Question

Action Quest Games Inc. adjusts its accounts annually. The following information is available for the year ended December 31, 2022.

1. Purchased a 1-year insurance policy on June 1 for $1.800 cash.
2 Paid $6,500 on August 31 for 5 months' rent in advance.
3. On September 4, received $3,600 cash in advance from a corporation to sponsor a game each month for a total of 9 months for the most improved students at a local school.
4.Signed a contract for cleaning services starting December 1 for $1.000 per month. Paid for the first 2 months on November 30. (Hint: Use the account Prepaid Cleaning to record prepayments.)
5. On December 5, received $1,500 in advance from a gaming club. Determined that on December 31, $475 of these games had not yet been played.
For each of the above transactions, prepare the journal entry to record the initial transaction.

Answer 1

The initial journal entries for Action Quest Games Inc. include recording prepaid expenses for insurance, rent, and cleaning services, as well as recognizing cash received in advance for sponsorships and gaming clubs as unearned revenue.

Step-by-step explanation:

To record the initial transactions for Action Quest Games Inc., we will make journal entries for each event that affects the company's financial position. Here are the entries:

1. Insurance Policy Purchase: Debit Prepaid Insurance $1,800; Credit Cash $1,800.
2. Advance Rent Payment: Debit Prepaid Rent $6,500; Credit Cash $6,500.
3. Advance Cash Received for Sponsorship: Debit Cash $3,600; Credit Unearned Revenue $3,600.
4. Cleaning Services Paid in Advance: Debit Prepaid Cleaning $2,000; Credit Cash $2,000.
5. Advance from Gaming Club: Debit Cash $1,500; Credit Unearned Revenue $1,500.

Each of these entries accounts for prepaid expenses or unearned revenues, which will be adjusted in the end-of-period adjusting entries to recognize expenses that have been incurred or revenues that have been earned in the period.