Apply adjustments to messier scenarios with reduced scaffolding
Messier Scenarios: Reduced Scaffolding
In Phase 2 each scenario told you exactly which type of adjustment applied. Now the scenarios are less labeled. You need to identify the type yourselfbefore you can record the entry.
These situations are closer to what Sarah actually sees at month-end: a pile of transactions, some invoices, some bills, some prepayments—and no labels.
Your Job:
For each scenario below, answer three questions: (1) What type of adjustment is this? (2) What accounts are affected? (3) What is the dollar amount for this period only?
On January 1, a client paid Sarah $3,600 for six months of consulting (January through June). Each month Sarah provides the same level of service.
Question: What is the adjusting entry on March 31?
Think Through It:
- Cash was received before the work was done. Which type is that?
- Monthly rate: $3,600 ÷ 6 = $600/month.
- By March 31, how many months have been earned? (January, February, March = 3 months)
- But the adjustment is only for March. The January and February portions should have been adjusted in those months already.
- So the March adjustment moves only one month: $600.
The Adjusting Entry (March 31):
Debit: Deferred Revenue — $600
Credit: Service Revenue — $600
The remaining deferred revenue balance after this entry: $3,600 – $600 – $600 – $600 = $1,800 (three months still owed).
Sarah started a website project on March 10 with a total fee of $1,500. By March 31 she has completed about 60% of the work. The client will be invoiced for the full amount when the project is finished in mid-April.
Question: What is the adjusting entry on March 31?
Think Through It:
- Work has been done but no cash has been received and no invoice sent. Which type?
- 60% of $1,500 = $900 of work completed in March.
- Revenue must be recognized for the portion earned in March.
The Adjusting Entry (March 31):
Debit: Accounts Receivable — $900
Credit: Service Revenue — $900
Sarah's office rent is $800 per month, due on the 5th of each month for the previous month. The March rent bill has not arrived yet. March rent was incurred and used.
Question: What is the adjusting entry on March 31?
Think Through It:
- The cost was incurred in March but no bill has arrived and no cash paid. Which type?
- The amount is known: $800 per month.
- Expense must be recorded in the period it was incurred.
The Adjusting Entry (March 31):
Debit: Rent Expense — $800
Credit: Accounts Payable — $800
1. Sarah paid $900 on March 1 for a full year of business software. By March 31, how much should be moved from Prepaid Software to Software Expense?
2. A client paid $2,400 on February 1 for four months of service. By March 31, how much total revenue has Sarah earned from this contract?
3. Sarah's utility bill for March usage is $180. The bill arrives April 10 and is due April 30. What should Sarah do on March 31?
4. What would happen to Sarah's March net income if she forgets to record $400 of accrued revenue?
Every adjusting entry touches at least one income statement account (revenue or expense) and one balance sheet account (asset or liability). That is not an accident—it is how accrual accounting keeps both statements honest.
Before Adjustments (Sarah's draft March income statement):
Service Revenue: $3,200 (only cash received)
Expenses: $1,100 (only bills paid)
Net Income: $2,100
After Adjustments (corrected March income statement):
Service Revenue: $3,200 + $500 + $900 + $600 = $5,200
Expenses: $1,100 + $350 + $800 + $200 + $75 = $2,525
Net Income: $2,675
The difference is $575. That is how much Sarah's draft net income was wrong before adjustments. An investor relying on the draft would make a bad decision.