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pg_0009 - Point The net cost of equipment is also called...

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Unformatted text preview: Point: The net cost of equipment is also called the depreciable basis. These account balances are reported in the assets section of the February 28 balance sheet in Exhibit 3.7. 1 Decision Maker Entrepreneur You are preparing an offer to purchase a family—run restaurant The depreciation schedule for the restaurant's building and equipment shows costs of $175,011) and accumulated depreciation of $155,000. This leaves a net for building and equipment of $20,000. ls this information useful in helping you decide on a purchase offer? [Answer—p. @ Unearned (Deferred) Revenues The term unearned revenues refers to cash received in advance of providing products and services. Unearned revenues, also called deferred revenues, are liabilities. When cash is accepted, an obligation to provide products or services is accepted. As products or services are provided, the unearned revenues become eamed revenues. Adjusting entries for unearned revenues involve increasing revenues and decreasing unearned revenues, as shown in Exhibit 3.8. EXHIBIT 3.8: Adjusting for Unearned Revenues Liability Revenue Debit Unadjusted Credit adjustment balance adjustment Point: To defer is to postpone. We postpone reporting amounts received as revenues until they are earned. An example of unearned revenues is from The New York Times Company, which reports unexpired (unearned) subscriptions of nearly $80 million: “Proceeds from . . . subscriptions are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions.” Unearned revenues are nearly 10% of the current liabilities for the Times. Another example comes from the Boston Celtics. When the Celtics receive cash from advance ticket sales and broadcast fees, they record it in an unearned revenue account called Deferred Game Revel! USE, The Celtics recognize this unearned revenue with adjusting entries on a game—by—game basis. Since the NBA regular season begins in October and ends in April, revenue recognition is mainly limited to this period. For a recent season, the Celtics' quarterly revenues were 50 million for July—September; 534 million for October— December; 548 million for JanuaryiMarch; and $17 million for Aprililune. Unearned Revenues Dec. 26 Cash received in advance and record liability advance. i'll work now through Feb. 24 Dec. 31 Provided services and record revenue FastForward has unearned revenues. It agreed on December 26 to provide consulting services to a client for a fixed fee of 53,000 for 60 days. On that same day, this client paid the 60—day fee in advance, covering the period December 27 to February 24. The entry to record the cash received in advance is 98 E 5'9 Dec. 26 Cash .................................... 3,000 Aseets = Liabilities + Equity Unearned Consulting Revenue. . . . . . . . . . . . . . 3.000 +3.000 +3000 Received advance payment for services over the next 60 days. This advance payment increases cash and creates an obligation to do consulting work over the next 60 days. As time passes, FastPorward will earn this payment through consulting. By December 31, it has provided five days' service and earned 5:60 of the 53,000 unearned revenue. This amounts to 52 50 (53,000 — 5MB). The revenue recagn frion Qn'rrcr'gt’e implies that encn -t'...............l "m--.“ "m... I... -............l a. "mu“... .. .1... n---....l...- :............ “an"--. "n... ..A.'.....:..- "a... ... -...l...... .1... I:-L:I:... mum“... “"1 "Mu—J-.. -n...“l "m--.“ “In..- "4.1.. ...
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