O'Reilly logo

Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

SOLUTION TO EXERCISE 3-4

images

Approach and Explanation: Write down the definitions for prepaid expense and unearned revenue. Think about what is to be accomplished by each of the adjustments required in this exercise. A prepaid expense is an expense that has been paid but not incurred. In a case where the prepayment was recorded as an increase in an asset account (such as Prepaid Expense or Supplies on Hand), the adjusting entry will record the increase in Expense (debit) and a decrease in the recorded Asset (credit) due to the consumption of the benefits yielded by the earlier prepayment. An unearned revenue is a revenue that has been received but not performed. In a case where the cash receipt was recorded as an increase in a liability account (such as Unearned Revenue or Deferred Revenue), the adjusting entry will record a decrease in the recorded liability Unearned Revenue (debit) and an increase in Earned Revenue (credit) due to the earning of all or a portion of the revenue represented by the earlier cash receipt.

It is helpful to sketch a T-account for the related asset or liability account. Enter the amounts reflected in that account before adjustment, enter the desired ending balance, and notice how the required adjustment is then obvious from facts reflected in your T-account. The T-accounts would appear as follows:

ILLUSTRATION 3-1 SUMMARY OF ADJUSTMENT RELATIONSHIPS AND ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required