Garrett Bass Co. began operations on January 1, 2014. Its fiscal year end is December 31. It prepares financial statements and adjusts its accounts annually. Selected transactions for 2014 follow:

1. On January 1, 2014, bought supplies for $1,250 cash. A physical count at December 31, 2014, revealed $375 of supplies still on hand.

2. Bought a $2,820, one-year insurance policy for cash on February 1, 2014. The policy came into effect on this date.

3. On December 1, Garrett received a $1,200 advance cash payment from four clients ($300 each) for services expected to be provided in the future. As at December 31, services had been performed for only one of the clients.

Instructions

(a) Assume that Garrett Bass Co. records all prepaid costs as assets and all revenues collected in advance as liabilities.

1. Prepare the journal entries for the original transactions.

2. Prepare the adjusting journal entries at December 31, 2014.

3. Post these journal entries to T accounts and calculate the balance in each account aft er adjustments. You do not need to post to the Cash account.

(b) Assume instead that Garrett Bass Co. records all prepaid costs as expenses and all revenues collected in advance as revenues.

1. Prepare the journal entries for the original transactions.

2. Prepare the adjusting journal entries at December 31, 2014.

3. Post these journal entries to T accounts and calculate the balance in each account after adjustments. You do not need to post to the Cash account.

TAKING IT FURTHER Compare the balances in each account calculated under (a) above with those calculated in (b). Comment on your findings.