Give the adjusting journal entry required for each item at December 31, 2018. If adjustments were not made each period, the financial results could be materially misstated. Determine the amount by which Brokeback's net income would have been understated, or overstated, had the adjustments in requirement 1 not been made.

1. The adjusting journal entry required for each item at December 31, 2018 are:

Brokeback Towing Company adjusting journal entry

• Dr Insurance Expense $144

($576/24*6)

Cr Prepaid Insurance $144

• Supplies Expense  $710

($1,000-$290)

Cr Supplies $710

• Dr Repairs and Maintenance Expense $790

Cr Accounts Payable $790

• Dr  Accounts Receivable $7,900

Cr Service Revenue $7,900

• Dr  Expense $2,700

Cr Accumulated Depreciation—Equipment $2,700

• Dr Interest Expense $490

Cr Interest Payable $490

• Income Tax Expense $7,250

($29,000*25%)

Cr Income Tax Payable $7,250

2.  Brokeback's net income

First step is to calculate the Unadjusted expenses

Unadjusted expenses =$144+$710+$790+$2,700+$490+$7,250

Unadjusted expenses= $12,084

Second step is to calculate the Net income  

Net income    =$12,084-$7,900

Net income  = $4,184 ( Overstated)

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Explanation:

The adjusting entries are shown below:

a.  Insurance expense A/c Dr $210

                      To Prepaid insurance A/c $210

(Being the insurance expense is recorded)

The computation is shown below:

= $840 × 6 months ÷ 24 months

= $210

b.  Supplies expense A/c Dr $600

             To Supplies A/c $600

(Being supplies account is adjusted)

The supplies expense is computed below

= Supplies unadjusted balance - supplies on hand

= $1,000 - $400

= $600

c. Repairs and Maintenance expenseA/c Dr $900

                 To Accrued LiabilitiesA/c $900

(Being the repairs and maintenance expense is recorded)

d. Accounts Receivable A/c Dr $8,450

             To Service revenue A/c $8,450

(Being the contract completion is recorded)

e. Depreciation expense A/c Dr $3,250

          To Accumulated depreciation A/c 3,250

(Being the depreciation expense is recorded)

f. Interest expenseA/c Dr $600

        To Interest payable A/c $600

(Being the interest expense is recorded)

g. Income tax expense A/c Dr $8,000

          To Income tax payable A/c $8,000

(Being the income tax expense is recorded)

It is computed below:

= $40,000 × 20%

= $8,000

2. Now the net income overstated or understated is

= Expenses - revenues

where,

Expenses = $210 + $600 + $900 + $3,250 +$600 + $8,000

= $13,560

And, the revenues is $8,450

So, the net income overstated is

= $13,560 - $8,450

= $5,110

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