Exercise 3-48 (Algorithmic) Expense Adjustments Faraday Electronic Service repairs stereos and DVD players. During 2019, Faraday engaged in the following activities: On September 1, Faraday paid Wausau Insurance $4,560 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance. At December 31, Faraday estimates that $1,620 of utility costs are unrecorded and unpaid. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $3,430 is unpaid and unrecorded at December 31. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,500 for 3 months' sponsorship—November 2019, December 2019, and January 2020—in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months' advertising has been used and 1 month remains unused. Required: 1. Prepare adjusting entries at December 31 for these four activities. Dec. 31 (Record use of prepaid insurance) Dec. 31 (Record use of utilities) Dec. 31 (Record use of equipment) Dec. 31 (Record use of prepaid advertising) 2. Conceptual Connection: What would be the effect on expenses if the adjusting entries were not made? a. b. c. d. Cumulative effect on expenses: by $

Answer 1

1. Adjusting entries at December 31:

Dec. 31 (Record use of prepaid insurance):
Insurance Expense $3,120
Prepaid Insurance $3,120

Dec. 31 (Record use of utilities):
Utility Expense $1,620
Accounts Payable $1,620

Dec. 31 (Record use of equipment):
Equipment Rent Expense $3,430
Accounts Payable $3,430

Dec. 31 (Record use of prepaid advertising):
Advertising Expense $3,000
Prepaid Advertising $3,000

2. Conceptual Connection: If the adjusting entries were not made, the expenses would be understated. The prepaid insurance, utility costs, equipment rent, and prepaid advertising would not be recognized as expenses in the current period, resulting in an inaccurate representation of the company's financial performance and profitability.