The Reed Company has fiscal year on December 31 and its financial statements are prepared on an annual basis. However, the accounting records are damaged accidently. For the fiscal year ended on December 31, 2020, only the unadjusted trial balance and the statement of financial position on December 31 are currently available.

Please try to restore other parts of the accounting records using the currently available information. The change in Accounts Receivables totally comes from providing service to customers.

	Unadjusted Trial Balance
Accounts Payable	7,000
Accounts Receivable	1,540
Accumulated Depreciation-Equip.	9,100
Cash	42,000
Depreciation Expense	0
Dividends	7,700
Equipment	52,500
Insurance Expense	0
Prepaid Insurance	12,460
Prepaid Rent	10,500
Retained Earnings	36,540
Rent Expense	0
Salaries and Wages Expense	26,600
Salaries and Wages Payable	0
Service Revenue	67,200
Share Capital-Ordinary	21,000
Supplies	2,240
Supplies Expense	1,400
Unearned Service Revenue	16,100

Question 1 (Continued)

Reed Company

Statement of Financial Position

December 31, 2020

Assets

Property, plant, and equipment

Equipment ...................................................................................... $ 52,500

Less: Accumulated depreciationequipment. ................................ (11,900) Current assets Prepaid insurance ........................................................................... 1,050 Prepaid Rent ................................................................................... 7,000 Supplies ......................................................................................... 490 Accounts receivable ....................................................................... 2,240	$ 40,600
Cash ................................................................................................ 42,000	52,780
Total assets .............................................................................. Equity and Liabilities Equity Share capital-ordinary .................................................................... $21,000	$93,380
Retained earnings ........................................................................... $49,980 Current liabilities	$70,980
Accounts payable ........................................................................... 7,000
Unearned Service Revenue ............................................................ 10,500
Salaries and Wages payable ........................................................... 4,900	22,400

Total equity and liabilities ..................................................... $93,380

Required:

1. Based the information given above, prepare adjusting entries for the Reed Company on December 31, 2020. You may omit descriptions for the journal entries.
2. Based on the information given above, prepare the income statement for Reed Company on December 31, 2020.
3. Based on the information given above, prepare the closing entries for the Reed Company on December 31, 2020. You may omit descriptions for the journal entries.

d. Originally, the insurance expense was mistakenly omitted and thus the expenses were greatly understated and the income was much higher than the current number. The error was identified and corrected using an correcting entry by the accountant. However, when the president of Reed Company prefers the original income and requires the accountant to remove the adjusting for insurance.

1. Who are the stakeholders in this situation?
2. Which accounting principles might be violated in this situation? Explain the effects on financial statements of the requirement by the president.