Example 1:Walmart devlivers products to a customer on May 25 on credit in the amount of $150. The cost of purchasing these products is $100. On June 10, Walmart collects cash. Question:1. When should Walmart recognize revenue?2. What journal entries should Walmart record on the two days?Example 2:Walmart collects cash in advance in amount of $150 from its customer on May 25. On June 10, Walmart delivers the products to the customer. The cost of purchasing these products is $100. Question:3. When should Walmart recognize revenue?4. What journal entries should Walmart record on the two days?Example 3:On Jan 1, 2009 Bank of America lends $1million to another company at the interest rate of 6% per year for 6 months.Question:1. What journal entry should Bank of America enter on Jan 1, 2009?2. What journal entry should Bank of America enter on Jan 31, 2009?3. What journal entry should Bank of America enter on June 30, 2009?Solution to Example 1:1) Walmart should recognize revenue on May 25 because revenue should be recognized when products are delivered to the customer, rather than the time the company collects cash from thecustomer (Revenue recognition principle).2) On May 25, the journal entry :Dr: Accounts receivable (A+) 150Cr: Revenue (SE+) 150This journal entry is to recognize revenue.Dr: Cost of Goods Sold (SE-) 100Cr: Inventory (A-) 100This journal entry is to recognize cost of generating revenue.On June 10, the journal entry :Dr: Cash (A+) 150Cr: Accounts receivable (A-) 150Solution to Example 2:1) Walmart should recognize revenue on June 10 because revenue should be recognized when products are delivered to the customer, rather than the time the company collects cash from thecustomer (Revenue recognition principle).2) On May 25, the journal entry :Dr: Cash (A+) 150Cr: Unearned revenue (L+) 150This journal entry is to recognize cash received in advance.On June 10, the journal entry :Dr: Unearned revenue (L-) 150Cr: Revenue (SE+) 150This journal entry is to recognize revenue.Dr: Cost of Goods Sold (SE-) 100Cr: Inventory (A-) 100This journal entry is to recognize cost of generating revenue.Solution to Example 3:1) On Jan 1, 2009, the journal entry:Dr: Notes receivable 1,000,000Cr: Cash 1,000,000This journal entry is to recognize lending of $1m to the borrower.2) On Jan 31, 2009, the journal entry:Dr: Interest receivable 5,000Cr: Interest revenue 5,000This journal entry is to recognize interest revenue for January. (Note: interest revenue for one month = 1,000,000*6%/12 = 5000).BOA will repeat the same journal entry (2) for the rest of five months including February, March, April, May, and June.3)Dr: Cash 1,030,000Cr: Notes receivable 1,000,000Cr: Interest receivable 30,000This journal entry is to recognize cash collection from both principle and interest revenue for 6 months.Alternatively, you can break the one journal entry into two entries as follows:Dr: Cash 1,000,000Cr: Notes receivable 1,000,000Dr: Cash 30,000Cr: Interest receivable
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