Black-Eyed Pears Ltd. initially records all prepaid costs as expenses and all revenue collected in advance as revenues. The following information is available for the year ended December 31,2014.
1. Purchased a one-year insurance policy on May I, 2014, for $9,600 cash.
2. On October 1, 2014, paid $9,200 for five months' rent in advance.
3. On October 15, 2014, purchased 36 advertising spots on a local radio station at a cost of $9,000. The advertising spots were to be used over the next six months. At December 31, the company had used 18 spots.
4. Signed a contract for legal services starting December 1, 2014, for $4,500 per month. Paid for the first three months on December 1, 2014.
5. During the year, sold $1,500 of gift certificates. Determined that on December 31, 2014, $475 of these gift certificates had not been redeemed.
Instructions
(a) For each of the above, prepare a journal entry to record the initial transaction.
(b) Post each of the above transactions. Use T accounts (ignore the Cash account).
(c) Journalize and post the adjusting entries at December 31, 2014.
(d) Determine the ending balance in each of the accounts.
Exercises 133
(e) Would the adjusting entries and accounts be affected if Black-Eyed Pears records prepayments by debiting an asset when prepaid costs are paid in cash, and crediting a liability when unearned revenues are collected in advance?