In its first year of operations, Roma Company reports the following. Earned revenues of $47,000 ($39,000 cash received from customers). Incurred expenses of $26,500 ($20,950 cash paid toward them). Prepaid $7,250 cash for costs that will not be expensed until next year. Compute Roma's first-year net income under the cash basis and the accrual basis of accounting. Cash Basis Accrual Basis ces Revenues Expenses Net income For each separate case below, follow the three-step process for adjusting the prepaid asset account at December 31. Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31 adjusting entry to get from step 1 to step 2. Assume no other adjusting entries are made during the year. Answer is complete but not entirely correct. a. Prepaid Insurance. The Prepaid Insurance account has a $6,200 debit balance to start the year. A review of insurance policies shows that $1,650 of unexpired insurance remains at year-end. DR of CR? Prepaid Insurance Step 1: Determine what the current account balance equals $ 560 ( Debit 560 320 Step 2: Determine what the current account balance should equal. $ 240 Debit 240 Step 3. Record the December 31 adjusting entry to get from step 1 to step 2 Adjusting Entry Debit Credit Supplies expense Supplies 320 320 < Prev 3 of 15 Next b. Prepaid Insurance. The Prepaid Insurance account has a $7,390 debit balance at the start of the year. A review of insurance policies shows $1,640 of insurance has expired by year-end. DR of Prepaid Insurance CR? Step 1: Determine what the current account balance equals $ 4,850 Debit 4,850 Step 2. Determine what the current account balance should equal 975 Credit 4,850 975 Step 3: Record the December 31 adjusting entry to get from step 1 to step 2. Adjusting Entry Debit Credit Supplies expense Supplies 3,875 3,875 ( c. Prepaid Rent. On September 1 of the current year, the company prepaid $42,000 for two years of rent for facilities being occupied that day. The company debited Prepaid Rent and credited Cash for $42,000. DR or CR? Step 1: Determine what the current account balance equals $ 17,300 Debit Prepaid Rent 17,300 13,860 Step 2 Determine what the current account balance should equal $ 3,440 Debit 3,440 Step 3: Record the December 31 adjusting entry to get from step 1 to step 2 Step 3: Record the December 31 adjusting entry to get from step 1 to step 2. Supplies expense Supplies Adjusting Entry Debit Credit 3,875 3,875 ( c. Prepaid Rent. On September 1 of the current year, the company prepaid $42,000 for two years of rent for facilities being occupied that day. The company debited Prepaid Rent and credited Cash for $42,000. DR or CR? Step 1: Determine what the current account balance equals. $ 17,300 Debit Prepaid Rent 17,300 13,860 Step 2: Determine what the current account balance should equal $ 3,440 Debit 3,440 Step 3: Record the December 31 adjusting entry to get from step 1 to step 2 Adjusting Entry Debit Credit Supplies expense Supplies 13,860 x 13,860