Laser Recording Systems, founded in 1981, produces disks for use in the home market. The following is an excerpt from Laser Recording Systems’ financial statements (all dollars in thousands).
LASER RECORDING SYSTEMS
Management Discussion
Accrued liabilities increased to $1,642 at January 31, from $138 at the end of the previous fiscal year. Compensation and related accruals increased $195 due primarily to increases in accruals for severance, vacation, commissions, and relocation expenses. Accrued professional services increased by $137 primarily as a result of legal expenses related to several outstanding contractual disputes. Other expenses increased $35, of which $18 was for interest payable.
Instructions
(a) Can you tell from the discussion whether Laser Recording Systems has prepaid its legal expenses and is now making an adjustment to the asset account Prepaid Legal Expenses, or whether the company is handling the legal expense via an accrued expense adjustment?
(b) Identify each of the adjustments Laser Recording Systems is discussing as one of the four types of possible adjustments discussed in the chapter. How is net income ultimately affected by each of the adjustments?
(c) What journal entry did Laser Recording make to record the accrued interest?