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Adjusting and Reversing Entries

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The following list of accounts and their balances represents the unadjusted trial balance of Bly Company at December 31, 2007:

Cash $ 30,890

Short-term Investment 60,000

Accounts Receivable 69,000

Allowance for Doubtful Accounts $ 500

Merchandise Inventory 54,720

Prepaid Rent 36,000

Plant and Equipment 160,000

Accumulated Depreciation 14,740

Accounts Payable 11,370

Bonds Payable 90,000

Common Stock 170,000

Retained Earnings 97,180

Sales 214,800

Cost of Goods Sold 154,400

Transportation-Out 11,000

Salaries and Wages Expense 32,000

Interest Expense 2,040

Rent Revenue 21,600

Miscellaneous Expense 890

Insurance Expense 9,250

$620,190 $620,190

Additional Data:

1. The balance in the Insurance Expense account contains the premium costs of three policies:

Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2006;

Policy 2, original cost of $5,400, 3-yr. term, taken out on Oct. 1, 2007;

Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2007.

2. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2006, the balance of the Plant and Equipment account was $260,000.

3. On December 28, 2007, the bookkeeper incorrectly credited sales for a receipt on account in the amount of $10,000.

4. At December 31, 2007, salaries accrued but unpaid were $4,200.

5. Bly estimates that 2% of sales will become uncollectible.

6. On August 1, 2007, Bly purchased, as a short-term investment, 70 $1,000, 9% bonds of Allen Corp. at par. The bonds mature on August 1, 2008. Interest payment dates are July 31 and January 31.

Instructions

(a) Record the necessary correcting and adjusting entries.

(b) Indicate which of the adjusting entries may be reversed at the beginning of the next accounting period.

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Solution Preview

a)

1
Prepaid insurance $4,950
Insurance expense $4,950
(Being, insurance premium of Policy 2 pertaining to period after Dec 31, 2007 transferred to repaid insurance account - $5400/36*3)

Insurance premium - 1 Oct 2007 $5,400
Period of insurance 36 months
Period expired up to 31 Dec 2007 3 months ...

Solution Summary

The solution examines adjusting and reversing entries for Bly Company. The balances represented as the unadjusted trial balance.

$2.19