Question

Consider the following situations for Shocker:
a, On November 28, 2021, Shocker receives a $3,150 payment from a customer for services to be rendered evenly over the next three months. Deferred Revenue is credited.
b. On December 1, 2021, the company pays a local radio station $2,430 for 30 radio ads that were to be aired, 10 per month, throughout December, January, and February. Prepaid Advertising is debited.
c. Employee salaries for the month of December totaling $7,100 will be paid on January 7, 2022.
d. On August 31, 2021, Shocker borrows $61,000 from a local bank. A note is signed with principal and 9% interest to be paid on August 31, 2022.
Required:
1. Record the necessary adjusting entries for Shocker at December 31, 2021. No adjusting entries were made during the year.

Answer 1

Answer:

a.

Dec 31, 2021    Deferred Revenue     1050 Dr

                                  Revenue                  1050 Cr

b.

Dec 31, 2021    Advertising Expense        810 Dr

                                 Prepaid Advertising          810 Cr

c.

Dec 31, 2021   Salaries Expense                7100 Dr

                                 Salaries Payable            7100 Cr

d.

Dec 31, 2021   Interest Expense                 1830 Dr

                                 Interest Payable              1830 Cr

Explanation:

a.

The revenue is received in advance for December 2021, January and February 2022. At the end of the year, the revenue for December has been earned and will be recorded as revenue and a decrease in liability of deferred revenue.

Revenue December = 3150 / 3 = 1050

b.

The advertisement expenses were paid in advance. On 31 December, the ads for december has been consumed and the expense will be recorded.

Advertising expense december = (2430 / 30)  * 10  = 810

c.

The salaries relating to december are accrued and will be paid in January. Thus, an accrual will be recorded against the salaries expense.

d.

The note carries interest that becomes due over the lifetime of the note. The accrual principle matches the revenues and expenses of a particular period. Thus, interest relating to 4 months from September 2021 to December 2021 will be recorded as an expense and a liability in adjusting entry made on 31 december 2021.

Interest expense 2021 = 61000 * 0.09 * 4/12  = 1830