EXERCISE $4\mathrm{.}3$

Preparing Adjusting

Entries to Convert an

Asset to an Expense

and to Convert a

$-$liability to Revenue

EXERCISE $4\mathrm{.}4$

Preparing Adjusting

Entries to Convert an

Asset to an Expense

and to Convert a

Liability to Revenue

EXERCISE $4\mathrm{.}5$

Preparing Adjusting

Entries to Accrue

Revenue and

Expenses for Which

No Cash Has Been

Received

EXERCISE $4\mathrm{.}6$

Deferred Revenue

The Golden Goals, a professional soccer team, prepares financial statements on a monthily basis.

The soccer season begins in May, but in April the team engaged in the following transactions:

Paid $$1,200,000$ to the municipal stadium as advance rent for use of the facilities for the

five$-$month period from $1$ May through $30$ September. This payment was initially recorded as

Prepaid Rent.

Collected $$4,500,000$ cash from the sale of season tickets for the team's home games. The

entire amount was initially recorded as Unearned Ticket Revenue. During the month of May,

the Golden Goals played several home games at which $$148,800$ of the season tickets sold in

April were used by fans.

Prepare the two adjusting entries required on $31$ May.

Genting Hong Kong, together with its jointly controlled entity, Norwegian Cruise Line, is the

third largest cruise operator in the world. Its printing costs for brochures are initially recorded

as Prepaid Supplies and are later charged to Advertising Costs when they are mailed. Passen$-$

ger deposits for upcoming cruises are considered unearned revenue and are recorded as Advance

Ticket Sales as cash is received. Deposited amounts are later converted to Passenger Ticket Rev$-$

enue as voyages are completed.

a$.$ Where in its financial statements does Genting Hong Kong report Prepaid Supplies? Where

in its financial statements does it report Advance Ticket Sales?

b$.$ Prepare the adjusting entry necessary when brochures costing $$1$ million are mailed.

c$.$ In its most recent annual report, Genting Hong Kong reported Advance Ticket Sales in excess

of US $$10$ million. Prepare the adjusting entry necessary in the following year as US $$5$ million

of this amount is earned.

d$.$ Consider the entire adjusting process at Genting Hong Kong. Which adjusting entry do you

think results in the most significant expense reported in the company's income statement?

The geological consulting firm of Gilbert, Marsh, & Kester prepares adjusting entries on a monthly

basis. Among the items requiring adjustment on $31$ December $2009,$ are the following:

The company has outstanding a $$50,000,9$ percent, two$-$year note payable issued on $1$ July

Payment of the $$50,000$ note, plus all accrued interest for the two$-$year loan period, is

due in full on $30$ June $2010.$

The firm is providing consulting services to Texas Oil Company at an agreed$-$upon rate of

$$1,000$ per day. At $31$ December, $10$ days of unbilled consulting services have been provided.

a$.$ Prepare the two adjusting entries required on $31$ December to record the accrued interest

expense and the accrued consulting revenue earned.

b$.$ Assume that the $$50,000$ note payable plus all accrued interest are paid in full on $30$ June

What portion of the total interest expense associated with this note will be reported in

the firm's $2010$ income statement?

c$.$ Assume that on $30$ January $2010,$ Gilbert, Marsh, & Kester receive $$25,000$ from Texas Oil

Company in full payment of the consulting services provided in December and January. What

portion of this amount constitutes revenue earned in January?

When Cathay Pacific sells tickets for future flights, it debits Cash and credits an account entitled

Unearned Transportation Revenue $($as opposed to crediting Passenger Services Revenue$).$ This

account, reported recently at HK$$6$ billion, is one of the largest liabilities appearing in the

company's balance sheet.

a$.$ Explain why this liability is often referred to as a deferred revenue account.

b$.$ What activity normally reduces this liability? Can you think of any other transaction that

would also reduce this account?

c$.$ Assume that, in a recent flight, passengers of the airline used tickets that they had purchased

in advance for HK$$200,000.$ Record the entry Cathay Pacific would make upon completion

of this flight.