On July 1, 2014, Seng Co. pays $14,400 to Nice Insurance Co. for a 1-year insurance contract....

Question:

On July 1, 2014, Seng Co. pays $14,400 to Nice Insurance Co. for a 1-year insurance contract. Both companies have fiscal years ending December 31.

1. Journalize the entry on July 1 and the adjusting entry on December 31 for Nance Insurance Co. Nance uses the accounts Unearned Service Revenue and Service Revenue.

2. Post the entry on July 1 and the adjusting entry on December 31 for Nance Insurance Co.

Unearned revenue

Unearned revenue as the name suggests is that revenue which is collected but not earned due to reasons like services have not been provided yet or product has not been delivered yet etc. This part of revenue is not an income so it is not reported in income statements rather it is reported in balance sheet in current liabilities section.

Answer and Explanation:

Part 1)

Journal entries in books of nance insurance co.

July 1st

Bank Dr. $14400

Service revenue Cr. $14400

( being premium received)

Every insurance premium amount is received for the coming one year of service and if any period is unexpired then services revenue is adjusted for this unexpired period.

December 31st

Service revenue Dr. $7200 ($14400 *6/12)

Unearned services revenue Cr. $7200

( being services revenue adjusted)

Part 2)

Bank A/c

Debit $ credit $
To service revenue 14400 by balance c/d 14400

Service revenue A/c

Debit $ credit $
To unearned service revenue 7200 By bank 14400
To transfer to income statement 7200

Unearned service revenue A/c

Debit $ credit $
By service revenue 7200

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