PREPAYMENT OF EXPENSES JDM, Inc., made the following prepayments for expense items during 2009:

a. Prepaid building rent for one year on April 1.

JDM paid $6,300, debiting prepaid rent for the amount paid.

b. Prepaid six months’ insurance on October 1 by paying $870. Prepaid insurance was debited.

c. Purchased $3,750 of office supplies on October 15, debiting office supplies inventory for the full amount. Office supplies costing $385 remain unused at Dec. 31, 2009.

d. Paid $2,880 for a 12-month service contract for maintenance on a computer. The contract begins November 1.

The full amount of the payment was debited to prepaid maintenance.

Required:

. Prepare journal entries to record the payment of cash for each transaction.

. Prepare adjusting entries for the prepayments at December 31, 2009.

. For all of the above items, assume that the accountant failed to make the adjusting entries. What would be the effect on net income?

Exercise