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14 January, 15:35

For each of the following transactions for the Sky Blue Corporation, prepare the adjusting journal entries required on October 31. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

(a) Collected $2,400 rent for the period October 1 to December 31, which was credited to Deferred Revenue on October 1.

(b) Paid $1,200 for a two-year insurance premium on October 1 and debited Prepaid Insurance for that amount.

(c) Used a machine purchased on October 1 for $48,000. The company estimates annual depreciation of $4,800.

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  1. 14 January, 16:28
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    (a) Debit Deferred revenue $800

    Credit Revenue $800

    Being entries to recognize revenue earned as at October 31.

    (b) Debit Insurance expense $400

    Credit Prepaid Insurance $400

    Being entries to record insurance expense incurred as at October 31.

    (c) Debit Depreciation expense $400

    Credit Accumulated depreciation $400

    Being entries to record depreciation expense on machine as at October 31

    Explanation:

    Adjusting entries are required when transactions have occurred but are yet to be properly accounted for in the company's books.

    (a) Cash collected in advance results in the debit in cash account and a credit to deferred revenue. When the revenue is earned, it is recognized by crediting revenue and debiting deferred revenue with the amount earned.

    As at October 31, amount earned

    = 1/3 * $2,400

    = $800

    Entries required

    Debit Deferred revenue $800

    Credit Revenue $800

    Being entries to recognize revenue earned as at October 31.

    (b) For amount paid in advance, the expense is recorded when incurred by debiting the expense account and crediting prepaid account to reduce the amount prepaid.

    Expense incurred as at October 31

    = 1/3 * $1,200

    = $400

    Entries required

    Debit Insurance expense $400

    Credit Prepaid Insurance $400

    Being entries to record insurance expense incurred as at October 31.

    (c) Depreciation expense is recognized as the fixed asset is used by debiting the expense account and crediting the accumulated depreciation account.

    Since the annual depreciation is $4,800

    Monthly depreciation = 1/12 * $4800

    = $400

    Entries required

    Debit Depreciation expense $400

    Credit Accumulated depreciation $400

    Being entries to record depreciation expense on machine as at October 31
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