Summary Business Accounting

Question:

Stewart receives a $20,000 payment three years in advance of a scheduled appearance as a graduation

speaker at a major state university. A four percent interest rate applies.

Required:

1. Prepare the journal entry to record Stewart’s initial receipt of the $20,000 payment.

2. Prepare journal entries to record any interest revenue or expense recognized by Stewart for years one,

two and three of the contract.

3. Prepare a journal entry to record revenue when Stewart delivers his graduation speech.



Answer:



1. Record interest expense at end of the first year of the contract:



Interest expense ($20,000 x 4%) 800

Unearned revenue 800



2. Record interest expense at end of the second year of the contract:



Interest expense ({$20,000 + 800} x 4%) 832

Unearned revenue 832



3. Record interest expense at end of the third year of the contract:



Interest expense ({$20,000 + 800 + 832} x 4%) 865

Unearned revenue 865