In each of the following transactions (a) through (c) for Romney's Marketing Company, use the three-step process illustrated in the chapter to record only the adjusting entry at the end of the current year. The process includes (1) determining if revenue was earned or an expense was incurred, (2) determining whether cash was received or paid in the past or will be received or paid in the future, and (3) computing the amount of the adjustment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
- Collected $2,000 rent for the period December 1 of the current year to April 1 of next year, which was credited to Unearned Rent Revenue on December 1.
- Purchased a machine for $46,000 cash on January 1. The company estimates annual depreciation at $3,700.
- Paid $3,300 for a two-year insurance premium on July 1 of the current year; debited Prepaid Insurance for that amount.
Answer
a.
1. Rent revenue is now earned.
2. Cash was received in the past – a deferred revenue was recorded.
3. Amount: $2,000 ÷ 4 months = $500 earned.
b.
1. Depreciation Expense on the equipment is now incurred.
2. Cash was paid in the past when the equipment was purchased − a deferred expense was recorded. The net book value of the equipment is overstated. Accumulated Depreciation (the contra-account) needs to be increased for the amount used during the period.
3. Amount: $3,700 given.
c.
1. Insurance expense was incurred in the period.
2. Cash was paid for the insurance in the past − a deferred expense was recorded.
3. Amount: $3,300 × 6/24 = $825.
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