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Paula Judge owns Judge Creative Designs. The trial balance of the firm for January 31, 2019, the first month of operations, is shown below. End-of-the-month adjustments must account for the following items: Supplies were purchased on January 1, 2019; inventory of supplies on January 31, 2019, is $1,600. The prepaid advertising contract was signed on January 1, 2019, and covers a four-month period. Rent of $2,100 expired during the month. Depreciation is computed using the straight-line method. The equipment has an estimated useful life of 10 years with no salvage value. Required: Complete the worksheet for the month. Prepare an income statement, statement of owner’s equity, and balance sheet. No additional investments were made by the owner during the month. Journalize and post the adjusting entries. Analyze: If the adjusting entries had not been made for the month, would net income be overstated or understated?

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Question Completion:

Judge Creative Designs

Trial Balance as of January 31, 2019:

Account Titles               Debit      Credit

Cash                           $34,900

Accounts receivable    12,000

Supplies                         6,550

Prepaid Advertising      6,000

Prepaid Rent                15,600

Equipment                  40,800

Accumulated Depreciation           0

Accounts Payable                         14,950

Capital account                            59,400

Drawing account         6,400

Fees Income                                 58,100

Advertising Expense  

Depreciation

Expense- Equipment

Rent Expense

Salaries Expense         9,100

Supplies Expense

Utilities Expense           1,100

Totals                    $132,450   $132,450

Answer:

Judge Creative Designs:

1. Adjusted Trial Balance as of January 31, 2019:

Judge Creative Designs

Trial Balance as of January 31, 2019:

Account Titles               Debit      Credit

Cash                           $34,900

Accounts receivable    12,000

Supplies                          1,600

Prepaid Advertising      4,500

Prepaid Rent                13,500

Equipment                  40,800

Accumulated Depreciation             $340

Accounts Payable                         14,950

Capital account                            59,400

Drawing account         6,400

Fees Income                                 58,100

Advertising Expense   1,500

Depreciation

Expense- Equipment    340

Rent Expense              2,100

Salaries Expense        9,100

Supplies Expense      4,950

Utilities Expense          1,100

Totals                    $132,790   $132,790

2. Income Statement for the month ended January 31, 2019:

Fees Income                               $58,100

Advertising Expense $1,500

Depreciation

Expense- Equipment    340

Rent Expense              2,100

Salaries Expense        9,100

Supplies Expense      4,950

Utilities Expense          1,100

Total expenses                            19,090

Net income                                $39,010

3. Statement of Owners' Equity for the month ended January 31, 2019:

Capital account       $59,400

Net income                 39,010

Drawing account        (6,400)

Equity balance         $92,010

4. Balance Sheet as of January 31, 2019:

Assets:

Cash                                      $34,900

Accounts receivable                12,000

Supplies                                      1,600

Prepaid Advertising                  4,500

Prepaid Rent                            13,500

Equipment                              40,800

Accumulated Depreciation        (340)

Total assets                        $106,960

Liabilities + Equity:

Accounts Payable                 $14,950

Capital account                       92,010

Total liabilities and equity  $106,960

5. Adjusting Journal Entries:

1. Debit Supplies Expense $4,950

Credit Supplies $4,950

To record the supplies expense.

2. Debit Advertising Expense $1,500

Credit Prepaid Advertising $1,500

To record the advertising expense.

3. Debit Rent Expense $2,100

Credit Prepaid Rent $2,100

To record rent expense for the month.

4. Debit Depreciation Expense $340

Credit Accumulated Depreciation $340

To record depreciation expense for the month.

6. Total adjusting expenses = $8,890.  The net income would have been overstated by $8,890.

Explanation:

a) Data and Adjustments:

1. Supplies Expense $4,950 Supplies $4,950 ($6,550 - $1,600) Balance $1,600

2. Advertising Expense $1,500 Prepaid Advertising $1,500 ($6,000/4) Balance $4,500

3. Rent Expense $2,100 Prepaid Rent $2,100 Balance $13,500 ($15,600 - $2,100)

4. Depreciation Expense $340 Accumulated Depreciation $340 ($40,800 * 10% * 1/12)

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