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Chapter Four
Challenge Exercise 1
LO: 2, 3
The ledger of Laurie Rental Agency on March 31 of the current year includes the following selected accounts
before adjusting entries have been prepared.
Debit Credit
Prepaid Insurance $ 5,400
Supplies 4,500
An analysis of the accounts shows the following.
1. The equipment depreciates $600 per month.
3. The note payable is dated January 1 and bears 12% interest.
5. The insurance policy is a two-year policy dated January 1.
Instructions :
A. Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional
accounts
are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.
Challenge Exercise 1 – Solution
(a)
1. Mar. 31 Depreciation Expense ($600 X 3) 1,800
Accumulated Depreciation—Equipment 1,800
3. 31 Interest Expense ($25,000 X 12% X 3/12) 750
Interest Payable 750
5. 31 Insurance Expense ($5,400 X 3/24) 675
Prepaid Insurance 675
B. Prepaid insurance has a balance of $4,725 ($5,400 - $675) and is reported as an asset in the balance
sheet.
Challenge Exercise 2
LO: 1,2,3,4
The income statement of Annette Co. for the month of July shows net income of $3,200 based on Service
Revenue $7,700, Salaries and Wages Expense $2,600, Supplies Expense $1,400, and Utilities Expense $500.
In reviewing the statement, you discover the following.
1. Insurance expired during July of $500 was omitted.
3. Depreciation on equipment of $250 was omitted.
5. Services provided but unrecorded totaled $700.
Instructions:
A. Prepare a correct income statement for July 2014.
(a)
ANNETTE CO.
Income Statement
For the Month Ended July 31, 2014
Revenues
Service revenue ($7,700 + $700) ...................................................... $8,400
Expenses
Salaries and Wages expense ($2,600 + $400) .................................. $3,000
(b)
Decrease in Prepaid insurance $ (500)
Increase in Supplies 300
(c)
Increase in Salaries and Wages Payable $ 400
