Exercise 1:
Delta Corporation has gathered the following information so year-end adjustments can be made:
(A) The company had $4,000 of office supplies on hand on January 1, 2020, purchased $6,300
of supplies during the year, and had $1,200 of supplies were on hand on December 31, 2020.
(B) The company sold $3,500 of gift cards during the year. By December 31, 2020, $1,800 of
those gift cards had been redeemed for services.
(C) The company pays employees every Friday for the hours they work during the week
(Monday – Friday). The company’s weekly payroll is $37,500. The last day of the year
(12/31/2020) was on Thursday.
(D) The company performed services totaling $6,000 on December 29, 30, and 31. The
customers had not been billed as of December 31, 2020.
(E) The company reported $175,000 in revenue and expenses of $80,000 for the year ended
December 31, 2020. The company pays a 28% income tax rate.
Required:
Assume the year-end adjustments above were not made prior to the preparation of the
December 31, 2020 financial statements. Determine the accounts that would be incorrectly
reported and indicate whether each account would be over- or understated and by how much.
Adjustment (A) has been completed on the answer sheet as an example.
Account
Amount
Overstated/Understated
(A)
Supplies Expense
$9,100
Understated
Supplies
9,100
Overstated
(B)
Unearned Revenue
$1,700
Overstated
Revenue
$1,700
Understated
(C)
Wage Expense
$7,500
Overstated
Wage Payable
$7,500
Overstated
(D)
Account Receivable
$6,000
Revenue
$6,000
Income Tax Expense
Income Tax Payable