Question

On July 1, 2020, Larkspur Co. pays $20,160 to Cullumber Insurance Co. for a 4-year insurance policy. Both companies have fiscal years ending December 31. Journalize the entry on July 1 and the adjusting entry on December 31 for Cullumber Insurance Co. Cullumber uses the accounts Unearned Service Revenue and Service Revenue.

Answer 1

The journal entry for 1st July would be:

Cash DR. $20,160

Unearned service revenue $20,160

The journal entry for 31st December would be:

Unearned service revenue DR. $2,520

Service revenue $2,520

Step-by-step explanation:

Cullumber Insurance co. received $20,160 on 1st July for 4-years insurance policy. So, it is a service revenue for the company whose services will be rendered later. Thus, it is an unearned revenue.

(The journal entry for 1st July has been attached below.)

On 31st December, the company has already rendered services for 6 months. Thus, it will record the service revenue of 6 months as revenue earned.

6-months revenue earned can be calculated as:

4-year revenue = $20,160

Revenue for each year =
`(20,160)/(4)` = $5,040

Revenue for 6 months =
`(5,040)/(2)` = $2,520

(The journal entry for 31st December has been attached below.)