Question

EXERCISE 4.9

Relationship of Adjusting Entries to Business Transactions

Among the ledger accounts used by Rapid Speedway are the following: Prepaid Rent, Rent Expense, Unearned Admissions Revenue, Admissions Revenue, Prepaid Printing, Printing Expense, Concessions Receivable, and Concessions Revenue. For each of the following items, provide the journal entry (if one is needed) to record the initial transaction and provide the adjusting entry, if any, required on May 31, assuming the company makes adjusting entries monthly.

1. On May 1, borrowed $600,000 cash from National Bank by issuing a 9 percent note payable due in three months.

2. On May 1, paid rent for six months beginning May 1 at $14,400 per month.

3. On May 2, sold season tickets for a total of $720,000 cash. The season includes 60 racing days: 15 in May, 20 in June, and 25 in July.

4. On May 4, an agreement was reached with Snack-Bars, Inc., allowing that company to sell refreshments at the track in return for 10 percent of the gross receipts from refreshment sales.

Answer 1

The adjusting entries are made to comply with the accrual and matching principles of accounting in which the expenses of the respective period is charged to that period only and others are deffered as per the nature of the transaction:

In the given case , transactions are given and need to make entry at the transaction date and adjusting entry at the end of the month:

1. On May 1, borrowed $600,000 cash from National Bank by issuing a 9 percent note payable due in three months.here the interest at the end of 1 months needs to be booked as adjusting entry the interest amount = 600,000 * 9% * 3/12 = $ 4,500.

2. On May 1, paid rent for six months beginning May 1 at $14,400 per month., here the rent paid is for 6 months in advance so cash expenses will be = $14,400 * 6 = $ 86,400 and the rent charge for the month will be only $14,400 and remaining $ 72,000 will be transferred to the prepaid rent.

3. On May 2, sold season tickets for a total of $720,000 cash. The season includes 60 racing days: 15 in May, 20 in June, and 25 in July. here the revenue for the 15 days in may i.e $180,000 ( 720000*15/60) will only be transferred to the revenue and the remaining $ 540,000 will be transferred to the Unearned Admissions Revenue.

4. On May 4, an agreement was reached with Snack-Bars, Inc., allowing that company to sell refreshments at the track in return for 10 percent of the gross receipts from refreshment sales.it is only and agreement no amount is specified so no journal entry will be made:

Based on the above calculations and discussions the journal entry will be as follows:

Journal Entry
Date	Accounts	Debit ($)	Credit ($)
May.1	Cash account	600,000
	Note payable		600,000
	(To record the cash received from note borrowing)
May .1	Rent account	86,400
	Cash account		86,400
	( To record rent paid for 6 months)
May.2	Cash Account	720,000
	Admission Revenue		720,000
	( To record admission revenue from ticket sold)
May.4	No Entry
May .31	Interest Expenses	4,500
	Accrued Interest payable		4,500
	( To record accrual of interest )
May .31	Prepaid Rent	72,000
	Rent Account		72,000
	( To record prepaid rent paid)
May .31	Admission Revenue	540,000
	Unearned Admission Revenue		540,000
	( To record unearned admission revenue)