Q38PGA - Horngren'S Financial And Managerial Accounting

Question

Rapid Way Pack’n Mail completed the following transactions during  

                  2018:

Nov. 1  Paid \(9,600 store rent covering the six-month period ending April 30, 2019.

Nov. 1 Paid \)6,000 insurance covering the five-month period ending March 31, 2019.

Dec. 1  Collected \(9,000 cash in advance from customers. The service revenue will be earned \)1,800 monthly over the five-month period ending April 30, 2019.

Dec. 1 Collected \(7,200 cash in advance from customers. The service revenue will be earned \)2,400 monthly over the three-month period ending February 28, 2019.

 

Requirements

1. Journalize the transactions assuming that Rapid Way debits an asset account for prepaid expenses and credits a liability account for unearned revenues.

2. Journalize the related adjusting entries at December 31, 2018.

3. Post the journal and adjusting entries to the T-accounts, and show their balances at December 31, 2018. (Ignore the Cash account.)

4. Repeat Requirements 1–3. This time, debit an expense account for prepaid expenses and credit a revenue account for unearned revenues.

5. Compare the account balances in Requirements 3 and 4. They should be equal.

Step-by-Step Solution

Answer

Service Revenue Earned: $ 4,200

Total Expense incurred: $ 5,600

Step 1: Recording of journal entry

Date	Particular	Debit	Credit
2018
Nov 1	Prepaid Rent	$ 9,600
	Cash		$ 9,600
	Being rent paid in advance
Nov 1	Prepaid Insurance	$6,000
	Cash		$6,000
	Being insurance taken for 6 months
Dec 1	Cash	$ 9,000
	Unearned Revenue		$ 9,000
	Being revenue received in advance
Dec 1	Cash	$ 7,200
	Unearned Revenue		$ 7,200
	Being revenue received in advance
	Total	$ 31,800	$ 31,800

Step 2: Recording of adjusting journal entry

Date	Particular	Debit	Credit
2018
Dec 31	Rent Expense	$ 3,200
	Prepaid Rent		$ 3,200
	Being rent expense incurred for 2 months
Dec 31	Insurance Expense	$2,400
	Prepaid Insurance		$2,400
	Being insurance expense incurred for 2 months
Dec 31	Unearned Revenue	$ 1,800
	Service Revenue		$ 1,800
	Being revenue received for one month
Dec 31	Unearned Revenue	$ 2,400
	Service Revenue		$ 2,400
	Being revenue received for one month
	Total	$ 9,800	$ 9,800

Step 3: Posting into ledger

Prepaid Rent
Date	Particular	Debit	Date	Particular	Credit
2018
Nov 1	To Cash	$ 9,600	Dec 31	By Rent Expense	$ 3,200
			Dec 31	By Balance c/d	6,400
		$ 9,600			$ 9,600

Prepaid Insurance
Date	Particular	Debit	Date	Particular	Credit
2018
Nov 1	To Cash	$ 6,000	Dec 31	By Insurance Expense	$ 2,400
			Dec 31	By Balance c/d	3,600
		$ 6,000			$ 6,000

Rent Expense
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Prepaid Rent	$ 3,200	Dec 31	By Balance c/d	$ 3,200

Insurance Expense
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Prepaid Insurance	$ 2,400	Dec 31	By Balance c/d	2,400

Unearned Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Service Revenue	$ 1,800	Dec 1	By Cash	$ 9,000
Dec 31	To Service Revenue	$ 2,400	Dec 1	By Cash	7,200
Dec 31	To Balance c/d	$ 12,000
		$ 16,200			$ 16,200

Service Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Balance c/d	$ 4,200	Dec 31	By Unearned Revenue	$ 1,800
			Dec 31	By Unearned Revenue	2,400
		$ 4,200			$ 4,200

Step 4: Repetition of requirement 1, 2 and 3

Date	Particular	Debit	Credit
2018
Nov 1	Rent Expense	$ 9,600
	Cash		$ 9,600
	Being rent paid in advance
Nov 1	Insurance Expense	$6,000
	Cash		$6,000
	Being insurance taken for 6 months
Dec 1	Cash	$ 9,000
	Service Revenue		$ 9,000
	Being revenue received in advance
Dec 1	Cash	$ 7,200
	Service Revenue		$ 7,200
	Being revenue received in advance
	Total	$ 31,800	$ 31,800

Date	Particular	Debit	Credit
2018
Dec 31	Prepaid Rent	$ 6,400
	Rent Expense		$ 6,400
	Being rent expense deferred for 4 months
Dec 31	Prepaid Insurance	$3,600
	Insurance Expense		$3,600
	Being insurance expense deferred for 3 months
Dec 31	Service Revenue	$ 7,200
	Unearned Revenue		$ 7,200
	Being revenue deferred for four month
Dec 31	Service Revenue	$ 4,800
	Unearned Revenue		$ 4,800
	Being revenue deferred for two month
	Total	$ 22,000	$ 22,000

Prepaid Rent
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Rent Expense	$ 6,400	Dec 31	By Balance c/d	6,400
		$ 6,400			$ 6,400

Prepaid Insurance
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Insurance Expense	$ 3,600	Dec 31	By Balance c/d	3,600
		$ 3,600			$ 3,600

Rent Expense
Date	Particular	Debit	Date	Particular	Credit
2018
Nov 1	To Cash	$ 9,600	Dec 31	By Prepaid Rent	$ 6,400
			Dec 31	By Balance c/d	3,200
		$ 9,600			$ 9,600

Insurance Expense
Date	Particular	Debit	Date	Particular	Credit
2018
Nov 1	To Cash	$ 6,000	Dec 31	By Prepaid Insurance	$ 3,600
			Dec 31	By Balance c/d	2,400
		$ 6,000			$ 6,000

Unearned Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Balance c/d	$ 12,000	Dec 31	By Service Revenue	$ 7,200
			Dec 31	By Service Revenue	4,800
		$ 12,000			$ 12,000

Service Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Unearned Revenue	$ 7,200	Dec 1	By Cash	$ 9,000
Dec 31	To Unearned revenue	4,800	Dec 1	By Cash	7,200
Dec 31	To Balance c/d	4,200
		$ 16,200			$ 16,200

Step 5: Comparison

Account Name	Account Balance under method 1	Account Balance under method 2
Rent Expense	$ 3,200 (Dr.)	$ 3,200 (Dr.)
Prepaid Rent	6,400 (Dr.)	6,400 (Dr.)
Insurance Expense	2,400 (Dr.)	2,400 (Dr.)
Prepaid Insurance	3,600 (Dr.)	3,600 (Dr.)
Unearned Revenue	12,000 (Cr.)	12,000 (Cr.)
Service Revenue	4,200 (Cr.)	4,200 (Cr.)