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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
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Case 3-81 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT

Cam and Anna are very satisfied with their first month of operations. Their major effort centered on signing various artists to live performance contracts, and they had more success than they had anticipated. In addition to Charm City, they were able to use their contacts in the music industry to sign 12 other artists. With the tours starting in February, Cam and Anna were eager to hold their first big event. Over the next month, the following transactions occurred.

Feb. 1 Collected advance ticket sales of S28,400 relating to various concerts that were being promoted.

1 Paid S800 to rent office space in February.

2 Paid Equipment Supply Services $1,500, the balance remaining from the January 3 purchase of supplies.

6 Paid $30, 150 to secure venues for future concerts. (These payments are recorded as Prepaid Rent.)

9 Received S325 related to the festival held on January 25.

12 Purchased S475 of supplies on credit from Equipment Supply Services.

15 Collected S3,400 of ticket sales for the first Charm City concert on the day of the concert.

15 Paid Charm City $9,000 for performing the Feb. I S concert. (Remember: Front Row records the fees paid to the artist in the Artist Fee Expense account.)

20 Collected advance ticket sales of $10, 125 relating to various concerts that were being promoted.

21 Collected $5,100 of ticket sales for the second Charm City concert on the day Of the concert.

21 Paid Charm City $12,620 for performing the Feb. 21 concert.

At the end of February, Cam and Anna felt like their business was doing well; however, they decided that they needed to prepare financial statements to better understand the operations of the business. Anna gathered the following information relating to the adjusting entries that needed to be prepared at the end of February.

  1. Two months of interest on the note payable is accrued. The interest rate is 9%.
  2. A Count of the supplies revealed that $1,825 of supplies remained on hand at the end of February.
  3. Two months of the annual insurance has expired.
  4. Depreciation related to the office equipment was $180 per month.
  5. The rental of the venues for all four Charm City concerts was paid in advance on January 8. As of the end of February, Charm City has performed two of the four concerts in the contract.
  6. An analysis of the unearned sales revenue account reveals that $8,175 of the balance relates to concerts that have not yet been performed.
  7. Neither Cam nor Anna have received their salary of $1,200 each for February.
  8. A utility bill of $435 relating to utility service on Front Row’s office for January and February was received but not paid by the end of February.

Required:

1. Analyze and journalize the February transactions.

To determine

To prepare: Journal entries. Also, provide analysis of the entries recorded.

Introduction: Journal entries provide a record of the financial activities undertaken within an organization. Journal entries helps in preparation of financial statements of a company.

Explanation

Journalizing:

Journalizing is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the accounts are posted to the relevant ledger accounts.

Accounting rules for journal entries:

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

Recording unearned income:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    February, 1Cash28,400
    Unearned sales revenue28,400
    (to record unearned income)

   Table (1)

  • Since cash is an asset, asset is increased. Hence, cash account is debited.
  • Since unearned sales revenue is a liability, liability is increased. Hence, unearned sales revenue account is credited.

Recording rent expense:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    February, 1Rent expense800
    Cash800
    (to record rent expense)

   Table (2)

  • Since rent expense is an expense, expense is increased. Hence, rent expense account is debited.
  • Since cash is an asset, asset is decreased. Hence, cash account is credited.

Recording repayament of liability:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    February, 2Accounts payable1,500
    Cash1,500
    (to record repayment of liability)

   Table (3)

  • Since account payable is a liability, liability is decreased. Hence, accounts payable account is debited.
  • Since cash is an asset, asset is decreased. Hence, cash account is credited.

Recording prepaid rent:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    February, 6Prepaid rent 30,150
    Cash30,150
    (to record prepaid rent)

   Table (4)

  • Since prepaid rent is an asset, asset is increased. Hence, prepaid rent expense account is debited.
  • Since cash is an asset, asset is decreased. Hence, cash account is credited.

Recording revenue of privious period:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    February, 9Cash325
    Accounts receivable325
    (to record income of previous period)

   Table (5)

  • Since cash is an asset, asset is increased. Hence, cash account is debited.
  • Since accounts receivable is an asset, asset is decreased. Hence, accounts receivable account is credited.

Recording purchase of supplies:

    DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
    February, 12Supplies475
    Accounts payable475
    (to record purchase of supplies)

   Table (6)

  • Since supplies is an asset, asset is increased...

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