Faraday Electronic Service repairs stereos and DVD players. During a recent year, Faraday engaged in the following activities:
a. On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance.
b. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid.
c. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31.
d. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for three months’ sponsorship—November 2011, December 2011, and January 2012—in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, two months’ advertising has been used and one month remains unused.
Required:
1. Prepare adjusting entries at December 31 for these four activities.
2. What would be the effect on expenses if the adjusting entries were not made?