Laser Recording Systems, founded in 1981, produces laser disks for use in the home market. Sales since 1985 have increased approximately 15\% per year. The following is an excerpt from Laser Recording Systems' 1994 financial statements (all dollar amounts are in thousands):

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(a) Can you tell from the above whether Laser Recording 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 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 its accrued interest?

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LASER RECORDING SYSTEMS INCORPORATED Management Discussion Accrued liabilities increased to $1,642 at January 31, 1994, from $138 at the end of fiscal year 1993. 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 expense increased $35, of which $18 was for interest payable.