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Practice Exercises:
PRACTICE 1
The company collected $1,000 cash in advance from a customer for services to be
rendered. Subsequently, the company rendered the services. Make the journal entries
necessary to record (1) the receipt of the cash and (2) the subsequent completion of
the services.
PRACTICE 2
On January 1, the company received layaway payments from two customers. Each
customer paid $50. On December 24, the layaway period expired. On that date, the
company received $300 from Customer 1 and delivered the promised merchandise
(costing $200). Customer 2 did not return to make the final payment and thus
forfeited the initial $50 layaway payment. Make the journal entries necessary to
record (1) the receipt of the initial layaway payments, (2) the receipt of the final
layaway payment and the delivery of the goods to Customer 1, and (3) the forfeit of
the layaway payment by Customer 2. The company uses a perpetual inventory
system.
PRACTICE 4
The company sells satellite phone service. Customers are required to pay an initial
fee of $360, followed by continuing service fees of $50 per month. The initial fee is
not refundable. The companys best estimate is that the average customer will
continue the service for three years. On January 1, the company signed up 200 new
customers. Make the journal entries necessary to record (1) the receipt of the initial
fees from these 200 customers, (2) the receipt of the first monthly payment from the
200 customers, and (3) the partial recognition of the initial fees as revenue after the
first month.
PRACTICE 5
The company operates a travel club through which subscribers can access low rates
for air fares, hotel rooms, and rental cars. Each year, subscribers pay a refundable
fee of $1,000 that allows them access to the companys services for that year. A
customer may receive a full refund of this fee at any time during the year with no
questions asked. The cost to service a customers account for a year is $120; these
costs are incurred in cash evenly throughout the year. The company can reliably
estimate that 30 percent of customers will ask for a full refund of their subscription
fee. On January 1, the company received payments from 1,500 subscribers. Make the
journal entries necessary to record (1) the receipt of the subscription fees from these
1,500 customers, (2) the partial recognition of the subscription fees as revenue after
the first month (with the associated service cost for the first month), and (3) final
recognition of revenue (and associated service cost) for the month of December as
well as the payment of full refunds to 30 percent of the customers (as expected).
PRACTICE 6
On January 1, Owner Company signed a one-year rental for a total of $480,000, with
monthly payments of $40,000 due at the end of each month. In addition, the renter
must pay contingent rent of two percent of all sales in excess of $50 million. The
contingent rent is paid in one payment on December 31. On January 31, Owner
Company received the first rental payment. At that time, sales for the renter had
reached $10 million. On May 31, Owner Company received the regular monthly rental
payment; by the end of May, the renter had reached a sales level of $55 million. On
December 31, Owner received the final monthly rental payment as well as the
contingent rental payment. The renters sales for the year totaled $80 million, of
which $12 million occurred in December. Make the journal entries necessary on the
books of Owner Company on (1) January 31, (2) May 31, and (3) December 31.
PRACTICE 7
Online Company operates a Web grocer. Customers submit their orders online to
Online Company; Online then forwards the orders to a national grocery chain. The
grocery chain arranges for assembly and shipment of the order. Online Company
receives two percent of the retail value of all orders it takes. During January, Online
Company received orders for groceries with a retail selling price of $300,000. These
groceries cost the grocery store chain $210,000. The grocery store chain collected
cash of $300,000 from the customers and paid the appropriate commission in cash to
Online Company. Based on this information, make all journal entries necessary in
January (1) on the books of Online Company and (2) on the books of the grocery store
chain. Assume that the grocery store chain uses a perpetual inventory system.