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5 April, 20:41

Give the adjusting journal entry required for each item at December 31, 2018. 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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  1. 5 April, 22:50
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    The adjusting entries are shown below:

    a. Insurance expense A/c Dr $210

    To Prepaid insurance A/c $210

    (Being the insurance expense is recorded)

    The computation is shown below:

    = $840 * 6 months : 24 months

    = $210

    b. Supplies expense A/c Dr $600

    To Supplies A/c $600

    (Being supplies account is adjusted)

    The supplies expense is computed below

    = Supplies unadjusted balance - supplies on hand

    = $1,000 - $400

    = $600

    c. Repairs and Maintenance expense A/c Dr $900

    To Accrued Liabilities A/c $900

    (Being the repairs and maintenance expense is recorded)

    d. Accounts Receivable A/c Dr $8,450

    To Service revenue A/c $8,450

    (Being the contract completion is recorded)

    e. Depreciation expense A/c Dr $3,250

    To Accumulated depreciation A/c 3,250

    (Being the depreciation expense is recorded)

    f. Interest expense A/c Dr $600

    To Interest payable A/c $600

    (Being the interest expense is recorded)

    g. Income tax expense A/c Dr $8,000

    To Income tax payable A/c $8,000

    (Being the income tax expense is recorded)

    It is computed below:

    = $40,000 * 20%

    = $8,000

    2. Now the net income overstated or understated is

    = Expenses - revenues

    where,

    Expenses = $210 + $600 + $900 + $3,250 + $600 + $8,000

    = $13,560

    And, the revenues is $8,450

    So, the net income overstated is

    = $13,560 - $8,450

    = $5,110
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