Chapter 3, Problem 3.38AP

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 April30, 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 expenses and credit a revenue account for unearned revenues.

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