Use of Account Balances as a Basis for Adjusting Entries-Annual Adjustments
The following account balances are taken from the records of Laugherty Inc. at December 31, 2014. The Supplies account represents the cost of supplies on hand at the beginning of the year plus all purchases. A physical count on December 31, 2014, shows only $1,520 of supplies on hand. The Unearned Revenue account represents the cash received from a customer on May 1, 2014, for 12 months of service beginning on that date. The Note Payable represents a six-month promissory note signed with a supplier on September 1, 2014. Principal and interest at an annual rate of 10% will be paid on March 1, 2015.
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Supplies
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$5,790 debit
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Unearned Revenue
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$1,800 credit
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Note Payable
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60,000 credit
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Required
1. Prepare the three necessary adjusting entries on the books of Laugherty on December 31, 2014. Assume that Laugherty prepares adjusting entries only once a year, on December 31.
2. Assume that adjusting entries are made at the end of each month rather than only at the end of the year. What would be the balance in Unearned Revenue before the December adjusting entry was made? Explain your answer.