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Chapter 3: 34PGA_2 (page 170)

Griffin Fishing Charters has collected the following data for the December 31 adjusting entries: a. The company received its electric bill on December 31 for \(375 but will not pay it until January 5. (Use the Utilities Payable account.) b. Griffin purchased a three-month boat insurance policy on November 1 for \)1,200. Griffin recorded a debit to Prepaid Insurance. c. As of December 31, Griffin had earned \(3,000 of charter revenue that has not been recorded or received. d. Griffin’s fishing boat was purchased on January 1 at a cost of \)33,500. Griffin expects to use the boat for 10 years and that it will have a residual value of \(3,500. Determine annual depreciation assuming the straight-line depreciation method is used. e. On October 1, Griffin received \)9,000 prepayment for a deep-sea fishing charter to take place in December. As of December 31, Griffin has completed the charter. Requirements 1. Journalize the adjusting entries needed on December 31 for Griffin Fishing Charters. Assume Griffin records adjusting entries only at the end of the year. 2. If Griffin had not recorded the adjusting entries, indicate which specific category of accounts on the financial statements would be misstated and if the misstatement is overstated or understated. Use the following table as a guide.

Short Answer

Expert verified

Answer

Adjusting Entry

Specific Category of Accounts on the Balance Sheet

Over / Understated

Specific Category of Accounts on the Income Statement

Over / Understated

(a)

Liability

Under

Expense

Under

Equity

Over

(b)

Asset

Over

Expense

Under

Equity

Over

(c)

Assets

Under

Revenue

Under

Equity

Under

(d)

Asset

Over

Expense

Under

Equity

Over

(e)

Liability

Over

Revenue

Under

Equity

Under

Step by step solution

01

Explanation on Adjusting Entry

Adjusting entry is year end entries, which is recorded to record accrued revenues and expenses for the period.

02

Effect of Ommission of Adjusting Entries

In case adjusting entry of accrued expense is not recorded, then it results in understatement of expenses and results in overstatement of net income. In balance sheet, equity will be overstated and liabilities will be understated.

In case adjusting entry of accrued revenue is not recorded, then it results in understatement of revenues and results in understatement of net income. In balance sheet, equity will be understated and assets will be understated.

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