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1. (4 points) A $40,000 fire insurance policy was purchased on October 1. The original journal entry debited Insurance Expense and credited cash. How will the adjusting journal entry made on December 31 affect the accounting equation (A=L+OE)?
If the insurance policy covers one year and the period ends on December 31, the adjusting entry will increase assets (prepaid insurance) and increase equity (decrease in insurance expense) by 30,000.
2. (4 points) On November 1 the company received $20,000 for rent of office space. The lease will begin on November 1. The original journal entry debited cash and credited Rent Revenue. How will the adjusting entry made on December 31 affect the accounting equation?
If the rent covers one year and the period ends on December 31, the adjusting entry will decrease equity (decrease in rent revenue) and increase liability (unearned revenue) by 16,667.
3. (4 points) You are reviewing the current months financial statements. You are told that there is an error in the financial statements. Specifically, in recording depreciation expense for the period, the accountant incorrectly debited wage instead of depreciation expense. How does this mistake affect net income?
Since both wage expense and depreciation expense are deducted from revenues, there will be no effect on net income....
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