Reynolds Computer Service offers data processing services to retail clothing stores. The following data have been collected to aid in the preparation of adjusting entries for Reynolds Computer Service for 2011:
a. Computer equipment was purchased from IBM in 2008 at a cost of $540,000. Annual depreciation is $132,500.
b. A fire insurance policy for a two-year period beginning September 1, 2011, was purchased from Good Hands Insurance Company for $12,240 cash. The entire amount of the pre-payment was debited to prepaid insurance. (Assume that the beginning balance of prepaid insurance was $0 and that there were no other debits or credits to that account during 2011.)
c. Reynolds has a contract to perform the payroll accounting for Dayton’s Department Stores. At the end of 2011, $5,450 of services have been performed under this contract but are unbilled.
d. Reynolds rents 12 computer terminals for $65 per month per terminal from Extreme Terminals Inc. At December 31, 2011, Reynolds owes Extreme Terminals for half a month’s rent on each terminal. The amount owed is unrecorded.
e. Perry’s Tax Service prepays rent for time on Reynolds’ computer. When payments are received from Perry’s Tax Service, Reynolds credits unearned rent revenue. At December 31, 2011, Reynolds has earned $1,810 for computer time used by Perry’s Tax Service during December 2011.
Required:
1. Prepare adjusting entries for each of the transactions.
2. What would be the effect on the balance sheet and the income statement if the accountant failed to make the above adjusting entries?