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1 October, 16:15

Videobusters, Inc. offered books of video rental coupons to its patrons at $40 per book. Each book contained a certain number of coupons for video rentals. During the current period 500 books were sold for $20,000, and this amount was credited to Unearned Rental Revenue. At the end of the period, it was determined that $15,000 worth of coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be:

a. Debit Rental Revenue $5,000 and credit Unearned Rental Revenue $5,000.

b. Debit Rental Revenue $15,000 and credit Unearned Rental Revenue $15,000.

c. Debit Unearned Rental Revenue $5,000 and credit Rental Revenue $5,000.

d. Debit Unearned Rental Revenue $15,000 and credit Rental Revenue $15,000.

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  1. 1 October, 17:09
    0
    The answer is:

    Dr Unearned rental revenue $15,000

    Cr Rental Revenue $15,000

    Explanation:

    According to the revenue recognition principle, Videobusters should only recognize revenue when it has substantially completed the earnings process. So the $20,000 it received from selling rental coupons should be credited to Unearned rental revenue. But after $15,000 worth of coupons were actually used to rent videos, then they should change $15,000 to earned revenue. They should do this by debiting Unearned rental revenue and crediting rental revenue.
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