P3-8

Daves Towing Company is at the end of its accounting year, December 31, 2017. The following data that must be considered were developed from the companys records and related documents:

1. On July 1, 2017, a three-year insurance premium on equipment in the amount of $600 was

   paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1.

2. At the end of 2017, the unadjusted balance in the Office Supplies account was $1,000. A

   physical count of supplies on December 31, 2017, indicated supplies costing $300 were still

   on hand.

3. On December 31, 2017, YYs Garage completed repairs on one of Daves trucks at a cost of

   $800. The amount is not yet recorded. It will be paid during January 2018.

4. In December, the 2017 property tax bill for $1,600 was received from the city. The taxes,

   which have not been recorded, will be paid on February 15, 2018.

5. On December 31, 2017, the company completed the work on a contract for an out-of-

   province company for $7,900 payable by the customer within 30 days. No cash has been

   collected and no journal entry has been made for this transaction.

6. On July 1, 2017, the company purchased a new hauling van. Depreciation for July to

   December 2017, estimated to total $2,750, has not been recorded.

7. As of December 31, the company owes interest of $500 on a bank loan taken out on

   October 1, 2017. The interest will be paid on September 30, 2018, when the loan is repaid.

   No interest has been recorded yet.

8. The income before any of the adjustments or income taxes was $30,000. The companys

   federal income tax rate is 30 percent. Compute adjusted income based on all of the preceding information, and then determine and record income tax expense.

REQUIRED:

1. Give the adjusting journal entry required for each transaction at December 31, 2017.

2. Without the adjustments made in requirement 1, by what amount would net income have been understated or overstated