A review of the ledger of Rolling Resort Inc. at December 31 produces the following data for the preparation of annual adjusting entries:
1. Salaries and Wages Payable, $0. There are eight salaried employees. Five employees receive a salary of $1,200 each per week, and three employees earn $800 each per week. Employees do not work weekends. All employees worked two days after the last pay period and before December 31.
2. Unearned Rent Revenue, $415,200. The company began subleasing condos in its new building on November I.
Each tenant has to make a $5,000 security deposit that is not refundable until occupancy is ended. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease:
3. Prepaid Advertising, $16,200. This balance consists of payments on two advertising contracts. The contracts provide for monthly advertising in two trade magazines. The terms of the contracts are as follows:
The first advertisement runs in the month in which the contract is signed.
4. Notes Payable, $80,000. This balance consists of a note for one year at an annual interest rate of9%, dated June I.
(a) Prepare the adjusting entries at December 31 . (Show all calculations.)
(b) Rolling Resort is preparing for a meeting with potential investors. What is the net effect of the adjusting entries on net income? Explain why Rolling Resort's potential investors should be willing to wait for Rolling Resort to complete its year-end adjustment process before deciding whether or not to invest in the company.