Brokeback Towing Company is at the end of its accounting year, December 31, 2021. The following data that must be considered were developed from the company’s records and related documents: On July 1, 2021, a two-year insurance premium on equipment in the amount of $600 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1. At the end of 2021, the unadjusted balance in the Supplies account was $1,000. A physical count of supplies on December 31, 2021, indicated supplies costing $300 were still on hand. On December 31, 2021, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $800. The amount is not yet recorded. It will be paid during January 2022. On December 31, 2021, the company completed a contract for an out-of-state company for $7,950 payable by the customer within 30 days. No cash has been collected and no journal entry has been made for this transaction. On July 1, 2021, the company purchased a new hauling van. Depreciation for July–December 2021, estimated to total $2,750, has not been recorded. As of December 31, the company owes interest of $500 on a bank loan taken out on October 1, 2021. The interest will be paid when the loan is repaid on September 30, 2022. No interest has been recorded yet. Assume the income after the preceding adjustments but before income taxes was $30,000. The company’s federal income tax rate is 30%. Compute and record income tax expense. Required: Give the adjusting journal entry required for each item at December 31, 2021. If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Brokeback's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
Brokeback Towing Company is at the end of its accounting year, December 31, 2021. The following data that must be considered were developed from the company’s records and related documents:
- On July 1, 2021, a two-year insurance premium on equipment in the amount of $600 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.
- At the end of 2021, the unadjusted balance in the Supplies account was $1,000. A physical count of supplies on December 31, 2021, indicated supplies costing $300 were still on hand.
- On December 31, 2021, YY’s Garage completed repairs on one of Brokeback’s trucks at a cost of $800. The amount is not yet recorded. It will be paid during January 2022.
- On December 31, 2021, the company completed a contract for an out-of-state company for $7,950 payable by the customer within 30 days. No cash has been collected and no
journal entry has been made for this transaction. - On July 1, 2021, the company purchased a new hauling van.
Depreciation for July–December 2021, estimated to total $2,750, has not been recorded. - As of December 31, the company owes interest of $500 on a bank loan taken out on October 1, 2021. The interest will be paid when the loan is repaid on September 30, 2022. No interest has been recorded yet.
- Assume the income after the preceding adjustments but before income taxes was $30,000. The company’s federal income tax rate is 30%. Compute and record income tax expense.
Required:
- Give the
adjusting journal entry required for each item at December 31, 2021. - If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Brokeback's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.
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