2. Bought a $3,090, one-year insurance policy for cash on April 1, 2014. The policy came into effect on this date — Horowitz Piano began operations January Its fiscal end December

Horowitz Piano Co. began operations on January 1, 2014. Its fiscal year end is December 31. It prepares financial statements and adjusts its accounts annually. Selected transactions for 2014 follow:

1. On January 15, 2014, bought supplies for $960 cash. A physical count on December 31, 2014, revealed $245 of supplies still on hand.

2. Bought a $3,090, one-year insurance policy for cash on April 1, 2014. The policy came into effect on this date.

3. On November 1, 2014, received a $1,750 advance cash payment from five clients ($350 each) for services expected to be provided in the future. As at December 31, 2014, services had still not been performed for two of the clients.

Instructions

(a) Assume that Horowitz Piano Co. records all prepaid costs as assets and all revenues collected in advance as liabilities.

1. Prepare the journal entries for the original transactions.

2. Prepare the adjusting journal entries at December 31, 2014.

3. Post these journal entries to T accounts and calculate the balance in each account after adjustments. You do not need to post to the Cash account.

(b) Assume instead that Horowitz Piano Co. records all prepaid costs as expenses and all revenues collected in advance as revenues.

1. Prepare the journal entries for the original transactions.

2. Prepare the adjusting journal entries at December 31, 2014.

3. Post these journal entries to T accounts and calculate the balance in each account after adjustments. You do not need to post to the Cash account.

TAKING IT FURTHER Compare the balance in each account calculated under (a) above with the balances calculated in (b). Comment on your findings.

SOLUTION

(a)

1. Jan. 15 Supplies 960

Cash 960

Apr. 1 Prepaid Insurance 3,090

Cash 3,090

Nov. 1 Cash 1,750

Unearned Revenue 1,750

2. Dec. 31 Supplies Expense ($960 − $245) 715

Supplies 715

Dec. 31 Insurance Expense 2,318

Prepaid Insurance 2,318