Gomez Co. had the following transactions in the last two months of its year ende

Question

Gomez Co. had the following transactions in the last two months of its year ended December 31. (Entries Problem 3-6A can draw from the following partial chart of accounts: Cash: Prepaid Insurance; Prepaid Advertising: Recording prepaid Prepaid Consulting Fees: Unearned Service Fees: Services Fees Earned: Insurance Expense: Advertising expenses and unearned Expense: Consulting Fees Expense.) Nov. 1 Paid $1,800 cash for future newspaper advertising P1 P4 1 Paid $2.460 cash for 12 months of insurance through October 31 of the next year 30 Received $3,600 cash for future services to be provided to a customer Dec. Paid $3,000 cash for a consultant's services to be received over the next three months. 1 15 Received $7.950 cash for future services to be provided to a customer 31 Of the advertising paid for on November 1, S1.200 worth is not yet used 3 A portion of the insurance paid for on November 1 has expired. No adjustment was made in 31 31 31 November to Prepaid Insurance Services worthsi.soare not yet prouhled toteaistotner who pailin Moumber . One-third of the consulting services paid for on December 1 have been received The company has performed S3,300 of services that the customer paid for on December 15. Chapter 3 Adusting Accounts fore Financis Statements Required 1. Prepare entries for these transactions under the method that initially records prepaid expenses as assets and records unearned revenues as liabilitics, Also prepare adjusting entries at the end of the year. 2. Prepare entries for these transactions under the method that initially records prepaid expenses as ex- s and records unearned revenues as revenues, Also prepare adjusting entries at the end of the year pense Analysis Component n why the aternative setw of caris n equirements 1 and 2 do not resli in difcet financial

Explanation / Answer

1. Journal entries for the given transactions under the method that initially records prepaid expenses as assets and records Unearned revenues as Liabilities

Note 1 - Advertising Expenses

Total cash paid for Newspaper advertisment = $1,800

Newspaper adsvertisment not yet used = $1,200

Newspaper advertiement used = $1,800 - $1,200 = $600

Note 2 - Insurance Expense

Total Insurance premium for 12 months= $2,460

Insurance premium for each month = $2,460 ÷ 12 = $205

Insurance Expenses expired for November and December = $205 x 2 = $410

Note 3 - Service Fees Earned

Total Cash received for future services = $3,600

Servcies not yet provided as on Dec 31 = $1,500

Therefore services provided = Service Fee Earned = $3,600 - $1,500 = $2,100

Note 4 - Consultancy Expenses

Total cash paid for consultancy services in future = $3,000

Consultancy services received untill dec 31 = Consultancy expenses = $3,000 ÷ 3 = $1,000

2. Journal entries for the given transactions under the method that initially records prepaid expenses as expenses and records Unearned revenues as revenues

Prepaid Insurance a/c  [Note 5]

Note 5 -  

Total Insurance expenses recognised for 12 months= $2,460

Insurance premium for each month = $2,460 ÷ 12 = $205

Insurance Expenses expired for November and December = $205 x 2 = $410

Insurance premium unexpired = Prepaid Insurance = $2,460 - $410 = $2,050

Note 6 - Prepaid Consulting Fee

Total cash paid for consultancy services in future = $3,000

Consultancy services received untill dec 31 = Consultancy expenses = $3,000 ÷ 3 = $1,000

Prepaid Consulting Fee = $3,000 - $1,000 = $2,000

Note 7 - Unearned Service Fees

Total Cash received for future services = $7,950

Services provided during November and Decemeber = $3,300

Servcies not yet provided as on Dec 31 = Unearned service Fees = $7,950 - $3,300 = $4,650

Date Account Titles and Explanation Debit Credit November 1 Prepaid Advertising a/c $1,800 Cash a/c $1,800 [Cash paid for news paper advertising] November 1 Prepaid Insurance a/c $2,460 Cash a/c $2,460 [Cash paid for insurance premium] November 30 Cash a/c $3,600 Unearned Service Fees a/c $3,600 [cash received in advance for future services] December 1 Prepaid Consulting Fees a/c $3,000 Cash a/c $3,000 [cash paid in advance for future consultancy services] December 15 Cash a/c $7,950 Unearned Service Fees a/c $7,950 [cash received in advance for future services] December 31 Advertising Expenses a/c [Note 1] $600 Prepaid Advertising a/c $600 [Advertising expenses recognised] December 31 Insurance Expense a/c [Note 2] $410 Prepaid Insurance a/c $410 Insurance expenses for November & December recognised] December 31 Unearned Service Fees a/c $2,100 Service Fees Earned a/c [Note 3] $2,100 [Revenue recognised] December 31 Consultancy Expenses a/c [Note 4] $1,000 Prepaid Consulting Fees a/c $1,000 [Consultancy expenses recognised] December 31 Unearned Service Fees a/c $3,300 Service Fees Earned a/c $3,300 [Revenue recognised]

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