Annual Adjustments Palmer Industries prepares annual financial statements and adjusts its accounts only at the end of the year. The following information is available for the year ended December 31, 2010:
a. Palmer purchased computer equipment two years ago for $15,000. The equipment has an estimated useful life of five years and an estimated salvage value of $250.
b. The Office Supplies account had a balance of $3,600 on January 1, 2010. During 2010, Palmer added $17,600 to the account for purchases of office supplies during the year. A count of the supplies on hand at the end of December 2010 indicates a balance of $1,850.
c. On August 1, 2010, Palmer created a liability account, Customer Deposits, for $24,000. This sum represents an amount that a customer paid in advance and that will be earned evenly by Palmer over a six-month period.
d. Palmer rented some office space on November 1, 2010, at a rate of $2,700 per month. On that date, Palmer recorded Prepaid Rent for three months’ rent paid in advance.
e. Palmer took out a 120-day, 9%, $200,000 note on November 1, 2010, with interest and principal to be paid at maturity.
f. Palmer operates five days per week with an average daily payroll of $500. Palmer pays its employees every Thursday. December 31, 2010, is a Friday.
1. For each of the preceding situations, identify and analyze the adjustment to be recorded on December 31, 2010.
2. Assume that Palmer’s accountant forgets to record the adjustments on December 31, 2010. Will net income for the year be understated or overstated? by what amount? (Ignore the effect of income taxes.)