Problem 2 7 Adjusting entries and income effects LO2 4, 2 5 The information necessary for preparing the 2016 year end adjusting entries for Vitos Pizza Parlor appears below Vitos fiscal year end is December 31 a On July 1, 2016, purchased $10,000 of IBM Corporation bonds at face value The bonds pay interest twice a year on January 1 and July 1 The annual interest rate is 12 b Vitos depreciable equipment has a cost of $30,000, a five year life, and no salvage value The equipment was purchased in 2014 The straight line depreciation method is used c On November 1, 2016, the bar area was leased to Jack Donaldson for one year Vitos received $6,000 representing the first six months rent and credited deferred rent revenue d On April 1, 2016, the company paid $2,400 for a two year fire and liability insurance policy and debited insurance expense e On October 1, 2016, the company borrowed $20,000 from a local bank and signed a note Principal and interest at 12 will be paid on September 30, 2017 f At year end, there is a $1,800 debit balance in the supplies (asset) account Only $700 of supplies remain on hand Required 1 Prepare the necessary adjusting journal entries at December 31, 2016 (If no entry is required for a particular transaction, select No journal entry required in the first account field Do not round intermediate calculations ) 2 Determine the amount by which net income would be misstated (Indicate with Overstatement , Understatement ) if Vito's failed to record these adjusting entries (Ignore income tax expense ) (Amounts to be deducted should be indicated by a minus sign Do not round intermediate calculations )

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Problem 2-7 Adjusting entries and income effects [LO2-4, 2-5] The information necessary for preparing the 2016 year-end adjusting entries for Vitos Pizza Parlor appears below.

Problem 2-7 Adjusting entries and income effects [LO2-4, 2-5]

The information necessary for preparing the 2016 year-end adjusting entries for Vitos Pizza Parlor appears below. Vitos fiscal year-end is December 31.

a.	On July 1, 2016, purchased $10,000 of IBM Corporation bonds at face value. The bonds pay interest twice a year on January 1 and July 1. The annual interest rate is 12%.
b.	Vitos depreciable equipment has a cost of $30,000, a five-year life, and no salvage value. The equipment was purchased in 2014. The straight-line depreciation method is used.
c.	On November 1, 2016, the bar area was leased to Jack Donaldson for one year. Vitos received $6,000 representing the first six months rent and credited deferred rent revenue.
d.	On April 1, 2016, the company paid $2,400 for a two-year fire and liability insurance policy and debited insurance expense.
e.	On October 1, 2016, the company borrowed $20,000 from a local bank and signed a note. Principal and interest at 12% will be paid on September 30, 2017.
f.	At year-end, there is a $1,800 debit balance in the supplies (asset) account. Only $700 of supplies remain on hand.

Required:

Prepare the necessary adjusting journal entries at December 31, 2016. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

2.	Determine the amount by which net income would be misstated (Indicate with "Overstatement", "Understatement") if Vito's failed to record these adjusting entries. (Ignore income tax expense.)(Amounts to be deducted should be indicated by a minus sign. Do not round intermediate calculations.)