Gauge Construction Company is making adjusting entries for the year ended March 31 of the current year. In developing information for the adjusting entries, the accountant learned the following: The company paid $3,900 on January 1 of the current year to have advertisements placed in the local monthly neighborhood paper. The ads were to be run from January through June. The bookkeeper debited the full amount to Prepaid Advertising on January 1. At March 31 of the current year, the following data relating to Construction Equipment were obtained from the records and supporting documents. Construction equipment (at cost) $ 550,000 Accumulated depreciation (through March 31 of the prior year) 148,800 Estimated annual depreciation for using the equipment 42,400 Required: 1. Record the adjusting entry for advertisements at March 31 of the current year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
2. Record the adjusting entry for the use of construction equipment during of the current year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
3. What amount should be reported on the current year's income statement for Advertising Expense? For Depreciation Expense?
4. What amount should be reported on the current year's balance sheet for Prepaid Advertising? For Construction Equipment (at net book value)?

1. Record the adjusting entry for advertisements at March 31 of the current year.

advertisement expense per month = $3,900 / 6 months = $650

$650 x 3 months = $1,950

Dr Advertising expense 1,950

    Cr Prepaid advertising 1,950

2. Record the adjusting entry for the use of construction equipment during of the current year.

Dr Depreciation expense 42,400

    Cr Accumulated depreciation - equipment 42,400

3. What amount should be reported on the current year's income statement for Advertising Expense?

$1,950

For Depreciation Expense?

$42,400

4. What amount should be reported on the current year's balance sheet for Prepaid Advertising?

$1,950 (= $3,900 - $1,950)

For Construction Equipment (at net book value)?

$358,800 (= $550,000 - $191,200)

Explanation:

Accrual accounting principle states that both revenues and expenses must be recognized during the periods that they effectively occur. They are not necessarily recorded during the periods in which they were collected or paid for.

1. The adjusting entry for advertisements at March 31 of the current year

Gauge Construction Company journal entry

1. March 31

Dr Advertising expense $1,950

Cr Prepaid advertising $1,950

($3,900×3/6)

(To record Advertising expense)

2. The adjusting entry for the use of construction equipment during of the current year.

Gauge Construction Company journal entry

Dr Depreciation expense $42,400

Cr Accumulated depreciation - equipment $42,400

(To record equipment expense)

3. The  amount that  should be reported on the current year's income statement for Advertising Expense and Depreciation Expense.

Advertising Expense=$3,900×3/6

Advertising Expense=$1,950

Depreciation Expense=$42,400

4. The  amount that  should be reported on the current year's balance sheet for Prepaid Advertising and Construction Equipment.

Prepaid Advertising=$3,900-($3,900×3/6)

Prepaid Advertising=$3,900-$1,950

Prepaid Advertising=$1,950

Construction Equipment=$550,000-($148,800+$42,400)

Construction Equipment=$550,000-$191,200

Construction Equipment=$358,800

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