Question

Section Two:

The Draper Company Records these journal entries:

Cash received for services in advance	$40
Accrued Expense	$17
Used portion of Prepaid Insurance	$12

Required:

Indicate the net effect of these journal entries on the following items. Indicate the dollar amount of the effect and the direction of the effect. (Example: $13 Increase, or $8 Decrease, or NO EFFECT)

1. Net Income             $_______________
2. Total Assets            $_______________
3. Total Liabilities        $_______________
4. Retained Earnings $_______________
5. Total Equity            $_______________
6. Working Capital       $_______________

Answer 1

Answer:

a	Net income	$40 increase
b	Total assets	$28 increase
c	Total liabilities	$17 Increase
d	Retained earnings	$40 increase
e	Total equity	$40 increase
f	Working capital	$23 increase

Calculations:

a	Service revenue	$40
	Less: Expenses [$17+$12]	($29)
	Net income	$11
b	Increase in cash	$40
	Decrease in prepaid insurance	($12)
	Increase in total assets	$28
c	Total liabilites = Accrued expenses
d	Retained earnings increased by net income
e	Total equity increased by increase in retained earnings
f	Increase in current assets (Cash)	$40
	(Less): Increase in current liabilities (Accrued expenses)	($17)
	Increase in working capital	$23