Question

Referring to the information below, indicate the income statement and balance sheet impacts in each case a through e if Walker Corp. failed to record the necessary adjusting entries.

a. Interest expense of $120 for the month of December 2020 will be paid in January 2021.
b. Unbilled revenue for services performed in December 2020 is $400. The company will prepare and forward invoices for this amount in January 2021 to customers with a 30-day collection term.
c. $1,200 cash was received in advance on November 30, 2020, for future services to be performed by Walker Corp. and was recorded as deferred service revenue. The services were performed on December 20, 2020.
d. Walker Corp. acquired a two-year insurance policy on January 1, 2020, for $3,840 cash that was recorded initially as prepaid insurance.
e. Depreciation on equipment is $4,800 for 2020.

Answer 1

a.

Income Statement : Expenses - Interest Expense, will understated and Income overstated by $120

Balance Sheet : Liabilities - Interest Payable, will be understated by $120

b.

Income Statement : Income - Revenue Earned, will understated and Income understated by $400

Balance Sheet : Assets - Accounts Receivables, will be understated by $400

c.

Income Statement : Income - Revenue Earned , will be

understated and Income understated by $1,200

Balance Sheet : Liabilities - Deferred Service Revenue, will be overstated by $1,200

d.

Income Statement : Expenses - Insurance Expense, will be understated and Income overstated by $1,920

Balance Sheet : Assets - Prepaid, will be overstated by $1,920

e.

Income Statement : Expenses - Depreciation Expense, will be understated and Income overstated by $4,800

Balance Sheet : Assets - Equipment, will be understated by $4,800

Step-by-step explanation:

So, the catch with this question is to make sure you understand what the adjusting entry should have been in the first place.

After that we then be able to tell the effect is that adjusting entry is not recorded.

Here are the adjusting entries should have been recorded :

a.

Debit : Interest Expense $120

Credit : Interest Payable $120

b.

Debit : Accounts Receivable $400

Credit : Revenue Earned $400

c.

Debit : Deferred Service Revenue $1,200

Credit : Revenue Earned $1,200

d.

Debit : Insurance Expense $1,920

Credit : Prepaid Insurance $1,920

e.

Debit : Depreciation Expense $4,800

Credit : Accumulated Depreciation $4,800

Then, see the effect discussed above.