Question
Marleigh Studios has a December 31 year-end.
| Date | Event |
|---|
| October 1 | Paid $12,000 for a one-year insurance policy, debiting Prepaid Insurance. |
| November 1 | Received $9,000 cash in advance for a six-month service contract, crediting Unearned Revenue. |
| December 31 | Record the adjusting entries for the insurance used and the revenue earned to date. |
Required: Prepare the October 1 and November 1 entries, then the two December 31 adjusting entries (3 months of insurance expired; 2 months of service revenue earned).
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 1 — accrual basis of accounting
Revenue is recognised when earned and expense when incurred, independent of cash movement. For each item ask which period the economic event belongs to, then let the balance sheet carry the difference as a receivable, payable, prepayment or unearned amount.
Common mistakes
- Recognising revenue on receipt of cash in advance rather than as a liability until earned.
- Expensing a payment that covers more than the current period without splitting off the prepaid portion.
- Leaving incurred but unbilled expenses unrecorded because no invoice has arrived.
Further readingThe 5 types of adjusting entry