Understanding the alternative treatment of prepaid expenses and unearned revenues Night Flyer Pack’n Mail completed the following transactions during 2016: Nov. 1 Paid $2,000 store rent covering the four-month period ending February 28, 2017. Nov. 1 Paid $12,500 insurance covering the five-month period ending March 31, 2017. Dec. 1 Collected $4,500 cash in advance from customers. The service revenue will be earned $1,500 monthly over the three-month period ending February 28, 2017. 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, 2017. Requirements 1. Journalize the transactions assuming that Night Flyer debits an asset account for prepaid expenses and credits a liability account for unearned revenues. 2. Journalize the related adjusting entries at December 31, 2016. 3. Post the journal and adjusting entries to the T-accounts, and show their balances at December 31, 2016. (Ignore the Cash account.) 4. Repeat Requirements 1–3. This time, debit an expense account for prepaid ex- penses and credit a revenue account for unearned revenues. 5. Compare the account balances in Requirements 3 and 4. They should be equal.
Understanding the alternative treatment of prepaid expenses and
unearned revenues
Night Flyer Pack’n Mail completed the following transactions during 2016:
Nov. 1 Paid $2,000 store rent covering the four-month period ending
February 28, 2017.
Nov. 1 Paid $12,500 insurance covering the five-month period ending
March 31, 2017.
Dec. 1 Collected $4,500 cash in advance from customers. The service
revenue will be earned $1,500 monthly over the three-month period
ending February 28, 2017.
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, 2017.
Requirements
1. Journalize the transactions assuming that Night Flyer debits an asset account for
prepaid expenses and credits a liability account for unearned revenues.
2. Journalize the related
3. Post the journal and adjusting entries to the T-accounts, and show their balances at
December 31, 2016. (Ignore the Cash account.)
4. Repeat Requirements 1–3. This time, debit an expense account for prepaid ex-
penses and credit a revenue account for unearned revenues.
5. Compare the account balances in Requirements 3 and 4. They should be equal.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 7 images
