Question

The information necessary for preparing the 2018 year-end adjusting entries for Vito’s Pizza Parlor appears below. Vito’s fiscal year-end is December 31.
On July 1, 2018, purchased $10,000 of IBM Corporation bonds at face value. The bonds pay interest twice a year on January 1 andJuly 1. The annual interest rate is 12%.
b. Vito’s depreciable equipment has a cost of $30,000, a five-year life, and no salvage value. The equipment was purchased in 2016.The straight-line depreciation method is used.
c. On November 1, 2018, the bar area was leased to Jack Donaldson for one year. Vito’s received $6,300 representing the first sixmonths’ rent and credited deferred rent revenue.
d. On April 1, 2018, the company paid $2,280 for a two-year fire and liability insurance policy and debited insurance expense.
e. On October 1, 2018, the company borrowed $19,000 from a local bank and signed a note. Principal and interest at 10% will be paidon September 30, 2019.
f. At year-end, there is a $1,600 debit balance in the supplies (asset) account. Only $690 of supplies remain on hand.
Required:
1. Prepare the necessary adjusting journal entries at December 31, 2018.
2. Determine the amount by which net income would be misstated if Vito's failed to record these adjusting entries. (Ignore income tax expense.

Answer 1

Answer:

Explanation:

a. Dr Interest receivable 600

        Cr Interest revenue 600

[0.12*10,000/2]

b. Dr Depreciation expense 6,000

         Cr Accumulated depriciation 6,000

[30,000/5]

c. Dr Deferred rent revenue 2,100

          Cr Rent revenue 2,100

d. Dr Prepaid insurance 1,425

        Cr Insurance expense 1,425

[2,280*15/24 = 1,425]

e. Dr Interest expense 475

        Cr Interest payable 475

[19,000*0.1*3/12]

f. Dr Supplies expense 910

         Cr Supplies 910

[1,600-690]

2)

Understatement of interest revenue (600)

Understatement of rent revenue (2100)

Overstatement of insurance expense (1425)

Understatement of depreciation expense 6000

Understatement of interest expense 475

Understatement of Supplies expense 910

Subtotal = 3260 of overstatement