Question

When the accounts of Blue Inc. are examined, the adjusting data listed below are uncovered on December 31, the end of an annual fiscal period.
1. The prepaid insurance account shows a debit of $4,896, representing the cost of a 2-year fire insurance policy dated August 1 of the current year.
2. On November 1, Rent Revenue was credited for $1,650, representing revenue from a subrental for a 3-month period beginning on that date.
3. Purchase of advertising materials for $801 during the year was recorded in the Advertising Expense account. On December 31, advertising materials of $266 are on hand.
4. Interest of $802 has accrued on notes payable.
(a) The adjusting entry for each item.(b) The reversing entry for each item where appropriate.

Answer 1

Answer:

1.-

insurance expense   1,020 debit

    prepaid  insurance              1,020 credit

2.-

rent revenue   1,650 debit

            cash                          1,650 credit

cash      1,650 debit

   unearned revenue      1,650 credit

unearned revenue    1,100 debit

   rent revenue                      1,100 credit

3.-

advertizing expense    535 debit

    advertizing supplies          535 credit

4.-

interest expense     802 debit

      interest payable         802 credit

Explanation:

2-years of 4,896 AKA 24 months

months outstanding during the year: August 1st to December 31th: 5 months

4,896 x 5/24 = 1,020

purchases of advertising materials  801

materials on hand at year-end       (266)  

advertising expense                         535

we must reverse the entry as the rent revenue wasn't accrued yet we have unearned revenue and at year-end we adjust for the earned protion which is 2 months: 1,650 x 2/3 = 1,100

as the inerest are accrued it means we aren't paying them at year-end