Chapter 3, Problem 6BPSB

Problem 3-6B

Recording prepaid expenses and unearned revenues

P4

Tremor Co. had the following transactions in the last two months of its fiscal year ended May 31. (Entries can draw from the following partial chart of accounts: Cash; Prepaid Insurance; Prepaid Advertising; Prepaid Consulting Fees; Unearned Service Fees; Services Fees Earned ;Insurance Expense; Advertising Expense; Consulting Fees Expense.)

Apr. 1- Paid $2,450 cash to an accounting firm for future consulting services.

1- Paid $3,600 cash for 12 months of insurance through March 31 of the next year.

30- Received $8,500 cash for future services to be provided to a customer.

May 1- Paid $4,450 cash for future newspaper advertising.

23- Received $10,450 cash for future services to be provided to a customer.

31- Of the consulting services paid for on April 1, $2,000 worth has been performed.

31- A portion of the insurance paid for on April 1 has expired. No adjustment was made in April to Prepaid Insurance.

31- Services worth $4,600 are not yet provided to the customer who paid on April

30.

31- Of the advertising paid for on May 1, $2,050 worth is not yet used.

31- The company has performed $5,500 of services that the customer paid for on May

23.

Required

1. Prepare entries for these transactions under the method that initially records prepaid expenses and unearned revenues in balance sheet accounts. Also prepare adjusting entries at the end of the year.

2. Prepare entries for these transactions under the method that initially records prepaid expenses and unearned revenues in income statement accounts. Also prepare adjusting entries at the end of the year.

Analysis Component

3. Explain why the alternative sets of entries in parts 1 and 2 do not result in different financial statement amounts.