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Adjusting Entries: Prepaid Expenses and Unearned Revenues

Erickson Group provides computer network consulting services. The company initially debits assets in recording prepaid expenses and credits liabilities in recording unearned revenues. Give the appropriate entry that Erickson would use to record each of the following transactions on the date it occurred. Prepare the adjusting entries needed on December 31, 2006. (Round all numbers to the nearest dollar.)

1. On March 15, 2006, Erickson received $35,000 for a contract to provide consulting services for 18 months beginning immediately.
2. On April 1, 2006, the company paid $350 for a two-year subscription to a computer networking journal. The subscription starts April 1, 2006, and expires March 31, 2008.
3. On May 1, 2006, Erickson paid $4,500 in property taxes for the year May 1, 2006, to April 30, 2007.
4. Erickson rented part of its office building to Boss Graphics, LLC. Boss paid $1,900 on August 1, 2006, for the next six months' rent.
5. On September 1, 2006, the company paid a two-year premium of $20,000 on an insurance policy that is effective September 1, 2006, and expires August 31, 2008.
6. Erickson loaned $250,000 to a client. On October 1, 2006, the client paid $21,000 for interest in advance (October 1, 2006, to September 30, 2007).

Solution Preview

Note: Most of the problems involved breaking down the amounts into monthly figures.

#1: The $35,000 was paid for 18 months.
Step a: Divide $35,000 by 18 months to get a monthly figure.
Step b: Since 10 months has passed, multiply the amount from step a by 10
Step c: Put the number you got in step b into the journal entry below:

Dr. Unearned revenue
Cr. Revenue

When the $35,000 was paid, the journal entry was to debit cash and credit unearned revenue. The entry above is ...

Solution Summary

The solution is comprised of an explanation for year end adjusting entries.