Assignment: Problem 1: During the first year of operations, a calendar year company received $14,400 in cash for rent on a portion of its building. Analysis indicates that of this amount $4,800...

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Assignment:


Problem 1:


During the first year of operations, a calendar year company received $14,400 in cash for rent on a portion of its building. Analysis indicates that of this amount $4,800 applies to next year.


a) Assuming the $14,400 was recorded initially in an income statement account (revenue), record all necessary entries.


b) Assuming the $14,400 was recorded initially in a balance sheet account (liability), record all necessary entries.


Problem 2:


Prior to adjustment at April 30, the end of the fiscal year, Salary Expense has a debit balance of $372,750. Salaries owed but not paid as of the same date total $5,275. On May 2, $6,000 is paid.



a) Present all necessary entries assuming a reversing entry is used.


b) Present all necessary entries assuming NO reversing entry is used.




ACC 102 Topic # 1 Accruals and Deferrals Some of these topics are covered in Chapter 3 and Chapter 4 Appendix 2 but if you follow this overview you should understand the concepts. There are two basic approaches to recording Accounting information: 1. Cash Basis 2. Accrual Basis Under the cash basis revenues are recognized when the cash is deposited and expenses are recognized when the checks are written. This approach is often used by businesses where inventory is not a significant factor – Accountants, Lawyers, Doctors. The accrual basis recognizes revenues when earned and expenses when incurred. What does this mean? Suppose I do accounting, for someone, $1000 in total, but I do not get paid right away. I have to bill them. The entry is the following: Entry: Accounts Receivable 1000 Fees Earned 1000 Suppose I receive a PSEG bill for the current month but I do not pay it until the following month. Under the accrual basis of accounting I must make an entry in the current month: Entry: Utilities Expense 500 Accounts Payable 500 Under the cash basis, I would not have to make either of these entries. Let’s look at an example: Suppose we go into business on December 1 and we are a calendar year taxpayer. We sell SONI TV’s (we change the spelling slightly). We give everyone who comes into the store instant credit and from December 1 until December 25 we sell 200 4” TV’s for $1000 each. Th entry is the following: Accounts Receivable 200,000 Sales 200,000 How is it possible that we can sell a 4” TV for $1000. The answer is we give a lifetime warranty on the set. From past experience we know that the warranty costs will average 95% of the sales price. This is an unreliable TV. We are closed from December 25-31 so no one has brought the set back to be fixed. Should we make a journal entry at December 31? If it is probable that people will return the set and we can reasonably estimate the costs we should make an entry. This is the Matching Concept where we try to match revenues and expenses in the same period. Dec 31 Warranty Expense 190,000 Liability Under Warranty 190,000 Notice the revenue (sales) and the expense (warranty expense) are in the same period and we arrive at a more accurate picture of Net Income. I want to try to explain Deferrals first. A deferral is the postponement of an expense already paid or a revenue already received. Deferred Expenses = Prepaid Expenses. Remember in ACC 101 we dealt with Prepaid Insurance. Prepaid Rent and Prepaid Taxes. There are two approaches for recording Deferred Expenses: They can be recorded initially in an Asset account or in an Expense account. The Asset system is by far the most common. Asset Approach-Calendar Year company Oct 1 Pay rent for 1 year $3600. (3600/12 = 300 per month) Initial Entry: Prepaid Rent 3600 Cash 3600 Dec 31 Adjusting entry: Rent Expense 900 Prepaid Rent 900 ( 3 months, Oct, Nov and Dec at 300 per month) Dec 31: Closing entry: Income Summary 900 (We close out, bring to zero revenues, expenses, drawing Rent Expense 900 Look at the T accounts at this point: Prepaid Rent Rent Expense _____________ _____________ 3600 |900 900 | 900 | | | | 2700 The Prepaid Rent account has a balance of 2700 which is 9 months. We want to carry the prepayment in an asset account and that is exactly where it is, therefore: Jan 1: Reversing Entry - NONE The rent expense account has been closed out. Expense Approach: Oct 1: Initial Entry: Rent Expense 3600 Debit Cash 3600 Credit Dec 31: Adjusting Entry: Prepaid Rent 2700 Rent Expense 2700 Under this method, the initial entry recorded all of the expense on October 1. Since we only want to recognize 900 of expense in the first three months, we must credit Rent Expense for 2700 to deduct that from the 3600. Dec 31: Closing Entry: Income Summary 900 Rent Expense 900 the closing entries under either method are the same. These are two approaches for arriving at the same final result. Let’s look at the T accounts: Prepaid Rent Rent Expense ________________ ______________ 2700 |
Answered 4 days AfterFeb 06, 2021

Answer To: Assignment: Problem 1: During the first year of operations, a calendar year company received $14,400...

Sumit answered on Feb 10 2021
149 Votes
Problem 1:
(a).
Initial Entry:
Cash $14400
Rent Revenue $14400
Adjusting E
ntry:
Rent Revenue $9600
Unearned Rent $9600
Closing Entry:
Income Summary $4800
Rent Revenue $4800
Reversing Entry:
Unearned Rent $9600
Rent Revenue $9600
(b).
Initial Entry:
Cash A/c Dr. $...
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