Question

Required Each of the following independent events requires a year-end adjusting entry. Show how each event and its related adjusting entry affect the accounting equation. Assume a December 31 closing date. The first event is recorded as an example. (Do not round intermediate calculations & Round your final answer to nearest whole dollar.)
a. Paid $6,200 cash in advance on October 1 for a one-year insurance policy.
b. Received an $5,000 cash advance for a contract to provide services in the future. The contract required a one-year commitment, starting April 1.
c. Purchased $1,900 of supplies on account. At year's end, $245 of supplies remained on hand.
d. Paid $11,280 cash in advance on August 1 for a one-year lease on office space.

Answer 1

Answer:

The effects on the accounting equation are:

Asset $-1,005 (decrease) = Liabilities $3,150 (increase) + Retained earnings $-4,155 (decrease)

The required journals are as below:

Explanation:

Accounting equation shows a company's balance sheet - in that the total assets of a company equals liabilities and equity.

Scenario (a)

Debit Prepaid insurance                                      $6,200

Credit Cash                                                           $6,200

(To record payment for one-year insurance policy)

Debit Insurance expense (0.25x$6,200)            $1,550

Credit Prepaid insurance                                     $1,550

(To record amortization of prepaid insurance - October - December)

Scenario (b)

Debit Cash                                                           $5,000

Credit Unearned revenue                                   $5,000

(To record unearned services revenue)

Debit Unearned revenue (0.75 x $5,000)         $3,750

Credit Sales revenue                                          $3,750

(To record amortization of unearned services revenue)

Scenario (c)

Debit Supplies                                                    $1,900

Credit Accounts payable                                   $1,900

(To record purchase of supplies on account)

Debit Supplies expenses ($1,900 - $245)        $1,655

Credit Supplies                                                   $1,655

(To record amortization of supplies)

Scenario (d)

Debit Prepaid lease                                         $11,280

Credit Cash                                                       $11,280

(Payment of office space in advance)

Debit Rent paid (5/12 x $11,280)                       $4,700

Credit Prepaid lease                                         $4,700

(Amortization of prepaid office space - August - December)

The required accounting equation using the formula: Assets = Liabilities + Equity

Cash -$6,200 + $5,000 - $11,280 + Prepayment $6,200 - $1,550 + $11,280 - $4700 + Supplies $1,900 - $1,655 = Unearned revenue $5,000 - $3,750 + Accounts payable $1,900

Cash $-12,480 + Prepayment $11,230 + Supplies $245 = Unearned revenue $1,250 + Accounts payable $1,900 + Retained earnings $-4,155

Asset $-1,005 (decrease) = Liabilities $3,150 (increase) + Retained earnings $-4,155 (decrease)