Question

please show work.

2. In 2019, the bookkeeper for a company mistakenly recorded an entry for a two-year contract as cash basis rather than accrual basis and made no adjustment at year-end. The mistake was not caught and resulted in the following errors: Assets 12/31/19 NE Assets 12/31/20 NE Assets 12/31/21 NE Liabilities 12/31/19 NI 2019 Equity 12/31/19 Understated - $765,000 Overstated - $765,000 Overstated - $765,000 Liabilities 12/31/20 NI 2020 Equity 12/31/20 Understated - $225,000 Understated - $540,000 Overstated - $225,000 Liabilities 12/31/21 NI 2021 Equity 12/31/20 NE Understated - $225,000 NE a. Determine the date the contract was signed (month/day/year). b. Determine the dollar value of the contract when it was signed. c. Determine whether the missing adjusting entry is an accrued expense, accrued revenue, deferred expense or deferred revenue and explain your rationale (lucky guesses don't merit points).

Answer 1

a)The Tables shows that the revenue is not equally recognized over the period two years it means some period is covered in year 2019 and some in 2020

Now Since 2020 is a complete period of 12 months ,it means Revenue earned per month = 540000/ 12 = $ 45000

So it means revenue recognized in 2021 covers number of months equals to :Total revenue recognized = revenue per month *number of months

          225000 = 45000*n

           n= 225000/45000

                = 5 months

So revenue of 5 months of 2021 represent period ending 1Jan 2021 -31May 2021 .

The period of contract of 2 years ends on 31 May 2021 so it means the contract is entered on 31 May 2021 -2 years = 1June 2019

DATE OF CONTRACT : 06/01/2019

b)The contract was entered on 1 June 2019 ,it means seven months of unearned contract revenue received is earned in 2019 (1June 2019-31Dec 2019)

Contract price =Liability at year end 2019+ total contract revenue earned over 7 months

                 = 765000+ (45000 *7)

               = 765000 + 315000

               = $ 1,080,000

c)Deferred revenue refers to amount received in advance but not yet earned and same is recognized over the period of contract as and when services are provided /sale is completed .

So,The situation is a case of Deferred revenue where the contract revenue was received in advance and same should be recognized over the period of 2 years however the adjustment made in the current situation was not correct.