40PGB-2 - Horngren'S Financial And Managerial Accounting

Question

Harrison Fishing Charters has collected the following data for the December 31 adjusting entries: a. The company received its electric bill on December 31 for \(375 but will not pay it until January 5. (Use the Utilities Payable account.) b. Harrison purchased a three-month boat insurance policy on November 1 for \)3,600. Harrison recorded a debit to Prepaid Insurance. c. As of December 31, Harrison had earned \(1,000 of charter revenue that has not been recorded or received. d. Harrison’s fishing boat was purchased on January 1 at a cost of \)56,500. Harrison expects to use the boat for five years and that it will have a residual value of \(6,500. Determine annual depreciation assuming the straight-line depreciation method is used. e. On October 1, Harrison received \)5,000 prepayment for a deep-sea fishing charter to take place in December. As of December 31, Harrison has completed the charter. Requirements 1. Journalize the adjusting entries needed on December 31 for Harrison Fishing Charters. Assume Harrison records adjusting entries only at the end of the year. 2. If Harrison had not recorded the adjusting entries, indicate which specific category of accounts on the financial statements would be misstated and if the misstatement is overstated or understated. Use the following table as a guide:

Step-by-Step Solution

Answer

Adjusting Entry	Specific Category of Accounts on the Balance Sheet	Over / Understated	Specific Category of Accounts on the Income Statement	Over / Understated
(a)	Liability	Under	Expense	Under
	Equity	Over
(b)	Asset	Over	Expense	Under
	Equity	Over
(c)	Assets	Under	Revenue	Under
	Equity	Under
(d)	Asset	Over	Expense	Under
	Equity	Over
(e)	Liability	Over	Revenue	Under
	Equity	Under

Step 1: Explanation on Adjusting Entry

Adjusting entry is year end entries, which is recorded to record accrued revenues and expenses for the period

Step 2: Effect of Ommission of Adjusting Entries

In case adjusting entry of accrued expense  is not recorded, then it results in understatement of expenses and results in overstatement of net income. In balance sheet, equity will be overstated and liabilities will be understated. 

In case adjusting entry of accrued revenue is not recorded, then it results in understatement of revenues and results in understatement of net income. In balance sheet, equity will be understated and assets will be understated.