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On February 1, 2013 the firm paid $1,600 for an 8-month equipment rental. The journal entry to record the debit to a real account. Zena Company’s financial records showed the following selected items for 2014: Advertising receipts $560,000 Land rental revenues $250,000 Interest paid on borrowings $ 100,000 Wage expense $ 190,000 Zena follows the accrual basis of accounting. The following balances were taken from Zena’s balance sheets: a. What were advertising-related revenues for 2014? b. What was interest expense for 2014? c. How much cash was paid out for wages and salaries during 2014? d. How much cash was collected for land rentals during 2014? Prepare AJEs that should be made on 12-31-15, the end of the accounting year, for each of the situations. If no AJE is required, indicate “none.” Assume the company only makes AJEs at the end of the accounting addition, identify the impact, if any, on the financial statements if you failed to make the appropriate AJE. Indicate impact, U for understatement, and O for overstatement. Use the following format to indicate the impact of failing to required entry for each situation.
Expert Answer
Solution:
a) Calculation of advertising related revenues for 2014
| $$ | |
| Advertising Receipts during the year 2014 | 560,000 |
| Less: Advertising Receivables, 12-31-13 | (15,000) |
| Plus: Advertising Receivables, 12-31-14 | 20,000 |
| Advertising Revenue for the year 2014 | 565,000 |
| If advertising costs are deducted from Advertising Receipts, then the revenue will be as follows: | |
| Prepaid Advertising Costs, 12-31-14 | 50,000 |
| Less: Prepaid Advertising Costs, 12-31-13 | 44,000 |
| Advertising Cost incurred during the year | 6,000 |
| Net Advertising Revenue for Year 2014 | |
| Advertising Revenue for the year 2014 | 565,000 |
| Less: Advertising Cost for year 2014 | (6,000) |
| Net Revenue from Advertising | 559,000 |
b) Interest Expense for 2014
| $$ | |
| Interest Paid during the year | 100,000 |
| Less: Interest Payable 12-31-13 | (56,000) |
| Add: Interest Payable 12-31-14 | 60,000 |
| Interest Expense for year 2014 | 104,000 |
c) Cash paid out for wages and salaries during 2014
| $$ | |
| Wages Payable, 12-31-13 | 25,000 |
| Plus: Wages Expense for year 2014 | 190,000 |
| Less: Wages Payable 12-31-14 | (18,000) |
| Total Cash Paid for Wages and salaries during 2014 | 197,000 |
d) Cash Collected for land rentals during 2014
| $$ | |
| Land Rental Revenues for year 2014 | 250,000 |
| Less: 12-31-13 Unearned Land Rental Revenue
(Which is earned during the year) |
(60,000) |
| Add: 13-31-14 Unearned Land Rental Revenue
(Cash Received during the year) |
63,000 |
| Total Cash Collected for Land Rentals during 2017 | 253,000 |
