Ken Hensley Enterprises, Inc., is a small recording studio in St. Louis. Rock bands use the studio to mix high-quality demo recordings distributed to talent agents. New clients are required to pay in advance for studio services. Bands with established credit are billed for studio services at the end of each month. Adjusting entries are performed on a monthly basis. An unadjusted trial balance dated December 31, year 1, follows. (Bear in mind that adjusting entries already have been made for the first 11 months of year 1, but not for December.)
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KEN HENSLEY ENTERPRISES, INC. UNADJUSTED TRIAL BALANCE DECEMBER 31, YEAR 1 $ 51,804 97,680 9,120 600 4,800 108,000 $63,000 19,200 1,008 3,840 11,520 96,000 45,600 128,400 21,600 1,440 3,216 19,800 25,200 1,008 2,820 21,480 $368,568 $368,568 Other Data 1. 2. Records show that $5,280 in studio revenue had not yet been billed or recorded as of December 31 Studio supplies on hand at December 31 amount to $8,280. 3. On August 1, year 1, the studio purchased a six-month insurance policy for $1,800. The entire premium was initially debited to Unexpired Insurance. 4. The studio is located in a rented building. On November 1, year 1, the studio paid $7,200 rent in advance for November, December, and January. The entire amount was debited to Prepaid Studio Rent 5. The useful life of the studio's recording equipment is estimated to be five years (or 60 months). The straight-line method of depreciation is used 6. On May 1, year 1, the studio borrowed $19,200 by signing a 12-month, 9 percent note payable to First Federal Bank of St. Louis. The entire $19,200 plus 12 months' interest is due in full on April 30, year 2. 7. Records show that $4,320 of cash receipts originally recorded as Unearned Studio Revenue had been earned as of December 31. 8. Salaries earned by recording technicians that remain unpaid at December 31 amount to $648 9. The studio's accountant estimates that income taxes expense for the entire year ended Decem ber 31, year 1, is $23,520. (Note that $21,480 of this amount has already been recorded.) Instructions For each of the numbered paragraphs, prepare the necessary adjusting entry (including an explanation) Using figures from the company's unadjusted trial balance in conjunction with the adjusting entries made in part a, compute net income for the year ended December 31, year 1 Was the studio's monthly rent for the last 2 months of year 1 more or less than during the first 10 months of the year? Explain your answer. a. b. c. d. Was the studio's monthly insurance expense for the last five months of year 1 more or less e. If the studio purchased all of its equipment when it first began operations, for how many f. than the average monthly expense for the first seven months of the year? Explain your answer months has it been in business? Explain your answer. Indicate the effect of each adjusting entry prepared in part a on the major elements of the com pany's income statement and balance sheet. Organize your answer in tabular form using the column headings shown. Use the symbols I for increase, D for decrease, and NE for no effect. The answer for the adjusting entry number 1 is provided as an example. Income Statement Balance Sheet Adjusting Entry Net Income Owners Revenue - Expenses AssetsLiabilitiesEquity NE NE
