Clint Stillmore operates a private investigating agency called Stillmore Investigations. Some clients pay in advance for services; others are billed after services have been performed. Advance payments are credited to an account entitled Unearned Retainer Fees. Adjusting entries are performed on a monthly basis. An unadjusted trial balance dated December 31, 2011, follows. (Bear in mind that adjusting entries have already been made for the first 11 months of 2011, but not for December.)

Other Data

1. Accrued but unrecorded client fees earned at December 31 amount to $1,500.

2. Records show that $2,500 of cash receipts originally recorded as Unearned Retainer Fees had been earned as of December 31.

3. Office supplies on hand at December 31 amount to $110.

4. The company purchased all of its office equipment when it first began business. At that time, the equipment’s estimated useful life was six years (or 72 months).

5. On October 1, 2011, the company renewed its rental agreement paying $1,800 cash for six months’ rent in advance.

6. On March 1 of the current year, the company paid $1,080 cash to renew its 12-month insurance policy.

7. Accrued but unrecorded salaries at December 31 amount to $1,900.

8. On June 1, 2011, the company borrowed money from the bank by signing a $9,000, 8 percent, 12-month note payable. The entire note, plus 12 months’ accrued interest, is due on May 31, 2012.

9. The company’s CPA estimates that income taxes expense for the entire year is $7,500.

Instructions

a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including an explanation).

b. Prepare the company’s adjusted trial balance dated December 31, 2011.

c. Using figures from the adjusted trial balance prepared in b, compute net income for the year ended December 31, 2011.

d. How much was the company’s average monthly rent expense in January through September of 2011? Explain your answer.

e. How much was the company’s average monthly insurance expense in January and February of 2011? Explain your answer.

f. If the company purchased all of its office equipment when it first began operations, for how many months has it been in business? Explain your answer.

g. Indicate the effect of each adjusting entry prepared in part a on the major elements of the company’s income statement and balance sheet. Organize your answer in tabular form using the column headings shown. Use the symbols I for increase, D for decrease, and NE for no effect.

The answer for adjusting entry number 1 is provided as an example.

Transcribed Image Text:

Income Statement Balance Sheet Adjusting Entry Net Owners' Revenue Expenses Income NE Assets Liabilities+ Equity NE