Question

The following data relate to the accounts of LIK Cooperation. Prepare the necessary adjusting journal entries indicated by each item for the year ended December 31, 2018.
A. A four-year insurance policy was purchased on April 1, 2018. The $96,000 insurance premium was fulaid on that date and a debit to prepaid insurance was recorded.
B. Unpaid salaries at year-end amount to $200,550.
C. Pruitt Corp. rents out some of its office space to Alliance Corp at $2,400 per month. On November 1, 2018, Pruitt Corp. recorded a credit to Rent Revenue for receipt of a rent payment of $7,200 from Alliance Corp. to cover rent from November 1, 2018 to January 31, 2019.
D. Pruitt Corporation holds bonds of another corporation. The bonds were purchased by Pruitt on June 30, 2018. Interest in the amount of $1,100 is received each year every June 30th.
1. Prepare any necessary adjusting entries on December 31, 2018.
2. Prepare the journal entry to record the receipt of interest on June 30, 2019.

Answer 1

Answer:

See the entries for (1) and (2) below.

Explanation:

1. Prepare any necessary adjusting entries on December 31, 2018.

SN    Details                                                 Dr ($)              Cr ($)    

A.      Insurance expenses (W. 1)                18,000

        Prepaid Insurance                                                    18,000

       (To record insurance expenses for 2018.)                              

B.      Salaries expenses                          200,550

         Accrued expenses - Salaries                              200,550

         (To record unpaid salaries).                                                      

C.      Rent revenue                                      2,400

         Advance revenue - Rent                                         2,400

        (To record liability for rent received for Jan. 31, 2019)              

D.      Accrued interest income (W.2)            550

         Interest income                                                           550

        (To record accrued interest income for 2018).                        

2. Prepare the journal entry to record the receipt of interest on June 30, 2019.

SN    Details                                                 Dr ($)              Cr ($)    

A.      Cash                                                     1,100

         Interest income                                                          550

         Accrued interest income (W.2)                                 550

       (To record the receipt of interest income.)                            

Workings:

W.1. Insurance expenses for 2018 (9 months: April 1 - December 31 = $96,000 * [9 months /(4 years * 12 months) = $18,000

W.1 Accrued interest revenue (July 1 to December 31) = $1,100 * (6 months / 12 months) = $550