Exercise 4-17 (Part Level Submission) Action Quest Games Inc. adjusts its accoun
ID: 2588271 • Letter: E
Question
Exercise 4-17 (Part Level Submission) Action Quest Games Inc. adjusts its accounts annually. The following information is available for the year ended December 31, 2017 1. Purchased a 1-year insurance policy on June 1 for $2,040 cash. 2. Paid $5,900 on August 31 for 5 months' rent in advance. On September 4, received $2,880 cash in advance from a corporation to sponsor a game each month for a total of 9 months for the most improved students at a local school. Signed a contract for cleaning services starting December 1 for $800 per month. Paid for the first 2 months on November 30. (Hint: Use the account Prepaid Cleaning to record prepayments.) On December 5, received $1,550 in advance from a gaming club. Determined that on December 31, $600 of these games had not yet been played 3. 4.Explanation / Answer
Note:
Line 1 and 2: Expenses should be recognised proportionately for the peroid for which benefit is received. For example in insurance out of 12 months only 7 months are passed from June to december so 7 months proportionate amount should be expensed. Same with rent where 4 months are used from Sep to Dec, hence expense should be recognised for 4 months.
and when it comes to debit and credit of accounts, prepaid insurance and prepaid rent are asset accounts which should be credited when a portion of it is expensed to profit and loss account. Insurance expense and rent expense accounts should be debited correspondingly.
Simlarly, when revenue is earned out of unearned revenue the portion earned only should be recognised as revenue. And revenue account should be credited when recognised. When revenue is earned to decrease the balance in unearned revenue, it should be debited.
Hope this helps, Good luck.
No Date Account titles Debit Credit 1 Dec.31 Insurance expense 1190 Prepaid insurance 1190 [Expense= 2040*7/12] 2 Dec.31 Rent expense 4720 Prepaid rent 4720 [Rent expense for 4 months= 5900*4/5] 3 Dec.31 Unearned service revenue 1280 Service revenue 1280 [Service revenue recognised for 4 months= 2880*4/9 4 Dec.31 Maitenance and repairs expense 800 Prepaid cleaning 800 [Cleaning expense for 1 month] 5 Dec.31 Unearned service revenue 950 Service revenue 950 [Revenue recognised to the extent of games played= 1550-600=950]Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.