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On Unearned Revenue - Adjusting Entries
Hey guys!
This is a problem that I answered on my own. I am not sure if it is correct or that I am making sense with this, but let me show you the problem. A Company receives a 12% commission from its suppliers for the sale of their products. The commissions received by the company is based on estimated sales which is $100,000. However, the actual sales made by the company in September totaled to $80,000. The company operations end September 30 and uses the real accounts in recording deferrals. So my answer is: Dr. Unearned Commission Revenue $2400 Cr. Commission Revenue $2400 Since the first part of the problem states that the company based their commission on estimated sales so $100,000*0.12 = 12,000 But then we still have the actual sales which is $80,000 so: $80,000*0.12 = $9,600 And then I got the difference $12,000-9600=$2400 Am I on the right track? |
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Yep, your analysis of the situation is correct. The actual entry(ies), though, depend on certain details which unfortunately, the problem's wording leaves open to interpretation. (It also appears that you might've reversed your proposed entry inadvertently.)
One possible take is that the supplier sends $12,000 to the company, "based on estimated sales [of] $100,000." If this money comes in at or near the beginning of the month, the company would likely record... DR Cash; CR Unearned Commission Revenue; $12,000. After the month concluded and it was determined that actual sales had been only 80K, the adjusting entry would be... DR Unearned Commission Revenue; CR Commission Revenue; $9,600. This lays the correct amount of earned revenue onto the P&L for the month, and leaves a credit balance of 2,400 in the liability account (Unearned Commission), presumably to be either refunded, or (more likely) carried over to next month. On the other hand, if the company had initially recorded... DR Cash; CR Commission Revenue; $12,000 Upon the receipt of the payment, then the proper subsequent adjusting entry would be... DR Commission Revenue; CR Unearned Commission Revenue; $2,400 ... which is just the reverse of yours. So yeah, your thinking is on the right track, but the way the entries would actually take shape depends on how these transactions actually occur; the question isn't entirely explicit in this respect. |
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