Prepaid Expense (PE)

1. Determine if the following adjusting entries are

◦ accrued expense (AE)

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◦ prepaid expense (PE)

◦ accrued revenue (AR)

◦ unearned revenue (UR)

a. _____ Atlas Magazine was previously prepaid $400,000 by subscribers and has delivered half of the magazines ordered.

b. _____ Hornsby Company agreed to provide 1,000 units of its product to Michaels Inc. and has substantially completed the agreement.

c. _____ Nancy and Sons owes its employees $30,000 for work done over the past two weeks.

d. _____ Replay Inc. advertised on TV 44 during the month of April, but has not yet made an entry to record the event.

e. _____ Centurion Company paid Reliable Insurance Company $54,000 for insurance for twelve months, six of which have passed.

f. _____ Reliable Insurance Company received a payment of $54,000 for insurance for twelve months from Centurion Company and six months have passed.

2. Determine if the following transactions for Marlin Corporation require an adjustment or not. If an adjusting entry is required, give the correct entry.

a. At the beginning of the month, Marlin agreed to perform services for the next three months for Catsui Corporation for $30,000 per month. Catsui paid Marlin $90,000 in advance. One month has now passed.

b. Marlin pays its employees every two weeks. At the end of the month, Marlin owes its employees $480,000, but will not pay them until the following week.

c. Marlin paid $300,000 for rent at the beginning of the month by debiting prepaid rent and crediting cash. The $300,000 covered six months of occupancy, but only one month has passed.

d. At the beginning of the month, Marlin agreed to perform services for Ryland Company for $16,000 per month for the next six months. Ryland has not yet paid any cash to Marlin and the work is not substantially complete.

3. Keating Inc. rents its headquarters from Starling Enterprises for $10,000 per month. On September 1, 20XX, Keating pays Starling $60,000 for six months worth of rent.

a. Record the entry that Keating Inc. would make on September 1 when they pay Starling.

b. Record the entry that Starling Enterprises would make on September 1 when they receive the rent payment from Keating.

c. Record the adjusting entry that Keating would make on December 31, 20XX, as the company prepares its annual financial statements.

d. Record the adjusting entry that Starling would make on December 31, 20XX, as the company prepares its annual financial statements.

4. Leon Jackson is ecstatic! First National Bank just approved a loan for Leon to start a Web site design

and maintenance business called Webworks. He is now ready to purchase his needed equipment, hire his administrative help, and begin designing sites. During June, his first month of business, the following occur:

a. Webworks signs a note at the bank and is given $10,000 cash.

b. Leon deposits $2,000 of his own money into Webworks’s checking account.

c. Webworks purchases a new computer and additional equipment for $3,000.

d. Webworks purchases supplies worth $200 on account that should last Webworks two months.

e. Webworks hires Nancy Po to assist with administrative tasks. She will charge $100 per Web site for her assistance.

f. Webworks begins working on his first two Web sites, one for Juan Sanchez, a friend of his dad’s and the other for Pauline Smith, a local businesswoman.

g. Webworks completes the site for Mr. Sanchez and sends him a bill for $600.

h. Webworks completes the site for Ms. Smith and sends her a bill for $450.

i. Webworks collects $600 in cash from Mr. Sanchez.

j. Webworks pays Nancy $100 for her work on Mr. Sanchez’s Web site.

k. Webworks receives $500 in advance to work on a Web site for a local restaurant. Work on the site will not begin until July.

l. Webworks pays taxes of $200 in cash.


A. Prepare journal entries for the above events if needed.

B. Post the journal entries to T-accounts.

C. Prepare an unadjusted trial balance for Webworks for June.

D. Prepare adjusting entries for the following and post them to your T-accounts, adding any additional T-accounts as necessary.

m. Webworks owes Nancy $100 for her work on Ms. Smith’s Web site.

n. Leon’s parents let him know that Webworks owes $80 toward the electricity bill. Webworks will pay them in July.

o. Webworks only used half of the supplies purchased in (d) above.

E. Prepare an adjusted trial balance for Webworks for June.