Question

Fes Company is making adjusting journal entries for the year ended December 31, 2018. In developing information for the adjusting journal entries, you learned the following:
a. A two-year insurance premium of $6,800 was paid on January 1, 2018, for coverage beginning on that date. As of December 31, points 2018, the unadjusted balances were $6,800 for Prepaid Insurance and $0 for Insurance Expense
b. At December 31, 2018, you obtained the following data relating to supplies:
Unadjusted balance in Supplies on December 31, 2018 $13,000
Unadjusted balance in Supplies Expense on December 31, 2018 68,000
Supplies on hand, counted on December 31, 2018 8,400
Required:
1. Of the $6,800 paid for insurance, what amount should be reported on the 2018 income statement as Insurance Expense? What amount should be reported on the December 31, 2018, balance sheet as Prepaid Insurance?
2. What amount should be reported on the 2018 income statement as Supplies Expense? What amount should be reported on t December 31, 2018, balance sheet as Supplies?
3. Indicate the accounting equation effects of the adjustment required for (a) insurance and (b) supplies.

Answer 1

Answer:

Fes Company

1. Amount to report on the 2018 income statement as Insurance Expense

= $3,400

b. Amount to report on the December 31, 2018 balance sheet as Prepaid Insurance

= $3,400

2. Amount to report on the income statement as Supplies Expense

= $72,600

b. Amount to report on the balance sheet as Supplies = $8,400

3. The accounting equation effects of the adjustment for:

a) Insurance

Assets (Prepaid Insurance -$3,400) = Liabilities + Equity (Retained Earnings -$3,400 as Insurance Expense)

b) Supplies

Assets (Supplies - $4,600) = Liabilities + Equity (Retained Earnings -$4,600 in addition to Supplies Expense)

Explanation:

Adjusting Journal Entries:

a.

Debit Insurance Expense $3,400

Credit Prepaid Insurance $3,400

To adjust for expense for the year.

b.

Debit Supplies Expense $4,600

Credit Supplies $4,600

To adjust for used supplies.

Workings:

Supplies

Dec. 31, 2018 Balance   $13,000

Supplies on hand              8,400

Supplies used                 $4,600

Dec. 31 Supplies Expense Balance   $68,000

Supplies used                                       $4,600

Total supplies expense = $72,600