Question

Service Pro Corp (SPC) is preparing adjustments for its September 30 year- end. For the following transactions and events, show the September 30 adjusting entries that SPC would make

a. Prepaid Insurance shows a balance of zero at September 30, but Insurance Expense shows a debit balance of $2,340, representing the cost of a three-year fire insurance policy purchased on September 1 of the current year.
b. On August 31 of this year, Cash was debited and Service Revenue was credited for $ 1,500. The $ 1,500 related to fees for a three- month period beginning September 1 of the current year.
c. The company’s income tax rate is 20%. After making the above adjustments, SPC’s net income before tax is $ 10,000. No income tax has been paid or recorded.

Answer 1

1 . Dr Prepaid Insurance $2,275

Cr Insurance Expense $2,275

2. Dr Service Revenue $1,000

Cr Deferred Revenue $1,000

3. Dr Income Tax Expense $2,000

Cr Income Tax Payable $2,000

Step-by-step explanation:

Preparation of the journal entries

1 . Dr Prepaid Insurance $2,275

Cr Insurance Expense $2,275

($2,340 - $2,340 × 1 months ÷ 36 months

= $2,340 - $65

= $2,275)

2. Dr Service Revenue $1,000

Cr Deferred Revenue $1,000

($ 1,500 × 2 months ÷ 3 months

= $1,000)

3. Dr Income Tax Expense $2,000

Cr Income Tax Payable $2,000

(.20*$10,000)