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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Enterprise Solutions Inc. licenses its productivity software to Blackmon Company for $100,000, payable at contract inception. Enterprise agrees to provide semiannual software upgrades over the 5-year length of the contract to enable Blackmon to benefit from any technological advancement. Enterprise concludes that the software license is not distinct from the promised upgrades. What journal entries are necessary for Enterprise to account for this transaction?

To determine

Journalize entries to account for the transaction.

Explanation

Contract: Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be “written oral or implied” by ordinary business practices.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

  • To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
  • To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entry at the time the license is granted and payment is received:

DateAccount title and explanationDebit ($)Credit ($)
 Cash100,000 
     Unearned revenue100,000
      (To record the amount of cash)  

Table (1)

  • Cash is an asset and it is increased. Therefore, debit cash account by $100,000.
  • Unearned revenue is a component of stockholders’ equity and it is increased. Therefore, credit unearned revenue account by $100,000...

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