RECORDING PREPAYMENTS AND ADVANCE COLLECTIONS IN INCOME STATEMENT ACCOUNTS. In the chapter all prepayments and advance collections were put into balance sheet accounts. Some businesses put prepayments and advance collections into income statement accounts. If prepayments and advance collections are put into income statement accounts, determination of the amounts for adjustments still proceeds in the same way—compare preadjustment and desired balances for accounts and determine the necessary adjustment. See if you can adapt the adjustment procedure we described in the chapter to a situation in which prepayments and advance collections are put into income statement accounts.

Layhill Auto Service made the following two prepayments in 19x2:

a) Paid $1,920 for a 12-month insurance policy on May 1, debiting insurance expense.

b) Paid $4,320 for office supplies, debiting the entire amount to office supplies expense. There was no inventory of office supplies on January 1.

Layhill received two advances from customers during 19x2:

c) On November 1, Layhill received $450 for 6 months’ preventive maintenance—

beginning November 1—on a truck owned by the local cable television company.

Service revenue was credited. |

d) During December Layhill received $500 from customers who purchased books of gift certificates for car washes. Each car wash is priced at $2.50. Service revenue was credited.

At December 31, 19x2, there was $215 of office supplies on hand. During December Layhill redeemed 20 of the car-wash gift certificates.

REQUIRED:

1. Prepare journal entries for each of the transactions.

2. Prepare December 31 adjustments for each of the items.