Scarletti and Long Inc., publishers of movie and song trivia books, made the following errors in adjusting the accounts at year-end (December 31):

a. Did not record depreciation on equipment costing \(\$ 130,000\) with a residual value of \(\$ 30,000\) and a 10 -year useful life.

b. Failed to adjust the deferred revenue account to reflect that \(\$ 2,000\) was earned by the end of the year.

c. Recorded a full year of accrued interest expense on an \(\$ 18,000,10\) percent note payable that has been outstanding since November 1 of the current year.

d. Failed to adjust insurance expense to reflect that \(\$ 400\) relates to future insurance coverage.

e. Did not accrue \(\$ 800\) owed to the company by another company renting part of the building as a storage facility.

Required:

1. For each error, prepare

(a) the adjusting journal entry that was made, if any,

(b) the entry that should have been made at year-end, and

(c) the entry to correct the error.

2. Using the following headings, indicate the effect of each error and the amount of the effect (i.e., the difference between the entry that was or was not made and the entry that should have been made). Use \(\mathrm{O}\) if the effect overstates the item, \(\mathrm{U}\) if the effect understates the item, and NE if there is no effect.

3. Explain the concept of materiality and how it might affect the adjusting entries you prepared in \((1)\).

Transcribed Image Text:

Statement of Financial Position Transaction Assets a. b. G. etc. Liabilities Shareholders' Equity Revenues Income Statement Expenses Profit