Question

BigWaveDave Surf School provides surfing lessons to individuals in Tofino, BC and also offers “Certified Surfing Instructor Training” to groups and individuals in other off-site locations. The business follows the practice of initially recording Prepaid Expenses and Unearned Revenues in balance sheet accounts (eg. prepaid asset or unearned liability). Following is the unadjusted trial balance. BigWaveDave only does accounting once per year at year end.

BigWaveDave Surf School (a proprietorship)
Unadjusted Trial Balance
December 31, 2018
ACCOUNT	DEBIT	CREDIT
Cash	$  3,100
Accounts receivable	4,800
Surfing supplies	2,900
Prepaid advertising	1,950
Prepaid insurance	5,600
Surf equipment (Sea-doos)	21,300
Accumulated amortization - Surf equipment		$ 13,160
Vehicles (GM Pick-up truck)	49,000
Accumulated amortization – Truck		27,450
Accounts payable		6,775
Salaries payable		1,500
Unearned fees		5,200
Dave Slater, capital		20,353
Fee revenue		36,050
Advertising expense	5,985
Amortization expense – Surf equipment	0
Amortization expense – Truck	0
Insurance expense	200
Surfing supplies expense	2,000
Salary expense	13,653
Total	$110,488	$110,488

Additional information related to fiscal year 2018 but not made available until January 5, 2019, a few days after the above unadjusted trial balance was prepared, is as follows:

1. Analysis of the company’s policies shows $5,400 of insurance coverage expired.

2. A physical count shows surfing supplies of $777 remaining at the end of the year.

3. The estimated annual amortization on the Sea-doos (surf equipment) is $4,500 and on the pick-up truck (vehicle) is $7,000.

4. Starting October 15^th, 2018 the school agreed to teach a three month class that runs to January 15^th, 2019 to an individual for a $1,200 per month fee, payable at the end of the classes. The service has been provided to date as agreed, but no payment has yet been received.

5. $1,000 of the balance in the prepaid advertising account represents advertising costs incurred in the month of December 2018.

6. On November 1, BigWaveDave agreed to do a four month off-site certified surfing instructor training course for a client starting December 1^st. The contract called for a $2,600 per month fee, and the client paid the first two months in advance on November 15^th. When the $5,200 cash was received, the unearned fees account was credited. The course ran as scheduled for the month of December 2018.

Required: In the space below OR on the attached answer booklet, prepare the necessary adjusting journal entries for BigWaveDave as at December 31, 2018.

Answer 1

Journal entries

Insurance A/c Dr 5400

To Prepaid Insurance 5400

(Being insurance expired transferred to insurance account)

Surfing supplies expense A/c Dr 2123

To Surfing supplies (2900-777) 2123

(Being surfing supplies consumed transferred to expense account)

Amortization expense – Surf equipment A/c Dr 4500

Amortization expense – Truck A/c Dr 7000

To Accumulated amortization - Surf equipment 4500

To Accumulated amortization – Truck A/c 7000

(Being amortisation expenses accounted)

Accrued revenue A/c Dr 3000

To fee revenue A/c (1200*2.5) 3000

(Being fee revenue accrued for 2.5 months @ $1200 pm)

Advertising expense A/c Dr 1000

To Prepaid advertising A/c 1000

(Being advertising expenses transferred from prepaid to expense)

Unearned revenue A/c Dr 2600

To fee revenue A/c 2600

(Being fee revenue earned transferred to revenue account)