Question

I. The Rau Co. closes its books once a year on Dec. 31. Required: (a) Make the necessary Dec. 31, 2000, adjusting entry for each of the following: (1) On Aug. 1, 2000, Rau received $2,800 in advance for seven months of consulting work. An income statement account was credited on Aug. 1st (2) On March 1, 2000, Rau paid $7,200 in advance for one year's rent. A balance sheet account was debited on March 1 st (3) On Nov. 1, 2000, Rau hired an advertising agency to do three months of advertising work for $4,500. This amount will be paid on Jan. 31, 2001, when the work is completed. (4) On Feb. 1, 1999, Rau received cash in advance for a three-year, 36-copy subscription to a magazine that Rau publishes. The subscription began with the February, 1999, issue. "Unearned Subscriptions Revenue” currently has $900 in it. (5) On April 1, 2000, Rau borrowed $10,000 from its bank by signing a three-year, 12% note. Interest is paid on the note semiannually on April 1st and Oct. 1st of each year. (6) On July 1, 1995, Rau acquired a machine for $45,000. The machine has an estimated life of 10 years, an estimated residual value of $3,000, and straight-line depreciation is being used. (b) Indicate which of the above entries may properly be reversed. 4

Answer 1

I.	The Rau co:
(a)	Ref.	Account titles and explanation					Debit	Credit
	1	Service revenue		2800*(2/7)			800
		Unearned revenue						800
		(Revenue for Jan and feb 2001 recorded as unearned)
	2	Rent expense		7200*(10/12)			6000
		Prepaid rent						6000
		(Rent expired from Mar 1 to Dec 31-10 monrhs)
	3	Advertising expense		4500*(2/3)			3000
		Advertising payable						3000
		(Advertisng expense payable for 2 months-Nov and Dec)
	4	Unearned subscriptions revenue				(Note:1)	432
		Subscriptions revenue						432
		(Subscriptions revenue earned)
	5	Interest expense		(10000*12%*3/12)			300
		Interest payable						300
		(Interest due from Oct 1 to Dec 31-3 months)
	6	Depreciation expense			(45000-3000)/10*(6/12)		2100
	.	Accumulated depreciation						2100
		(Depreciation recorded)
	Note:1
	Received advance in Feb 1,1999 for 3 year (36 months) subscription
	Current balance=$900
	This will be after expiration of 11 months (Feb 1999 to Dec 1999).
	Hence, the current balance represents advance for 25 months (36-11).
	Revenue to be recognized in 2000=900*(12/25)=$ 432
(b)	Entry (3) and (5)
I.	The nixon advertising agency
(a)	Date	General journal					Debit	Credit
	Feb 1.	No entry required
	May 1.	Cash					30000
		Note payable						30000
		(Borrowed from bank)
	June 1.	Equipment					33000
		Cash						33000
		(Purchased equipment)
	June 12.	Accounts receivable					6600
		Service revenue						6600
		(Billed customers)
	June 20.	Cash		(Plug)			6468
		Discount allowed		(6600*2%)			132
		Accounts receivable						6600
		(Customers paid)
	Aug 1.	Consulting charges					9000
		Cash						9000
		(Consulting charges paid in advance for 6 months)
	Oct 1.	Prepaid rent					36000
		Cash						36000
		(Rent paid in advance for 5 months)
	Nov 1.	No entry required

Date (b) Adjusting entries: Account titles Debit Credit Dec 31. Interest expense 30000*10%*(8/12) 2000 Interest payable 2000 (Interest due from May 1 to Dec 31-8 months) Dec 31. Depreciation expense (33000-3000)/5*(7/12) 3500 Accumulated depreciation 3500 (Depreciation recorded from June 1 to Dec 31-7 months) Dec 31. Prepaid consulting charges 9000*(1/6) 1500 Consulting charges 1500 (Consulting charges for Jan 2001 recorded as prepaid) Dec 31. Rent expense 36000*(3/5) 21600 Prepaid rent 216001 (Rent expired from Oct 1 to Dec 31-3 monrhs) Dec 31. Accounts receivable (800*2) 1600 Service revenue 1600 (Revenue earned for Nov and Dec-2 months) Debit Credit (c) Reversing entries: Date Account titles Jan 1. Interest payable Interest expense (Reversal of Interest due) 2000 2000

Jan 1. 1600 (Reversal of Interest due) Service revenue Accounts receivable (Reversal of revenue earned) 1600 Debit Credit (d) Date Mar 31. 4000 Account titles Cash (800*5) Service revenue (Services revenue earned for cash) 4000 (e) Date May 1. Account titles Note payable Interest payable Interest expense 30000*10%*(4/12) Cash (Repayment of note) Debit Credit 30000 2000 1000 33000