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This Discusses Adjusting Entries for an Advertising Agency

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You are an accountant working for an advertising agency and you are working on the adjusting entries for the year ending December 31st. You notice that the prepaid insurance account is too high, because the policy has now been used up based on time. You paid for another year on January 1st, so the December 31 balance did not require any adjusting. Discuss whether this is accurate and what the effect will be of this behavior on the financial statements.

1. How are you going to correct last year's balance? Debit? Credit?

2. When you prepaid an expense and the prepaid expires on a certain month the accountant
must credit the account when the prepaid expires. In this case the prepaid expired December 31
the accountant must credit the expense at the end of the fiscal period.

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This is not accurate. Accounts must be adjusted at year-end. It does not matter that the amounts were the same. At year-end, prepaid accounts need to be adjusted for the expense that has been used, throughout the year. The financial statements will be misstated, even though the amounts are the same. Insurance expense will be too low - which will make expenses too low, which will in turn make net income too high.

1. You are going to correct last year's balance by the following:

Solution Summary

The solution provides a detailed breakdown of how to handle the exercise, including giving all necessary adjustments and entries.

See Also This Related BrainMass Solution

P5-3A Moulton Department Store: prepare adjusting entries and financial statements

See attached file.
Chapter 5: P5-3B Page 224

P5-3A Moulton Department Store is located in midtown Metropolis. During the past several
years, net income has been declining because of suburban shopping centers. At the end of the
company's fiscal year on November 30, 2006, the following accounts appeared in two of its trial

Unadjusted Adjusted Unadjusted Adjusted
Accounts Payable $ 47,310 $ 47,310 Interest Revenue $ 5,000 $ 5,000
Accounts Receivable 11,770 11,770 Merchandise Inventory 36,200 36,200
Accumulated Depr.-Delivery Equip. 15,680 18,816 Notes Payable 46,000 46,000
Accumulated Depr.-Store Equip. 32,300 41,800 Prepaid Insurance 13,500 3,000
Cash 8,000 8,000 Property Tax Expense 3,500
Common Stock 60,000 60,000 Property Taxes Payable 3,500
Cost of Goods Sold 633,220 633,220 Rent Expense 19,000 19,000
Delivery Expense 8,200 8,200 Retained Earnings 24,200 24,200
Delivery Equipment 57,000 57,000 Salaries Expense 120,000 120,000
Depr. Expense-Delivery Equip. 3,136 Sales 850,000 850,000
Depr. Expense-Store Equip. 9,500 Sales Commissions Expense 8,000 10,500
Dividends 12,000 12,000 Sales Commissions Payable 2,500
Insurance Expense 10,500 Sales Returns and Allowances 10,000 10,000
Interest Expense 8,000 8,000 Store Equip. 125,000 125,000
Utilities Expense 10,600 10,600
(c) Gross profit $3,850

Prepare financial statements
and adjusting and closing
(SO 4, 5) SEE PAGE 201-203

Analysis reveals the following additional data.

1. Salaries expense is 75% selling and 25% administrative.
2. Insurance expense is 50% selling and 50% administrative.
Problems: Set A 225
3. Rent expense, utilities expense, and property tax expense are administrative expenses.
4. Notes payable are due in 2009.

(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified
balance sheet.
(b) Journalize the adjusting entries that were made.
(c) Journalize the closing entries that are necessary.

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