Assignments

Prepaid expenses

Following are three separate transactions that pertain to prepaid items. Evaluate
each item and prepare the journal entries that would be needed for the initial
recording and subsequent end-of-20X3 adjusting entry.

The company has a calendar year-end and does not make any adjusting entries prior
to December 31.

(1) The company purchased an 18-month insurance policy for $18,000 on June 1,
20X3.

(2) The company started 20X3 with $20,000 in supplies (this was previously
recorded, and you do not need to make an entry for the beginning balance),
purchased $30,000 in supplies during the year, and found only $13,000 in supplies
on hand at the end of 20X3.

(3) The company paid $2,500 to rent a truck. The rental period began on December
16, 20X3, and ends on February 14, 20X4.

Depreciation

Mohamed Bakar Alidini recently formed a business in the Republic of Yemen to

process liquefied natural gas for export to other countries. Natural gas can be
converted to a liquid by cooling it to -163 degrees Celsius. It then assumes a highly
compressed state and can be transported by specially designed cryogenic vessels.
Mohamed’s business invested 80,000,000 (Yemeni Rials/YER) in a
cooling/containment chamber with a 4-year life. The chamber will have no remaining
value at the end of the 4-year period.

(a) Prepare journal entries to record annual depreciation for each of the four years,
assuming Alidini uses the straight-line method.

(b) Show how the annual depreciation will appear in each year’s income statement.

(c) Show how the asset and related accumulated depreciation will appear in each
year’s balance sheet.
Unearned revenue

Stargate Publishing issues the Weekly Window. The company’s primary sources of
revenue are sales of subscriptions to customers and sales of advertising in the
Weekly Window. Stargate owns its building and has excess office space that it leases
to others.

The following transactions involved the receipt of advance payments. Prepare the
indicated journal entries for each set of transactions.

(1) On September 1, 20X5, the company received a $24,000 payment from an

advertising client for a 6-month advertising campaign. The campaign was to run from
November, 20X5, through the end of April, 20X6. Prepare the journal entry on
September 1, and the December 31 end-of-year adjusting entry.

(2) The company began 20X5 with $120,000 in unearned revenue relating to sales of
subscriptions for future issues. During 20X5, additional subscriptions were sold for
$1,230,000. Magazines delivered during 20X5 under outstanding subscriptions
totaled $1,020,000. Prepare a summary journal entry to reflect the sales of
subscriptions, and the end-of-year adjusting entry to reflect magazines
delivered.

(3) The company received a $3,000 rental payment on December 16, 20X5, for the
period running from mid-December to Mid-January. Prepare the December 16 journal
entry, as well as the December 31 end-of-year adjusting entry.