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 Income Taxes Payable 1,500

Question

a. Which of these accounts probably was created at the end of the fiscal year as a result of an accrual? Which probably was 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, interest, and income taxes 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, Interest Payable, and Income Taxes 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 three accruals for wages, interest, and income taxes 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.