
---When adjustments are recorded:
Net Income after adjustments
$ 32,000.00
Income tax at 25%
$ 8,000.00
Net Income after Tax
$ 24,000.00
---Had the adjustments were not recorded:
Net Income after adjustments
$ 32,000.00
Add: Insurance expense not recorded
$ 162.00
Add: Supplies expense not recorded
$ 680.00
Add: rent Expense not recorded
$ 820.00
Less: Service revenue not recorded
$ 8,050.00
Add: Depreciation expense not recorded
$ 2,850.00
Add: Interest expense not recorded
$ 520.00
$ (3,018.00)
Net Income before tax would have been
$ 28,982.00
Income tax expense at 25%
$ 7,245.50
Net Income after Tax
$ 21,736.50
---Answer
Net Income before Tax
Net Income after Tax
When adjustments are made
$ 32,000.00
$ 24,000.00
If adjustments were not made
$ 28,982.00
$ 21,736.50
Difference and Answer
$ 3,018.00 - Net Income before tax would have been understated by $ 3018
$ 2,263.50 - Net Income after tax would have been understated by $ 2263.50
Date
General Journal
Debit
Credit
a. 31 Dec 2015
Insurance expense
$ 162.00
Prepaid Insurance
$ 162.00
(insurance expired recorded: 648 x 6/24): 648 is paid for 24 months, Jul to Dec = 6 months only
b. 31 Dec 2015
Supplies expense
$ 680.00
Supplies
$ 680.00
(supplies used recorded: Unadjusted balance (-) balance in hand)
c. 31 Dec 2015
Repair expenses
$ 820.00
Expenses payable
$ 820.00
(expenses outstanding recorded)
d. 31 Dec 2015
Accounts receivables
$ 8,050.00
Service Revenue
$ 8,050.00
(revenue earned recorded)
e. 31 Dec 2015
Depreciation expense
$ 2,850.00
Accumulated Depreciation
$ 2,850.00
(depreciation expense recorded)
f. 31 Dec 2015
Interest expense
$ 520.00
Interest payable
$ 520.00
(Interest due to be paid)
g. 31 Dec 2015
Income Tax expense
$ 8,000.00
Income Tax Payable
$ 8,000.00
(income tax recorded on $32000 income)
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