Palmer Industries prepares annual financial statements and adjusts its accounts
ID: 2418454 • Letter: P
Question
Palmer Industries prepares annual financial statements and adjusts its accounts only at the end of t Ik year. The following informal ion is available for the year ended December 31,2012: Palmer purchased computer equipment two years ago for SI 5,000. The equipment has an estimated useful life of five vcats and an estimated salvage value ofS250. The Office Supplies account lud a balance of S3 00 on Januaiy 1, 2012. During 2012, Palmer added S17 00 to tlx: account for purchases of oflicc supplies during tlx: year. A count of tire supplies on hand at the end of December 2012 indicates a balance of SI,850. On August 1,2012, Palmer created a liability account, Customer Deposits, for S24,000. This sum represents an amount that a customer paid in advance and that will be earned evenly by Palmer over a six-month period. Palmer rented some ofiice space on November 1, 2012, at a rate of S2,700 per month. On that date, Palmer recorded Prepaid Rent for three months' rent pi id in advance. Palmer took out a 120-day, 994, S200,000 note on November 1, 2012, with interest and principal to be paid at maturity. Palmer operates five days per week with an average daily payroll of S500. Palmer pays its employees every Thursday. December 31, 2012, is a Monday. Required For each of the preceding situations, identity and analyze the adjustment to be recorded on December 31, 2012. Assume that Palmer's accountant forgets to record t Ik adjustments on December 31, 2012. WiB net income for the year be understated or overstated? by what amount? (Ignore the effect of income taxes.)Explanation / Answer
61- adjustment entries to be made for adjustment in year end
1)Depreciation account debit 2950
credit computer equipment
2- Profit and Loss account debit 19350
credit cost of goods sold 19350
3- customer deposit debit 24000
credit income in advance 24000
(for correction of wrong entry)
income in advance debit 20000
credit income 20000
(income credited for the year)
4- prepaid rent debit 8100
to rent in advance 8100
(rent in advance credited)
rent in advance debit 5400
to rent income 5400
(rent income credited for the year)
5- debit cash 200000
debit interest 6000
credit notes payable 206000
6- salary debit 500*30 = 15000
credit outstanding salary 15000
2-
If following adjustments are not made at year end income would be affected by INCREASE DECREASE 1 If depreciation is not charged 2950 2 IF COST OF GOODS SOLD IS NOT RECOREDED PROIFTS WOULD 19350 3 IF INCOME RECEIVED IN ADVANCE IS NOT RECORDED INCOME WILL UNDERSTATED 20000 4 IF RENT RECEIVED IS NOT RECORDED INCOME WILL UNDERSTATED 5400 5 IF INTEREST ON NOTES PAYABLE IS NOT RECORDED INCOME WILL OVERSTATED BY 6000 6 IF SALARY IS NOT RECORED INCOME WOULD BE OVERSTATED 15000 TOTAL 43300 25400 Income over stated 17900
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