Ouellette & Associates began operations on January 1, 2014. Its fiscal year end is December 31 and it prepares financial statements and adjusts its accounts annually. Selected transactions for 2014 follow:
1. On January 10, bought office supplies for $3,400 cash. A physical count at December 31, 2014, revealed $925 of supplies still on hand.
2. Paid cash for a $3,780, one-year insurance policy on February 1, 2014. The policy came into effect on this date.
3. On March 31, purchased equipment for $21,240 cash. The equipment has an estimated six-year useful life.
4. Leased a truck on September 1 for a one-year period for $500 per month. Paid the full lease cost of $6,000 in cash.
5. On October 15, received a $1,800 advance cash payment from a client for accounting services expected to be provided in the future. As at December 31, one-third of these services had not been performed.
6. On November 1, rented out unneeded office space for a six-month period starting on this date, and received a $1,725 cheque for the first three months' rent.
(a) Prepare a journal entry to record transactions 1 to 6. All prepaid costs should be recorded in asset accounts.
All revenue collected in advance of providing services should be recorded as liabilities.
(b) An adjusting entry at December 31, 2014, is required for each of these transactions. Using the format shown in E3-3, prepare the following:
1. A basic analysis and a debit-credit analysis of the required adjustment.
2. The adjusting journal entry.
(c) Post the transactions and adjusting entries to T accounts and calculate the final balance in each account.
(Posting to the Cash account is not necessary.)
TAKING IT FURTHER Could Ouellette & Associates avoid the need to record adjusting entries by originally recording items 1 through 4 as expenses, and items 5 and 6 as revenues? Explain.