Response to the following problem:
Quake Co. had the following transactions in the last two months of its fiscal year ended May 31. Apr. 1 Paid $3,450 cash to an accounting firm for future consulting services. 1 Paid $2,700 cash for 12 months of insurance through March 31 of the next year. 30 Received $7,500 cash for future services to be provided to a customer. May 1 Paid $3,450 cash for future newspaper advertising. 23 Received $9,450 cash for future services to be provided to a customer. 31 Of the consulting services paid for on April 1, $1,500 worth has been received. 31 A portion of the insurance paid for on April 1 has expired. No adjustment was made in April to Prepaid Insurance. 31 Services worth $3,600 are not yet provided to the customer who paid on April 30. 31 Of the advertising paid for on May 1, $1,050 worth is not yet used. 31 The company has performed $4,500 of services that the customer paid for on May 23.
Required:
1. Prepare entries for these transactions under the method that records prepaid expenses and unearned revenues in balance sheet accounts. Also prepare adjusting entries at the end of the year.
2. Prepare entries for these transactions under the method that records prepaid expenses and unearned revenues in income statement accounts. Also prepare adjusting entries at the end of the year.
Analysis Component
3. Explain why the alternative sets of entries in parts 1 and 2 do not result in different financial statement amounts.