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On December 1st, the company pays a local radio station $200,000 for 4 months of radio ads that are to be aired equally throughout December through March. Prepaid Advertising was debited on December 1st and no other entries regarding this transaction were made since then.
15. $ After the adjusting entry has been recorded on December 31", determine the amount of advertising expense for the year ended December 314 16. S After the adjusting entry has been recorded on December 31%, determine the ending balance in the prepaid advertising account that should be recorded on the December 31" Balance Sheet. Use the following transactions to answer questions
17-19 Determine the amount of revenue or expense that would be reported at the time of the transaction under the two methods. An example transaction has been completed for you.

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Question Completion:

Journalize the adjusting entry.

Answer:

Adjusting Journal Entry:

December 31:

Debit Advertising Expense $50,000

Credit Prepaid Advertising $50,000

To record the advertising expense for the year (1 month's).

Explanation:

a) Data and Calculations:

December 1: Prepaid Advertising for 4 months = $200,000

Advertising expense for the year (1 month) = $50,000 ($200,000/4 months)

Balance of Prepaid Advertising for 3 months = $150,000 ($200,000 *3/4)

b) The Adjusting Journal entry recognizes the advertising expense that relates to the year and carry forward the prepaid balance to the next accounting year.  Expenses and revenue are recorded when the services are consumed or rendered and not when cash is exchanged.  In this case, the $200,000 is not recognized as advertising expense for the current year.  Instead, only $50,000 is recorded as expense.  The balance of $150,000 is carried forward to the next year when the service will be consumed.

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