Question

Latté Da Coffee has a calendar year-end. The following transactions occurred during the year:

• On September 1, it paid for an insurance policy for $6,120. It is a 9-month contract. You may assume an equal amount of the insurance is used up for each month the policy is valid.
• On October 10, it received $2,450 from a customer for prepaid coffee beans. The customer will be receiving the coffee beans in an equal amount for the next seven (7) consecutive months.
• On December 1, it billed $687 for coffee which a customer had purchased. The customer paid the bill in full on December 19.
• On December 12, it received an invoice from the fuel company for $866. It paid the invoice on December 30.

Questions:

1. For each transaction, prepare the journal entry to record the initial transaction. Make sure to properly format your journal entry. (HINT: there are four journal entries you must make.) (Each correct journal entry is worth 1 point.)
2. For each transaction, prepare any necessary adjusting journal entry as of December 31 (or any other applicable date provided). Make sure to properly format your journal entry. You may properly assume no adjusting entries were prepared at the end of each month. (HINT: there are four journal entries you must make.) (Each correct journal entry is worth 1 point.)

SPECIFIC INSTRUCTIONS: For each journal entry, type your response in the following format:

DR (account name) $(amount)
CR (account name) $(amount)

For example, if you are making an entry to debit Cash for $100 and credit Accounts Payable for $100, you would enter the following:

  DR Cash $100
CR Accounts Payable $100

Answer 1

Journal Entries:

Credit Account Date Title Debit 01-Sep DR Prepaid Insurance $ 6,120 CR Cash (To record payment of insurance in advance) $ 6,120 10-Oct DR Cash $ 2,450 CR Unearned Service Revenue $ 2,450 (To record cash received for services to be provided in the future) $ 687 DR Accounts 01-Dec Receivable CR Service Revenue (To record sale of coffee on account) $ 687 $ 866 12-Dec DR Fuel Expenses CR Accounts Payable (To record fuel expenses incurred) $ 866 19-Dec DR Cash $ 687 CR Accounts Receivable (To record payment received from customer) $ 687

Journal Entries and Adjusting Journal Entries:

Credit Account Date Title Debit 30-Dec DR Accounts Payable $ CR Cash (To record payment of fuel expenses) 866 $ 866 Adjusting Entries 31-Dec DR Insurance Expense $ 2,720 CR Prepaid Insurance $ 2,720 (To record insurance expense incurred till 31st December) Insurance Expense = (Total Insurance Amount/Insurance Period) X Months Expired Insurance Expense = ($6,120/9 months) X 4 months 4 Months = Sept, Oct, Nov, and December 700 $ 700 DR Unearned Service 31-Dec Revenue $ CR Service Revenue (To record service revenue earned) Calculation = ($2,450/7) X 2 months 2 months = November and December