Question

Videobusters, Inc. offered books of video rental coupons to its patrons at $40 per book. Each book contained a certain number of coupons for video rentals. During the current period 500 books were sold for $20,000, and this amount was credited to Unearned Rental Revenue. At the end of the period, it was determined that $15,000 worth of coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be:

a. Debit Rental Revenue $5,000 and credit Unearned Rental Revenue $5,000.
b. Debit Rental Revenue $15,000 and credit Unearned Rental Revenue $15,000.
c. Debit Unearned Rental Revenue $5,000 and credit Rental Revenue $5,000.
d. Debit Unearned Rental Revenue $15,000 and credit Rental Revenue $15,000.

Answer 1

The answer is:

Dr Unearned rental revenue $15,000

Cr Rental Revenue $15,000

Step-by-step explanation:

According to the revenue recognition principle, Videobusters should only recognize revenue when it has substantially completed the earnings process. So the $20,000 it received from selling rental coupons should be credited to Unearned rental revenue. But after $15,000 worth of coupons were actually used to rent videos, then they should change $15,000 to earned revenue. They should do this by debiting Unearned rental revenue and crediting rental revenue.