Ouellette & Associates records adjusting entries on an annual basis. The company has the following information available on accruals that must be recorded for the year ended December 31, 2014:
1. Ouellette has a $10,000, 8% note receivable with a customer. The customer pays the interest on a monthly basis on the first of the month. Assume the customer pays the correct amount each month.
2. Ouellette pays its employees a total of $6,500 every second Tuesday. Employees work a five-day week, Monday to Friday, and are paid for all statutory holidays. December 31, 2014, is a Wednesday. Employees were paid on Tuesday, December 23, 2014 (for the pay period starting Wednesday, December 10, and ending Tuesday, December 23) and will be paid again on Tuesday, January 6, 2015 (for the pay period starting on Wednesday, December 24, and ending on Tuesday, January 6).
3. Ouellette has a contract with a customer where it provides services prior to billing the customer. On December 31, 2014, this customer owed Ouellette $3,375. Ouellette billed the customer on January 7, 2015, and collected the full amount on January 18, 2015.
4. Ouellette received the $485 December utility bill on January 10, 2015. The bill was paid on its due date, January 22, 2015.
5. Ouellette has a $25,000, 5% note payable. Interest is paid every six months, on October 31 and April 30. Assume that Ouellette made the correct interest payment on October 31, 2014, and April 30, 2015.
For each of the above items, do the following:
(a) Prepare the adjusting journal entries required on December 31, 2014.
(b) Prepare the journal entry to record the related cash transaction in 2015. Assume all payments and receipts are made as indicated.
TAKING IT FURTHER Indicate which elements in the financial statements (assets, liabilities, owner's equity, revenue, expenses, and profit) would be either understated or overstated at December 31, 2014, if the accounts were not adjusted.