The Rift Music Store reported net income of $1,200 and thefollowing account bala

Question

The Rift Music Store reported net income of $1,200 and thefollowing account balances.

Cash                                                                          $1,425

AccountsReceivable                                                2,300

Prepaidinsurance                                                       1,200

Equipment and furnishings                                       3,200

Less: Accumulateddepreciation                                 (500)

Accountspayable                                                       1,300

Wagespayable                                                           1,520

Owners equity (includes net income of$1,200)         4,805

After this information was prepared, the bookkeeper discoveredthat he had forgotten to make two necessary adjusting entries forthe year and, therefore, they were not reflected in the balancesshown. Information concerning the two missing adjusting entriesfollows:

a.       The prepaid insuranceinvolves a 3-year fire insurance policy that was purchased (andwent into effect) on January 1, 2007. By the end of the year, aportion of the insurance policy has been used up.

b.      The wages payable does notinclude the wages that were owed at year-end to two workers who hadbeen temporarily assigned to work off the premises. This amounttotaled $375.

Use the following schedule, determine the correct year-endamount of the (1) total assets (2) total liabilities, (3)owners’ equity, and (4) net income.

                                                         Assets        Liabilities          Equity            Net Income

Year-end amounts before correction

Adjusting Entry (a):

Adjusting entry (b):

Year-end correctedamounts                            

Explanation / Answer

Adjustingentries a. Insurance expense $400           PrepaidInsurance $400 ($1200/3) b Wages expense $375        WagesPayable $375 ASETS before Adjustments after adjustement adjustement Cash $1,425 $1,425 A/R $2,300 $2,300 Prepaid Insurance $1,200 ($400) $800 Equipment& Fur. $3,200 less acc. Depreciation ($500) $2,700 $2,700 TOTAL $7,625 $7,225 LIABILITIES Accounts Payable $1,300 $1,300 Wages payable $1,520 $375 $1,895 TOTAL $2,820 $3,195 EQUITY Owners equity $3,605 $3,605 Net income $1,200 ($875) $425 TOTAL $4,805 $4,030 Total liabilities + equity $7,625 $7,225 Net income $1,200 less: Insurance expense ($400)         Wages expense ($375) Actual net income $425

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