Sparty Corporation adjusts its accounts only at year-end. The following information is available as a source for preparing adjusting entries at December 31, 2019.

1. During July 2019, Sparty sold 100 one-year subscriptions for their monthly publication at $72 each, with the subscriptions starting October 1. When Sparty received the $7,200 in subscription payments it credited the liability account titled Unearned Subscription Revenue.

2. On November 1, 2019, Sparty paid $6,000 for a 6-month insurance policy. When Sparty paid the $6,000 it recognized the entire amount as a debit to an asset account titled Prepaid Insurance.

3. Sparty failed to recognize $1,500 in rent for December owed to Sparty by one of Sparty’s tenant that rents a part of Sparty’s building.

4. The Supplies Inventory account had a $15,000 balance at the beginning of the year (January 1, 2019). During the year, $13,000 of supplies were acquired, with the Supplies Expense account debited at the time of purchase. The supplies count at the end of the year (December 31, 2019) showed $11,000 of supplies still on hand.

Required:

A. For each of the above numbered items, prepare the necessary adjusting journal entry. If no adjusting entry is required, explain why. Put the adjusting journal entries in the worksheet tab titled “Part A, Question A.”

B. Below are 4 adjusting journal entries (AJEs) that another firm, Wolverine, failed to make at year end. For each entry NOT MADE indicate the effect that each omitted AJE would have on the Wolverine’s financial statements for the year ended 12/31/2019. Use O for overstated, U for understated, and NE for no effect. Organize your answer in tabular form, using the column headings shown below and provided in the worksheet titled “Part A, Question B.”

Example 0: At year end, Wolverine failed to make the below AJE to record that fact that employees earned $4,000 in wages which will be paid on the next payroll date in January 2019.

Compensation Expense (+E, -NI, -R/E, -SE) 4,000 Salaries Payable (+L)

4,000

If that adjustment was not made expenses and liabilities would be understated by $4,000. If expenses are understated, then Net Income and Stockholders’ Equity will be overstated.

Income Statement Balance Sheet

Adjusting Revenue - Expense = Net Income Assets = Liabilities + Stockholders’ Equity entry
Example 0 NE U O NE U O

AJE #1: At year end, Wolverine failed to make the below AJE to recognize that a tenant owed Wolverine $1,000 rent for the month of December. The rent is due to Wolverine in January of 2019.

Rent Receivable 1,000 Rent Revenue

1,000

AJE #2: At year end, Wolverine failed to make the below AJE to record that Wolverine had some debt that had accrued interest of $400.

Interest Expense 400
Interest Payable 400

AJE #3: At year end, Wolverine failed to make the below AJE to record that Wolverine performed $3,000 in services in December that had been prepaid by the customer in November. Note that when the services were paid for in November, Wolverine increased (debited) cash and increased (credited) Unearned Service Revenue, a liability account.

Unearned Service Revenue 3,000 Service Revenue

3,000
AJE #4: At year end, Wolverine failed to make the below AJE to record depreciation of $2,000.

Depreciation Expense 2,000
Accumulated Depreciation 2,000

Answer rating: 100% (QA)

JOURNAL ENTRIES IN THE BOOKS OF SPARTY CORPORATION Date P... View the full answer