Chapter 3, Problem 21QS

a.

To determine

Prepare the journal entries by recording the prepayment of expenses in an asset account and prepayment of revenue in a liability account.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare the journal entry to record the advance cash payment of insurance.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 1	Prepaid insurance		6,000
	Cash			6,000
	(To record the journal entry for advance cash payment of insurance)

Table (1)

• Prepaid insurance is an asset and it is increased. Therefore, debit prepaid insurance with $6,000.
• Cash is an asset and it is decreased. Therefore, credit cash with $6,000.

Prepare the journal entry to record the cash received in advance for services.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
August 1	Cash		2,400
	Unearned revenue			2,400
	(To record the journal entry for cash received in advance for services)

Table (2)

• Cash is an asset and it is increased. Therefore, debit cash account with $2,400.
• Unearned revenue is a liability and it is increased. Therefore, credit unearned revenue with $2,400.

Prepare the adjusting entry to record the expiration of insurance expense.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Insurance expense		6,000
	Prepaid insurance			6,000
	(To record the adjusting entry for prepaid insurance)

Table (3)

• Insurance expense is an expense account and it is increased. Therefore, debit insurance expense with $6,000.
• Prepaid insurance is an asset and it is decreased. Therefore, credit prepaid insurance expense with $6,000.

Prepare the adjusting entry to record the service provided.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Unearned revenue		2,000
	Revenue $\left(\$2,400\times \frac{5}{6}\right)$			2,000
	(To record the adjusting entry for service provided)

Table (4)

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue with $2,000.
• Revenue is a revenue account and it is increased. Therefore, credit revenue account with $2,000.

b.

To determine

Prepare the journal entries by recording the prepayment of expenses in an expense account and prepayment of revenue in a revenue account.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare the journal entry to record the advance cash payment of insurance.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 1	Insurance expense		6,000
	Cash			6,000
	(To record the journal entry for advance cash payment of insurance)

Table (5)

• Insurance expense is an expense account and it is increased. Therefore, debit insurance expense with $6,000.
• Cash is an asset and it is decreased. Therefore, credit cash with $6,000.

Prepare the journal entry to record the cash received in advance for services.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
August 1	Cash		2,400
	Revenue			2,400
	(To record the journal entry for cash received in advance for services)

Table (6)

• Cash is an asset and it is increased. Therefore, debit cash account with $2,400.
• Revenue is a revenue account and it is increased. Therefore, credit revenue account with $2,400.

Prepare the adjusting entry to record the expiration of insurance expense.

• No adjusting entry is required for insurance

Prepare the adjusting entry to record the service provided.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Revenue $\left(\$2,400\times \frac{1}{6}\right)$		400
	Unearned Revenue			400
	(To record the adjusting entry for service provided)

Table (7)

• Revenue is a revenue account and it is decreased. Therefore, debit revenue account with $400.
• Unearned revenue is a liability and it is increased. Therefore, credit unearned revenue with $400.