Chapter 3, Problem 3.44BP

Understanding the alternative treatment of prepaid expenses and unearned revenues

Speedy Pack’n Mail completed the following transactions during 2016:

Nov. 1	Paid $5,200 store rent covering the four-month period ending February 28, 2017.
1	Paid $9,600 insurance covering the six-month period ending April 30, 2017.
Dec. 1	Collected $5,400 cash in advance from customers. The service revenue will be earned $1,800 monthly over the three-month period ending February 28, 2017.
1	Collected $10,000 cash in advance from customers. The service revenue will be earned $2,000 monthly over the five-month period ending April30, 20 17.

Requirements

1. Journalize the transactions assuming that Speedy 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, 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.