CH 1 and 2 Key Terms

Answe
r Definition   Term
Amount of accumulated earnings not distributed as dividends a Sales Revenue
Amount of cash (or other property) contributed in exchange for the
company’s stock b Accounts Receivable
Amount paid for insurance relating to future periods c Inventory Chapter 2 In-Class
Amount realized by a business by selling its goods or services d Depreciation Expense Problem
Amounts (customer deposits) received in advance of providing goods
or services to customers e Prepaid Insurance
Amounts owed to suppliers for goods or services bought on credit f Accounts Payable The information
Cost of plant and equipment used up during the period g Contributed Capital necessary for preparing
Cost of products sold in the ordinary course of business h Cost of Goods Sold the 2018 year-end
Goods on hand that are being held for resale i Retained Earnings adjusting entries for
The right to collect from customers for prior sales on credit j Unearned Revenue Vito’s Pizza Parlor
  appears below. Vito’s
fiscal year-end is
Definition   Term
December 31.
Economic entity
The original transaction value upon acquisition. a assumption
The life of an enterprise can be divided into artificial time periods. b Monetary unit assumption a. On July 1,
The entity will continue indefinitely. c Going concern assumption 2018, purchased
The enterprise is separate from its owners and other entities. d Expense recognition $10,000 of IBM
Record expenses in the period the related revenue is recognized. e Historical cost principle Corporation bonds
Criteria usually satisfied for products at point of sale. f Full-disclosure principle
at face value. The
Concerns the relative size of an item and its effect on decisions. g Periodicity
bonds pay interest
All information that could affect decisions should be reported. h Revenue recognition
A common denominator is the dollar. i Materiality twice a year on
January 1 and July 1.
The annual interest rate is 12%.
b. Vito’s depreciable equipment has a cost of $30,000, a five-year life, and no salvage value. The equipment was purchased in 2016. The
straight-line depreciation method is used.
c. On November 1, 2018, the bar area was leased to Jack Donaldson for one year. Vito’s received $6,000 representing the first six months’ rent
and credited deferred rent revenue.
 d. On April 1, 2018, the company paid $2,400 for a two-year fire and liability insurance policy and debited insurance expense.
e. On October 1, 2018, the company borrowed $20,000 from a local bank and signed a note. Principal and interest at 12% will be paid on
September 30, 2019.
f. At year-end, there is a $1,800 debit balance in the supplies (asset) account. Only $700 of supplies remain on hand.

Required:
1. Prepare the necessary adjusting journal entries at December 31, 2018.
2. Determine the amount by which net income would be misstated if Vito’s failed to record these adjusting entries. (Ignore income tax expense.)