ACCT 5001 – Module 3

In-class Problem 1

Part A – Revenue Recognition

Let’s look at 3 different scenarios for Lucky Inc. Lucky Inc. sells vending machines to corporate clients.
The following transactions happened during the month of December, 20x2:

1) Lucky received an order for five vending machines from Company A. As the machines were a
custom order, Lucky required pre-payment before committing to the order. Company A sent in
payment for all five machines, a total of $10,000, on December 1, 20x2. The machines will be
delivered January 15, 20x3.

December 1, 20x2

DR Cash 10,000

CR Deferred Revenue 10,000

January 15, 20x3 (when the machines are delivered)

DR Deferred Revenue 10,000

CR Revenue 10,000

2) Lucky delivered one vending machine to Company B on December 15, 20x2. Upon delivery,
Company B paid $2,000 cash directly to the delivery person.

December 15, 20x2

DR Cash 2,000

CR Revenue 2,000

3) Lucky delivered three vending machines to Company C on December 22, 20x2. Company C is an
old client, and orders many machines throughout the year. As such, Lucky has offered Company
C the option to pay within 30 days. Company C takes them up on this offer and received an
invoice due January 20, 20x3 for $6,000.

December 22, 20x2

DR Accounts Receivable 6,000

CR Revenue 6,000

January 20, 20x3

DR Cash 6,000

CR Accounts Receivable 6,000

For each of the above scenarios write the journal entries. Prepare them in chronological order.

Part B – Matching Expenses

Let’s look at 3 different scenarios for Lucky Inc. Lucky Inc. sells vending machines to corporate clients.
The following transactions happened during the month of December, 20x2:

1) December 1, 20x2 Lucky paid its annual insurance policy which covers the period of December 1,
20x2 to November 30, 20x3 (12 months). The total cost of the policy was $1,200.

December 1, 20x2

DR Prepaid Insurance 1,2000

CR Cash 1,200

December 31, 20x2

I have to record the expense for 1 month (DEC)

DR Insurance Expense 100

CR Prepaid Insurance 100

2) December 15, 20x2 Lucky paid a cleaning company $250 cash to do a deep clean of its carpets in
their offices.

December 15, 20x2

DR Maintenance Expense 250

CR Cash 250

3) Lucky hired an advertising firm to develop a marketing campaign. The one-day blitz campaign
ran on December 22, 20x2 during a holiday special on local tv. The total cost of the campaign
was $5,000. The invoice will be paid January 21, 20x3, as they have 30 days to pay the invoice
from the date of service.

December 22, 20x2

DR Advertising Expense 5,000

CR Accounts Payable 5,000

When the payment is made

DR Accounts Payable 5,000

CR Cash 5,000