Question

Wang Company accumulates the following adjustment data at December 31.

For each item, indicate the (1) type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense) and (2) the status of the accounts before adjustment (overstated or understated). (Enter your answers in alphabetical order.)
(1)Type of Adjustment (2) Accounts Before Adjustment
(a) Services performed but unbilled totals $600.
(b) Store supplies of $160 are on hand. The supplies account shows a $1,900 balance.
(c) Utility expenses of $275 are unpaid.
(d) Service performed of $490 collected in advance.
(e) Salaries of $620 are unpaid.
(f) Prepaid insurance totaling $400 has expired.

Answer 1

(a)Type of adjustment is accrued revenue. The account was understated before adjustment.

(b) The type of adjustment is prepaid expense. The account was overstated.

(c) The type of adjustment is accrued expense which has been understated.

(d) Adjustment type is unearned revenue. The account was understated.

(e) Salaries of $620 are unpaid. - Adjustment type is accrued expense and the account was understated.

(f) Prepaid expense which was overstated before adjustment.

Step-by-step explanation:

(a) Services performed but unbilled totals $600 - Since the service has been provided, revenue has been earned and should have been recognized with the corresponding debit to the accrued revenue account. Before adjustment, the accrued revenue account would have been understated.

(b) Store supplies of $160 are on hand. The supplies account shows a $1,900 balance. - This shows that stores supplies of $1,740 (the difference between $1,900 and $160) had been used up and should have been recognized as expense. As such, the type of adjustment is to prepaid expense. The account was overstated before adjustment as the balance should be $160 and not $1,900.

(c) Utility expenses of $275 are unpaid - The adjustment should have been posted to expense and accrued expense. Hence the type of adjustment is accrued expense which has been understated before adjustments.

(d) Service performed of $490 collected in advance - When the advance was collected, unearned revenue should have been recognized. Since it was not recognized before adjustment, the account was understated.

(e) Salaries of $620 are unpaid. - This is an accrued expense as the expense has been incurred but is yet to be paid. A non recognition before adjustment means the account was understated.

(f) Prepaid insurance totaling $400 has expired - This means that the prepaid insurance should have been derecognized since it has expired. As such, the account was overstated before adjustment.