Q5-7TI - Horngren'S Financial And Managerial Accounting

Question

Click Computers has the following transactions related to the sale of merchandise inventory.

Mar. 1 Sold a computer (cost of \(3,000) for \)8,000 to a customer. The customer paid cash. The sales price included a one-year service contract valued at $168.

Dec. 31 Recorded the amount of service contract earned.

Journalize the transactions for Click Computers assuming that the company uses the perpetual inventory system.

Step-by-Step Solution

Answer

The total of debits and credits for the journal is $11,336.

Meaning of Service Contract

In business terms, a service contract denotes an agreement between a consumer and a business entity in which the maintenance and service of the equipment are covered over a specified period. 

Preparation of journal entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
Mar 1	Cash	8,168
	Service revenue		8,000
	Unearned revenue		168
	(Cash sales including one-year service contract)
Mar 1	Cost of goods sold	3,000
	Inventory		3,000
	(Recorded the cost of goods sold)
Dec 31	Unearned revenue	168
	Service revenue		168
	(Service revenue earned)