Question

Lily Company began business on January 1, 2017. The company’s year-end is December 31. The following events occurred during the first year of operations: Apr. 1 Paid cash in the amount of $24,000 for a one-year rental contract on a building. July 1 Received $60,000 in cash from customers for services to be provided evenly during the next twelve months. Oct. 1 Acquired a building by borrowing $300,000 at 6% interest, principal and interest payable at maturity in ten years. Annual depreciation expense is $12,000.

1. Prepare the necessary adjusting journal entries at December 31 (10 points total). (Hint: Four adjusting entries are necessary.)

2. Bonus: For each of the adjusting entries, indicate which of the following type of entry was recorded: accrued expense, accrued revenue, deferred expense, or deferred revenue (2 points total).

Answer 1

1. Adjusting Journal entries at December 31 are as follows:

Rent expense = $24,000 x (9Months/12 Months) = $18,000

Revenue recognized from Unearned Revenue = $60,000 x (6Months/12Months)

Interest Expense = $300,000 x 6% x (3Months/12Months) = $4,500

Depreciation = $12,000 x (3Months/12Months)

2. Indicating the type of entry recorded:

Deferred Revenue indicates the Cash received earlier to the revenue recognition;

Accrued Expense refers to the expense incurred but not yet paid.

Deferred Expense refers to the cash paid earlier to the incurring of the expense.

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