Need Accounting Help To Answer One Question Only
Need An Accounting Help For Answering Only One Question Attachded Que
Need an Accounting help for answering only one question attached. The question is:
The following information applies to the questions displayed below. Costanza Company experienced the following events and transactions during July:
- July 1: Received $3,000 cash in advance of performing work for Vivian Solana.
- July 6: Received $7,500 cash in advance of performing work for Iris Haru.
- July 12: Completed the job for Solana.
- July 18: Received $8,500 cash in advance of performing work for Amina Jordan.
- July 27: Completed the job for Haru.
- July 31: None of the work for Jordan has been performed.
Prepare journal entries (including any adjusting entries as of the end of the month) to record these events using the procedure of initially crediting the Fees Earned account when payment is received from a customer in advance of performing services. (If no journal entry is required for a particular transaction, select "No journal entry required" in the first account field.)
Paper For Above instruction
In July, Costanza Company faced several transactions involving cash received in advance for services yet to be performed, as well as completed jobs. Proper accounting treatment of these transactions is essential for accurate financial reporting, especially concerning revenue recognition and liability management. The company's approach involves initially crediting the Fees Earned account when payment is received before service fulfillment, which aligns with the concept of recognizing revenue upon cash receipt under the cash basis of accounting but also necessitates corresponding adjusting entries to adhere to revenue recognition principles under accrual accounting.
Following the company's policy, the initial journal entries for each cash receipt involve debiting cash and crediting Fees Earned, reflecting the receipt of cash and anticipated revenue. However, since the services have not yet been performed at the time of receipt, these entries temporarily recognize revenue prematurely, necessitating adjusting entries at the end of July to defer revenue recognition until the services are actually rendered or to recognize revenue for completed jobs.
Initial Cash Receipt Entries
On July 1, Costanza Company received $3,000 from Solana. Since the company's procedure is to credit Fees Earned upon receipt of cash in advance, the initial entry is:
- Debit Cash $3,000
- Credit Fees Earned $3,000
Similarly, on July 6, the entry is:
- Debit Cash $7,500
- Credit Fees Earned $7,500
On July 18, the entry is:
- Debit Cash $8,500
- Credit Fees Earned $8,500
Adjusting Entries for Services Performed
Since the company only recognizes revenue upon service completion or according to the company's policy of initial crediting, adjusting entries are necessary at the end of July to transfer the appropriate amounts from Fees Earned to Revenue when the jobs are completed.
On July 12, when the job for Solana was completed, the adjusting entry is to recognize the earned revenue by debiting Fees Earned and crediting a revenue account, such as Service Revenue:
- Debit Fees Earned $3,000
- Credit Service Revenue $3,000
Similarly, on July 27, when the job for Haru was completed, the adjusting entry is:
- Debit Fees Earned $7,500
- Credit Service Revenue $7,500
Regarding the job for Amina Jordan, no services have been performed by July 31. As per the company's policy, no revenue should be recognized before service completion. Therefore, no adjusting entry is required for this account at this time, but an appropriate liability or unearned revenue account may be used in actual practice to reflect cash received in advance.
Summary of Journal Entries
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| July 1 | Cash | $3,000 | |
| Fees Earned | $3,000 | ||
| July 6 | Cash | $7,500 | |
| Fees Earned | $7,500 | ||
| July 18 | Cash | $8,500 | |
| Fees Earned | $8,500 | ||
| July 12 (Adjusting) | Fees Earned | $3,000 | |
| Service Revenue | $3,000 | ||
| July 27 (Adjusting) | Fees Earned | $7,500 | |
| Service Revenue | $7,500 |
This systematic approach ensures that Revenue recognition complies with the matching principle and accrual basis accounting standards, allowing for accurate financial statements that reflect the economic reality of transactions within the reporting period.
References
- Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting, IFRS Edition. Wiley.
- Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
- U.S. Securities and Exchange Commission. (2021). Revenue Recognition and Accounting Standards. SEC.gov.
- FASB. (2014). Accounting Standards Codification Topic 606: Revenue from Contracts with Customers. FASB.org.
- Accounting Coach. (2023). Revenue Recognition Principles. accountingcoach.com.
- Heising, D., & Massoud, M. (2018). A Comprehensive Guide to Accounting for Cash and Accrual Accounting. Journal of Accounting & Finance.
- CPA Australia. (2020). Principles of Revenue Recognition. cpaaustralia.com.au.
- Financial Accounting Standards Board (FASB). (2022). ASC Topic 340: Other Asset and Liability Accounts. fasb.org.
- Harvard Business Review. (2015). How to Recognize Revenue Properly. hbr.org.
- American Institute of CPAs. (2019). Clarifications in Revenue Recognition Standards. aicpa.org.