College Accounting 2nd Edition by David Haddock, John Price,Michael Farina

Exercise 7

Preparing a worksheet and financial statements, journalizing adjusting entries, and posting to ledger accounts.
Sadie Palmer owns Palmer Creative Designs. The trial balance of the firm for January 31, 2013, the first month of operations, is shown on the bottom of page 146.
INSTRUCTIONS
1. Complete the worksheet for the month.
2. Prepare an income statement, statement of owner's equity, and balance sheet. No additional investments were made by the owner during the month.
3. Journalize and post the adjusting entries. Use 3 for the journal page number. Use the following account numbers: Supplies, 121; Prepaid Advertising, 130; Prepaid Rent, 131; Accumulated Depreciation-Equipment, 142; Supplies Expense, 517; Advertising Expense, 519; Rent Expense, 520; Depreciation Expense, 523.
End-of-the-month adjustments must account for the following items:
a. Supplies were purchased on January 1, 2013; inventory of supplies on January 31, 2013, is $1,100.
b. The prepaid advertising contract was signed on January 1, 2013, and covers a four-month period.

c. Rent of $1,600 expired during the month.
d. Depreciation is computed using the straight-line method. The equipment has an estimated useful life of 10 years with no salvage value.
Analyze: If the adjusting entries had not been made for the month, would net income be overstated or understated?