Problem #2: Adjusting Entries (54 points) You must determine the proper GAAP tre

Question

Problem #2: Adjusting Entries (54 points) You must determine the proper GAAP treatment of the items described in two scenarios presented below. In the scenarios, you will prepare and post journal entries for one or more transactions as requested. . In each scenario, you will prepare the necessary adjusting entry in general journal form and post the adjustment to the relevant T-accounts. You will need to compute the account balances to answer any follow up questions as well as to post entries for transactions in the following year when requested. Please note that you will not use all of the T-accounts provided in some scenarios. You must use Cash to record some entries. T-accounts for Cash are not provided as they would be affected by many other transactions. Therefore you will only partially post those entries. Scenario #1: Magazine Subscriptions (14 points) On December 31, 2017, The Active Accountant reported Unearned Subscriptions Revenue of $4,100,000. That balance included $2,830,000 for subscriptions to issues to be published in 2018 and $1,270,000 for issues to be published in 2019. 1. During 2018, the magazine sold subscriptions for cash of $17,500,000 that consisted of: For issues to be published in 2018 For issues to be published in 2019 For issues to be published in 2020 $9,850,000 $5,360,000 $2,290,000 Prepare the general journal entry to record the cash received for the subscriptions sold during 2018. Post the entry to the relevant T-account(s) on the following page and compute the resulting balance(s) at December 31, 2018 before adjustment. (2 points entry+ 2 points for posting/balance) DATE ACCOUNT NAMES DEBIT CREDIT 2018

Explanation / Answer

1. a. The magazine has received a total of 17,500,000 in cash for magazine subscriptions. The journal entry will be:

Cash A/c Dr. 17,500,000

To Subscriptions Revenue A/c 17,500,000

Cash A/c

Subscriptions Revenue A/c

1. b. On 31/12/2017 Unearned Subscription Revenue is 4,100,000. Out of this 2,830,000 pertains to 2018. So if all the issues of 2018 have been produced, then this amount will have to be transferred to the Subscription Revenue A/c on 31/12/2018.

Secondly out of the 17,500,000 received in 2018 for subscriptions, only 9,850,000 pertains to the year 2018. Thus the remaining amount of 7,650,000 earlier recorded as revenue will have to be transferred to the Unearned Subscription Revenue A/c.

Journal Entries will be as follows:

31/12/2018 Unearned Revenue Subscriptions A/c 2,830,000

To Revenue Subscriptions A/c 2,830,000

31/12/2018 Revenue Subscriptions A/c 7,650,000

To   Unearned Revenue Subscriptions A/c 7,650,000

Ledger Posting:

  Unearned Revenue Subscriptions A/c

  Revenue Subscriptions A/c

1.c. Balances will be shown as follows:

Income Statement:

Revenue Subscriptions A/c 12,680,000 (Credit Side)

Statement of Financial Position

  Unearned Revenue Subscriptions A/c 8,920,000 (Credit/Liabilities Side)

2.a. Brown Capacitator raises a loan of $600,000 and issues a promissory note against it. The amount so recieved will be debited in the Bank A/c and the promissory note shall be recorded as a liability

Journal Entry:

1/9/2018 Bank A/c 600,000

To Short Term Notes Payable A/c 600,000

Ledger Posting:

Bank A/c

Short Term Notes Payable A/c

2.b. The interest paid being an expense will be debited and bank account will be credited.

Interest Expense 0.075*(3/12)*600,000 = 11,250

Journal Entry

1/12/2018 Interest Expense A/c Dr. 11,250

To Bank A/c 11,250

Ledger Posting

Interest Expense

Bank A/c

2.c. Even though the next interest payment falls on 1/3/2019 but the interest pertaining to the month of December is an expense of this accounting period that is financial year 2018. So, an entry will have to be passed to recognize interest expense for the month of December.

Interest Expense for December = (1/12)*0.075*600,000 = 3,750

Journal Entry:

31/12/2018 Interest Expense A/c Dr. 3,750

To Interest Payable A/c 3,750

Interest Expense

Interest Payable

2.d. Balances will be shown as below:

Income Statement:

Interest Expense 15,000 (Debit Side)

Statement of Financial Position:

Interest Payable 3,750 (Credit/Liability Side)

Short Term Note Payable 600,000 (Credit/Liability Side)

2.e. The Ledger accounts have been closed and balanced in 2.c.

2.f.& 2 g.

Journal Entry:

1/3/2018 Interest Expense A/c Dr. 7,500

Interest Payable A/c Dr. 3,750

To Bank A/c Dr. 11,250

1/6/2018 Interest Expense A/c Dr. 11,250

Short Term Note Payable A/c Dr. 600,000

To Bank A/c 611,250

Ledger Posting

Interest Expense

Thus the balance of Interest Expense A/c on 1/6/19 = 18,750

Interest Payable A/c

Short Term Note Payable A/c

Balance of Short Term Notes Payable on 1/6/19 = 0

Bank A/c

Note: Balance of Bank A/c on 1/6/19 cannot be determined as opening balance and other transactions are not known

3. a. The 60,000 recorded as prepaid advertsing expense on 31/12/17 will be reversed and recognised as an expense in 2018 as they represent the amount paid for advertising in the month of Jan to May 2018.

The amount of 168,000 recorded as advertising expense in 2018 represents the cost of advertising from June 2018 to May 2019. Of this the cost of Jan 2019 to May 2019 shall be recognized as a prepaid expense as it pertains to 2019 and is not an expense of 2018.

Prepaid Expense = 168,000*(5/12) = 70,000

Journal Entry

31/12/2018 Advertising Expense A/c Dr. 60,000

To Prepaid Advertising Expense A/c 60,000

31/12/2018 Prepaid Advertising Expense A/c Dr. 70,000

To Advertising Expense A/c

Ledger Posting:

Advertising Expense A/c

Prepaid Advertising Expense A/c

3.b.

Balances will be shown as below:

Income Statement:

Advertising Expense 158,000 (Debit Side)

Statement of Financial Position:

Prepaid Advertising Expense 70,000 (Debit/Asset Side)

Particulars Amount Particulars Amount To Subscriptions Revenue A/c 17,500,000

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.