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3 years ago

For each separate case below, follow the three-step process for adjusting the unearned revenue liability account at December 31

Business

1 answer:

Vadim26 [7]3 years ago

8 0

Answer:

1. Assume no other adjusting entries are made during the year a. Tao Co. receives $10,000 cash in advance for four months of legal services on October 1, 2017, and records it by debiting Cash and crediting Unearned Revenue both for $10,000. It is now December 31, 2017, and Tao has provided legal services as planned. hat adjusting entry should Tao make to account for the work performed from October 1 through December 31, 2017?

Step 1: Unearned Revenue has a credit balance of $10,000

Step 2: Unearned Revenue should have a credit balance of $2,500 only.

Step 3: Adjusting Journal Entry:

Debit Unearned Revenue $7,500

Credit Service Revenue $7,500

To record revenue for services performed to December 31, 2017.

2. Caden started a new publication called Contest News. Its sub subscriber, Caden debits Cash and credits Unearned Subscription Revenue for the amounts received. The company has 100 new subscribers as of July 1, 2017. It sends Contest News to each of these subscribers every month from July through December Assume no changes in subscribers, prepare the journal entry that Caden must make as of December 31, 2017, to adjust the Subscription Revenue account and the Unearned Subscription Revenue account pay $24 to receive 12 monthly issues.

Step 1: Unearned Subscription Revenue has a credit balance of $2,400

Step 2: Unearned Subscription Revenue should have a credit balance of only $1,200.

Step 3: Adjusting Journal Entry:

Debit Unearned Subscription Revenue $1,200

Credit Subscription Revenue $1,200

To record subscription revenue for services performed to December 31, 2017.

Explanation:

Tao Co and Caden follow the three-step process of adjusting unearned revenue liability accounts at year-end. The purpose of the steps is to ensure that correct amounts remain as balances in the unearned revenue accounts. The steps also help to adjust the Earned Revenue account to its proper amount in recognition of goods or services provided in accordance with the accrual concept and the matching principle of generally accepted accounting principles.

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2 years ago

The current price of the common stock of Internet Enterprises is $100. Over the course of a year, the stock's price will either

KATRIN_1 [288]

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Current value of this newly issued option on Internet Enterprises= $25

Explanation:

Risk free rate for 6 month or period 1= (1000-909.09)/909.09=10%

Risk free rate for 1 year= (1000-826.45)/826.45=21%

Hence, risk free rate for period 2= (1+21%)/(1+10%)-1=10%

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Risk Free rate factor for period 2 (R2)=1+10%=1.1

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Downward price factor for a period(d)=(1-50%)^(1/2)=0.707

Probability of upward price= (R-d)/(u-d)=(1.1-0.707)/(1.414-0.707)=0.55

Probability of downward price= 1-0.55=0.45

After period 1: Upward price=100*1.414=141.4 with probability 55%

Downward price =100*0.707=70.7 with probability 45%

After period 2:

Upward Price will be =141.4*1.414=200 with probability= 55%*55%=30.25%

Downward price will be=70.7*0.707=50 with probability=45%*45%=20.25%

Mid price will be = 141.4*0.707 or 70.7*1.414=100 with probability =2*45%*55%=49.5%

Now, the highest price the stock can go is $200 with probability 30.25% and it was issued at $100

Hence, expected payoff of the option=30.25%*(200-100)=$30.25

So, current value of the newly issued option= 30.25/(1+21%)=$25

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