Chapter 3, Problem P3A.44BPGB

Understanding the alternative treatment of prepaid expenses and unearned revenues

Speedy I’ack’n Mail completed the following transactions during 2016:

Nov. 1 Paid $5,200 store rent covering the lour-month period ending February 28, 2017.

I Paid $9,600 insurance covering the six-rnonlh period ending April 30, 2017.

Dec I Collected $5,400 cash in advance from customers. The service

revenue will be earned S 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 April 30, 2017.

Requirements

1. Journalize die transactions assuming that Speedy Pack’n Mail debits an asser account for prepaid expenses and credits a liability account for unearned revenues.
2. Journalize the related adjusting entries at December 31,2016.
3. Posr the journal and adjusting entries to the T-accounrs, and show their balances at December 31, 2016. (Ignore the Cash account.)
4. Repeat Requirements 1-3. This rime debit an expense account fur prepaid expenses and credit a revenue account for unearned revenues.
5. Compare rhe account balances in Requirements 3 and 4, They should be equal.