Question

Harrison Fishing Charters has collected the following data for the December 31 adjusting entries: a. The company received its electric bill on December 31 for \(375 but will not pay it until January 5. (Use the Utilities Payable account.) b. Harrison purchased a three-month boat insurance policy on November 1 for \)3,600. Harrison recorded a debit to Prepaid Insurance. c. As of December 31, Harrison had earned \(1,000 of charter revenue that has not been recorded or received. d. Harrison’s fishing boat was purchased on January 1 at a cost of \)56,500. Harrison expects to use the boat for five years and that it will have a residual value of \(6,500. Determine annual depreciation assuming the straight-line depreciation method is used. e. On October 1, Harrison received \)5,000 prepayment for a deep-sea fishing charter to take place in December. As of December 31, Harrison has completed the charter. Requirements 1. Journalize the adjusting entries needed on December 31 for Harrison Fishing Charters. Assume Harrison records adjusting entries only at the end of the year. 2. If Harrison had not recorded the adjusting entries, indicate which specific category of accounts on the financial statements would be misstated and if the misstatement is overstated or understated. Use the following table as a guide:

Short answer

Adjusting entries are as follows:

	Journal entry
Transactions	Accounts and Explanation	Debit	Credit
(a)	UtilitiesExpense	$375
	UtilitiesPayable		$375
	To record accrued electricity expense
(b)	Insurance Expense	$2,400
	Prepaid Insurance		$2,400
	To record insurance expense
(c)	Accounts Receivable	$1,000
	Service Revenue		$1,000
	To record the service revenue earned
(d)	Depreciation Expense—Boat	$10,000
	Accumulated Depreciation—Boat		$10,000
	To record depreciation on boat
(e)	Unearned Revenue	$5,000
	Service Revenue		$5,000
	To record service revenue earned that was collected in advance

Step-by-step solution

Calculation of Insurance Expense

Insurance expense is calculated as follows:

$\begin{array}{c}\mathbf{InsuranceExpense}\mathbf{=}\mathbf{AmountPaid}\mathbf{\times }\frac{\mathbf{NumberofMonthsExpired}}{\mathbf{TotalMonthsofInsurancePaid}}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}\mathbf{\times }\frac{\mathbf{2}}{\mathbf{3}}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{400}\end{array}$

Calculation of Depreciation Expense

Depreciation expense is calculated as follows:

$\begin{array}{c}\mathbf{DepreciationExpense}\mathbf{=}\frac{\mathbf{Cost}-\mathbf{ResidualValue}}{\mathbf{UsefulLife}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{56}\mathbf{,}\mathbf{500}-\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{500}}{\mathbf{5}}\\ \mathbf{=}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\end{array}$