Burke Bros. records adjusting entries on an annual basis. The company has the following information available on accruals that must be recorded for the year ended December 31, 2017:
1. Burke Bros. has a $40,000, 5.5% note payable. Interest is payable on a monthly basis on the first of the month. Assume that Burke Bros. made the correct interest payment on December 1, 2017, and January 1, 2018.
2. Burke Bros. pays its employees a total of $7,500 every second Monday for work completed the two preceding weeks. Employees work a five-day week, Monday to Friday, and are paid for all statutory holidays. December 31, 2017, is a Sunday. Employees were paid on Monday, December 18, 2017, and will be paid again on Tuesday, January 2, 2018.
3. Burke Bros. owns drilling equipment, which it rents to customers for $1,200 per day. On December 31, 2017, a customer has had the equipment for 10 days. Burke Bros. billed the customer for 15 days when the equipment was returned on January 5, 2018. The customer paid the full amount that day.
4. Burke Bros. received the $290 December telephone bill on January 5, 2018. The bill was paid on January 9, 2018.
5. Burke Bros. has a $10,000, 7% note receivable with a customer. Interest is receivable every six months on October 31 and April 30. Assume the customer makes the correct payment to Burke Bros. on October 31, 2017, and April 30, 2018.
Instructions
For each of the above items, do the following:
(a) Prepare the adjusting journal entry required on December 31, 2017.
(b) Prepare the journal entry to record the related cash transaction in 2018. Assume all payments and receipts are made as indicated.
TAKING IT FURTHER
Indicate which elements in the financial statements (assets, liabilities, owner's equity, revenue, expenses, and profit) would be either understated or overstated at December 31, 2017, if the accounts were not adjusted.