Quality Heating Company has the following liabilities at year end: Notes Payable $20,000 Accounts Payable 15,000 Unearned Contract Revenue 9,000 Wages Payable 2,900 Interest Payable 700 a. Which of these accounts probably was/were created at the end of

Question

the fiscal year as a result of an accrual? Which probably was/were adjusted at year end? Explain your answer. b. Which adjustments probably reduced net income? Which probably increased net income? Explain your answers.

Answer 1

a. Wages and interest are expenses that commonly have accrued but have not been paid at year's end. The offsetting liability accounts for these expenses are Wages Payable and Interest Payable. Unearned Contract Revenue probably required an adjusting entry because some of the contract services undoubtedly have been provided and thus earned. It is less likely that adjusting entries affected Notes Payable or Accounts Payable.
b. The accruals for wages and interest decreased net income because each increased expenses. On the other hand, the adjustment for Contract Revenue Earned increased net income because the revenue was recognized as having been earned.