Question: The Amato Theater is nearing the end of the year and is preparing for a meeting with its bankers to discuss the renewal of a loan. The accounts listed below appeared in the December 31, 2017, trial balance.
| Debit | Credit |
Prepaid advertising | \(6,000 | |
Equipment | 192,000 | |
Accumulated depreciation | | \)60,000 |
Note payable | | 90,000 |
Unearned service revenue | | 17,500 |
Ticket revenue | | 360,000 |
Advertising expenses | 18,680 | |
Salaries and wages expenses | 67,600 | |
Interest expenses | 1,400 | |
Additional information is available as follows.
1. The equipment has an estimated useful life of 16 years and a salvage value of \(40,000 at the end of that time. Amato uses the straight-line method for depreciation.
2. The note payable is a one-year note given to the bank January 31 and bearing interest at 10%. Interest is calculated on a monthly basis.
3. Late in December 2017, the theater sold 350 coupon ticket books at \)50 each. Two hundred of these ticket books have been used by year-end. The cash received was recorded as Unearned Service Revenue.
4. Advertising paid in advance was \(6,000 and was debited to Prepaid Advertising. The company has used \)2,500 of the advertising as of December 31, 2017.
5. Salaries and wages accrued but unpaid at December 31, 2017, were $3,500.
Accounting
Prepare any adjusting journal entries necessary for the year ended December 31, 2017.
Analysis
Determine Amato’s income before and after recording the adjusting entries. Use your analysis to explain why Amato’s bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal.
Principles
Although Amato’s bankers are willing to wait for the adjustment process to be completed before they receive financial information, they would like to receive financial reports more frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful representation, are inherent in preparing financial statements for shorter accounting time periods?
