Question

When the accounts of Daniel Barenboim 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 $5,280, 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 $1,800, representing revenue from a subrental for a 3-month period beginning on that date.
3. Purchase of advertising materials for $800 during the year was recorded in the Advertising Expense account. On December 31, advertising materials of $290 are on hand.
4. Interest of $770 has accrued on notes payable.
Instructions
Prepare the following in general journal form.
a. The adjusting entry for each item.
b. The reversing entry for each item where appropriate.

Answer 1

Answer:

1. The prepaid insurance account shows a debit of $5,280, representing the cost of a 2-year fire insurance policy dated August 1 of the current year.

• Dr Insurance expense 1,100 (= $5,280 x 5/24 months)
•     Cr Prepaid insurance 1,100

Five months of insurance expense must be recorded for August - December.

2. On November 1, Rent Revenue was credited for $1,800, representing revenue from a subrental for a 3-month period beginning on that date.

• Dr Rent revenue 600 (= $1,800 x 1/3 months)
•     Cr Unearned revenue 600

Rent revenue corresponding to January cannot be recorded as earned yet, so it must be recorded as unearned revenue (liability).

3. Purchase of advertising materials for $800 during the year was recorded in the Advertising Expense account. On December 31, advertising materials of $290 are on hand.

• Dr Advertising supplies (or materials) 290
•     Cr Advertising expense 290

Unused advertising material is considered an asset that can be used during the next period, the same as any other supplies.

4. Interest of $770 has accrued on notes payable.

• Dr Interest expense 770
•     Cr Interest payable on notes payable 770

Accrued interest must be recorded as an expense during the period in which it occurs (accrual principle).