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Make the required adjusting journal entries on December 31, 2010 for the following transactions that occurred during the accounting period from January 1, 2010 to December 31, 2010:

1. One year's insurance was purchased and paid in full for a total premium of $2,400 on May 1, 2010.
2. On October 1, 2010, a building space was rented to a client for two years. Two years' rent of $12,000 was collected in advance.
3. Taxes accrued for 2010 totaled $4,000.
4. Earned service fees amounted to $8,000 from our clients as of December 31, but have not yet been billed.

On May 1, when the insurance was purchased, prepaid insurance (an asset) is debited, and cash is credited. As of December 31, 2010, eight months' insurance policy expired, so $(\$2,400/12)\; x 8=\$\text{1,600}$ should be recorded as insurance expense (a debit to insurance expense), reducing the balance of prepaid insurance by crediting the same amount. After this adjustment, the business should have an $800 balance left in prepaid insurance, which will be shown on the balance sheet for 2010, and an $800 insurance expense, which will be shown on the 2010 income statement.

If this adjustment were not made,

• expenses would have been understated,
• income would have been overstated,
• retained earnings would have been overstated, and
• assets would have been overstated.

On October 1, 2010, when $12,000 was collected from the client for services to be rendered in the future, the cash would be debited, and unearned rent revenue (a liability) would be credited. This is because the $12,000 cash collected in advance had not been earned yet. However, as of December 31, 2010, the business would earn three months' of rent: ($12,000/24) x 3 = $1,500. So, the business makes an adjustment to the account for the $1,500 revenue earned by debiting the unearned rent revenue account and crediting rent revenues by $1,500. As a result of this, the December 31, 2010 balance sheet would show an unearned rent revenue balance of $10,500, and the 2010 income statement would show rent revenue of $1,500.

If this adjustment were not made,

• revenues would have been understated,
• income would have been understated,
• retained earnings would have been understated, and
• liabilities would have been overstated.

As of December 31, 2010, accrued taxes for 2010 totaled $4,000. We will be paying 2010 taxes sometime in 2011. Therefore, this $4,000 needs to be recorded as a debit to income tax expense and a credit to income taxes payable. After this adjustment, the balance sheet, as of 2010, would show income taxes payable of $4,000, and the 2010 income statement would show an interest expense of $4,000.

If this adjustment were not made,

• expenses would have been understated,
• net income would have been overstated,
• retained earnings would have been overstated, and
• liabilities would have been understated.

Accounts receivable would be debited by $8,000 for revenues earned, and fees earned would be credited by the same amount. As a result of this, the balance sheet, as of December 31, 2010, would show $8,000 in accounts receivable, and the income statement would show revenue of $8,000.

If this adjusting entry were not made,

• revenues would have been understated,
• income would have been understated,
• retained earnings would have been understated, and
• assets would have been understated.