Question

Jester Company began operations on January 1, 2018. The company had the following transactions in its first year of business:

• January 4: Owners invested $120,000 (the par value of the stock) in exchange for 20,000 shares of common stock.
• February 2: Jester took out a 10-year note payable in the amount of $80,000 to pay for operating expenses.
• Interest payments are due every six months, and the balance of the note will be paid off in a lump-sum in 10 years. The interest rate is 10% annually, that is, 5% every six months.
• February 16: Jester signed a rental lease for its operating facility and paid a year of rent up front in the amount of $60,000. The rental lease runs from March 1, 2018, through February 29, 2019.
• March 1: Jester purchased office supplies in the amount of $12,000 and paid in cash.
• March 12: Jester paid $18,000 cash for advertising expenses.
• April 1: Jester purchased a two-year insurance policy that runs from April 1, 2018, to March 31, 2020, in the amount of $40,000 and paid in full for the policy in cash.
• May 12: Jester negotiated a contract with a customer to provide entertainment services for a one-year period running from June 1, 2018, to May 31, 2019. The customer paid the contract in full on May 12 with cash in the amount of $64,000.
• June 16: Jester paid wages in the amount of $12,000 to employees in cash.
• July 20: Jester negotiated a contract with a customer to provide entertainment services for a six-month period running from September 1, 2018, to February 28, 2019. The customer paid the contract in full on July 20 with cash in the amount of $42,000.
• August 2: Jester paid cash in the amount of $4,000 for the first interest payment on the note payable taken out on February 2.
• August 18: Jester received and paid a utilities bill in the amount of $7,000 in cash.
• September 10: Jester paid wages in the amount of $28,000 in cash.
• October 1: Jester negotiated a contract with a customer to provide entertainment services for a one-year period running from October 1, 2018, to September 30, 2019, in the amount of $420,000. The customer paid the contract in full on October 1.
• November 14: Jester purchased office supplies in the amount of $26,000 on account with the vendor.
• December 6: Jester received an advertising bill for $22,000. The services were provided in 2018 and the bill will be paid in January.
• At year-end, Jester had $18,000 of office supplies remaining on hand.

Required:

1. Prepare the journal entries for the original transactions. Provide brief explanations if necessary. (15 points)
2. Prepare any necessary year-end adjusting journal entries for these transactions. Provide brief explanations if necessary. (7 points)

Answer 1

ACCOUNTING JOURNAL   
Date Account Debit Credit
Jan 4 Bank A/c Dr. $1,20,000
To Share Capital A/c $1,20,000
(BeingOwners' investment in 20,000 shares of common stock at par value )
  
Feb 2 Operating Expenses A/c Dr. $80,000
To 10 year note payable $80,000
(Being 10-year note payable issued for $80,000 to pay for operating expenses)   
  
Feb 16 Prepaid Rent A/c Dr. $60,000
To Bank A/c $60,000
(Being signed a rental lease for its operating facility and paid a year of rent up front in the amount of $60,000. The rental lease runs from March 1, 2018, through February 29, 2019)   
  
Mar 1 Office Supplies A/c Dr. $12,000
To Cash A/c $12,000
(Being purchase of office supplies in the amount of $12,000 and paid in cash.)   
  
Mar 12 Advertisement Expense A/c Dr. $18,000
To Cash A/c $18,000
(Being $18,000 cash paid for advertising expenses)   
  
April 1 Prepaid Insurance A/c Dr. $40,000
To Cash A/c $40,000
(Being purchase of a two-year insurance policy that runs from April 1, 2018, to March 31, 2020, in the amount of $40,000 and paid in full for the policy in cash.)   
  
May 12 Bank A/c Dr. $64,000
To Advance Income A/c $64,000
(Being Advance received against contract with a customer to provide entertainment services for a one-year period running from June 1, 2018, to May 31, 2019, $64,000.)   
  
June 16 Wages Expense A/c Dr. $12,000
To Cash A/c $12,000
(Being wages of $12,000 paid to employees in cash)   
  
July 20 Bank A/c Dr. $42,000
To Advance Income A/c $42,000
(Being Advance received against contract with a customer to provide entertainment services for a 6 months period running from Sept 1, 2018, to Feb 28, 2019, $42,000.)   
  
Aug 2 Interest Expense A/c Dr. $4,000
To Interest Expense Payable A/c $4,000
(Being first interest payment due for 6 months on the note payable taken out on February 2.)   
  
Aug 2 Interest Expense Payable A/c Dr. $4,000
To Cash A/c $4,000
(Being first interest payment due for 6 months on the note payable taken out on February 2. paid in cash)   
  
Aug 18 Utility Expense A/c Dr. $7,000
To Cash A/c $7,000
(Being payment of utilities bill in the amount of $7,000 in cash.)   
  
Sept 10 Wages Expense A/c Dr. $28,000
To Cash A/c $28,000
(Being wages of $28,000 paid to employees in cash)   
  
Oct 1 Bank A/c Dr. $4,20,000
To Advance Income A/c $4,20,000
(Being Advance received against contract with a customer to provide entertainment services for a one year period running from Oct 1, 2018, to Sept 30, 2019,)   
  
Nov 14 Office Supplies A/c Dr. $26,000
To Supplier A/c $26,000
(Being office supplies of $26,000 purchased on credit)   
  
Dec 6 Advertisement expense A/c Dr, $22,000
To Advertisement expenses payable A/c $22,000
(Being advertisement expense due)   
  
  
  
YEAR END ENTRIES   
Date Account Debit Credit
Dec 31 Rent Expense A/c Dr. $50,000
To Prepaid Rent A/c $50,000
(Being rent expenses adjusted from prepaid rent from April to Dec $60,000*10/12)   
  
Dec 31 Insurance Expense A/c Dr. $15,000
To Prepaid Insurance A/c $15,000
(Being insurance expenses adjusted from prepaid insurance from April to Dec $60,000*10/12)   
  
Dec 31 Advance Income A/c Dr. $37,333
To Service Fee A/c $37,333
(Being income for 7 months, i.e., from june to december, adjusted from advance fee received)   
  
Dec 31 Advance Income A/c Dr. $14,000
To Service Fee A/c $14,000
(Being income for 4 months, i.e., from september to december, adjusted from advance fee received)

Dec 31 Advance Income A/c Dr. $14,000
To Service Fee A/c $14,000
(Being income for 4 months, i.e., from september to december, adjusted from advance fee received)   
  
Dec 31 Advance Income A/c Dr. $1,05,000
To Service Fee A/c $1,05,000
(Being income for 3 months, i.e., from october to december, adjusted from advance fee received)   
  
Dec 31 Consumable Expense A/c Dr. $20,000
To Office supplies A/c $20,000
(Being office supplies consumed out of total of 38,000, closing balance $18000)