Question

Big Red Computer Sales sold to Little Red Insurance Co. The following package.

Initial software package for         100,000

Training                                     300,000

Updates                                       50,000

Terms of the sale include initial down payment of 200,000 on date of sale of 1/1/04 and balance due 1/1/05. Software package is to be delivered and installed when down payment is made. Training is to incur over first two years and update to occur at end of first year. Prepare journal entries.

Answer 1

Journal entries in the books of Little Red Insurance Co.					Journal entries in the books of Big Red Computer Sales
Date	Account Titles	Debit	Credit		Date	Account Titles	Debit	Credit
01/01/2004	Software	$100,000			01/01/2004	Little Red Insurance Co.	$250,000
	Prepaid expenses	$350,000				Cash	$200,000
	Cash		$200,000			Sales		$100,000
	Big Red Computer Sales		$250,000			Unearned Service Revenue		$350,000
31/12/2004	Software Maintenance	$50,000			31/12/2004	Unearned Service Revenue	$50,000
	Prepaid expenses		$50,000			Service Revenue		$50,000
31/12/2004	Training Expenses	$150,000			31/12/2004	Unearned Service Revenue	$150,000
	Prepaid expenses		$150,000			Service Revenue		$150,000
01/01/2005	Big Red Computer Sales	$250,000			01/01/2005	Cash	$250,000
	Cash		$250,000			Little Red Insurance Co.		$250,000
31/12/2005	Training Expenses	$150,000			31/12/2005	Unearned Service Revenue	$150,000
	Prepaid expenses		$150,000			Service Revenue		$150,000