Q44PGB - Horngren'S Financial And Managerial Accounting

Question

Sent It Pack’n Mail completed the following transactions during 2018:

 

Nov. 1  Paid \(6,000 store rent covering the four-month period ending February 28, 2019.

1  Paid \)7,800 insurance covering the six-month period ending April 30, 2019.

Dec. 1 Collected \(12,000 cash in advance from customers. The service revenue will be earned \)2,400 monthly over the five-month period ending April 30, 2019.

1 Collected \(7,500 cash in advance from customers. The service revenue will be earned \)1,500 monthly over the five-month period ending April 30, 2019.

 

Requirements

1. Journalize the transactions assuming that Sent It Pack’n Mail 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: $ 3,900

Total Expense incurred: $ 5,600

Step 1: Recording of journal entry

Date	Particular	Debit	Credit
2018
Nov 1	Prepaid Rent	$ 6,000
	Cash		$ 6,000
	Being rent paid in advance for 4 months
Nov 1	Prepaid Insurance	$7,800
	Cash		$7,800
	Being insurance taken for 6 months
Dec 1	Cash	$ 12,000
	Unearned Revenue		$ 12,000
	Being revenue received in advance for 5 months
Dec 1	Cash	$ 7,500
	Unearned Revenue		$ 7,500
	Being revenue received in advance for 5 months
	Total	$ 33,300	$ 33,300

Step 2: Recording of adjusting entry

Date	Particular	Debit	Credit
2018
Dec 31	Rent Expense	$ 3,000
	Prepaid Rent		$ 3,000
	Being rent expense incurred for 2 months
Dec 31	Insurance Expense	$2,600
	Prepaid Insurance		$2,600
	Being insurance expense incurred for 2 months
Dec 31	Unearned Revenue	$ 2,400
	Service Revenue		$ 2,400
	Being revenue received for one month
Dec 31	Unearned Revenue	$ 1,500
	Service Revenue		$ 1,500
	Being revenue received for one month
	Total	$ 9,500	$ 9,500

Step 3: Posting into the ledger

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

 

 

Prepaid Insurance
Date	Particular	Debit	Date	Particular	Credit
2018
Nov 1	To Cash	$ 7,800	Dec 31	By Insurance Expense	$ 2,600
			Dec 31	By Balance c/d	5,200
		$ 7,800			$ 7,800

 

Rent Expense
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Prepaid Rent	$ 3,000	Dec 31	By Balance c/d	$ 3,000

 

Insurance Expense
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Prepaid Insurance	$ 2,600	Dec 31	By Balance c/d	2,600

 

Unearned Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Service Revenue	$ 2,400	Dec 1	By Cash	$ 12,000
Dec 31	To Service Revenue	$ 1,500	Dec 1	By Cash	7,500
Dec 31	To Balance c/d	$ 15,600
		$ 19,500			$ 19,500

 

Service Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Balance c/d	$ 3,900	Dec 31	By Unearned Revenue	$ 2,400
			Dec 31	By Unearned Revenue	1,500
		$ 3,900			$ 3,900

 

Step 4: Repetition of requirements 1, 2 and 3

Date	Particular	Debit	Credit
2018
Nov 1	Rent Expense	$ 6,000
	Cash		$ 6,000
	Being rent paid in advance
Nov 1	Insurance Expense	$7,800
	Cash		$7,800
	Being insurance taken for 6 months
Dec 1	Cash	$ 12,000
	Service Revenue		$ 12,000
	Being revenue received in advance
Dec 1	Cash	$ 7,500
	Service Revenue		$ 7,500
	Being revenue received in advance
	Total	$ 33,300	$ 33,300

 

 

Date	Particular	Debit	Credit
2018
Dec 31	Prepaid Rent	$ 3,000
	Rent Expense		$ 3,000
	Being rent expense deferred for 2 months
Dec 31	Prepaid Insurance	$5,200
	Insurance Expense		$5,200
	Being insurance expense deferred for 4 months
Dec 31	Service Revenue	$ 9,600
	Unearned Revenue		$ 9,600
	Being revenue deferred for four month
Dec 31	Service Revenue	$ 6,000
	Unearned Revenue		$ 6,000
	Being revenue deferred for four month
	Total	$ 23,800	$ 23,800

 

Prepaid Rent
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Rent Expense	$ 3,000	Dec 31	By Balance c/d	3,000
		$ 3,000			$ 3,000

 

Prepaid Insurance
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Insurance Expense	$ 5,200	Dec 31	By Balance c/d	5,200
		$ 5,200			$ 5,200

 

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

 

Insurance Expense
Date	Particular	Debit	Date	Particular	Credit
2018
Nov 1	To Cash	$ 7,800	Dec 31	By Prepaid Insurance	$ 5,200
			Dec 31	By Balance c/d	2,600
		$ 7,800			$ 7,800

 

Unearned Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Balance c/d	$ 15,600	Dec 31	By Service Revenue	$ 9,600
			Dec 31	By Service Revenue	6,000
		$ 15,600			$ 15,600

 

Service Revenue
Date	Particular	Debit	Date	Particular	Credit
2018
Dec 31	To Unearned Revenue	$ 9,600	Dec 1	By Cash	$ 12,000
Dec 31	To Unearned revenue	6,000	Dec 1	By Cash	7,500
Dec 31	To Balance c/d	3,900
		$ 19,500			$ 19,500

Step 5: Comparison

Account Name	Account Balance under method 1	Account Balance under method 2
Rent Expense	$ 3,000 (Dr.)	$ 3,000 (Dr.)
Prepaid Rent	3,000 (Dr.)	3,000 (Dr.)
Insurance Expense	2,600 (Dr.)	2,600 (Dr.)
Prepaid Insurance	5,200 (Dr.)	5,200 (Dr.)
Unearned Revenue	15,600 (Cr.)	15,600 (Cr.)
Service Revenue	3,900 (Cr.)	3,900 (Cr.)