Ogonquit Enterprises 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, 2014:
a. Ogonquit purchased office furniture last year for $25,000. The furniture has an estimated useful life of seven years and an estimated salvage value of $4,000.
b. The Supplies account had a balance of $1,200 on January 1, 2014. During 2014, Ogonquit added $12,900 to the account for purchases of supplies during the year. A count of the supplies on hand at the end of December 2014 indicates a balance of $900.
c. On July 1, 2014, Ogonquit credited a liability account, Customer Deposits, for $8,800. This sum represents an amount that a customer paid in advance and that will be earned evenly by Ogonquit over an eight-month period.
d. Ogonquit rented some warehouse space on September 1, 2014, at a rate of $4,000 per month. On that date, Ogonquit debited Prepaid Rent for six months’ rent paid in advance.
e. Ogonquit took out a 90-day, 6%, $30,000 note on November 1, 2014, with interest and principal to be paid at maturity.
f. Ogonquit operates five days per week with an average weekly payroll of $4,150. Ogonquit pays its employees every Thursday. December 31, 2014, is a Wednesday.
Required
1. For each of the preceding situations, prepare in general journal form the appropriate adjusting entry to be recorded on December 31, 2014.
2. Assume that Ogonquit’s accountant forgets to record the adjusting entries on December 31, 2014. Will net income for the year be understated or overstated? by what amount? (Ignore the effect of income taxes.)