Accounting Test #1 review
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): The company entered into a lending transaction whereby it allowed another company to borrow $1,000,000 to be paid back at the end of three years. The note was signed on May 1, 20x2 and accrues annual interest of 3%. Interest will be paid at maturity.
$1,000,000 * (3%) * (8/12) = $20,000 Accrued Revenue A inc. Interest Receiv 20,000 NI inc.------Interest Rev 20,000
On 1/1/x9, Clovis Corp. has total assets of $1,750,000 and capital stock totaling $360,000. If the company has total liabilities that amount to $670,000, then what must be the company's retained earnings at 1/1/x9? Remember that at its most basic level, total equity may be split between capital stock (i.e. owner investments/common stock/preferred stock) and retained earnings. Equity = Capital stock accounts + Retained earnings.
$1,750k = $670k + $360k + RE RE = $720k
Provide journal entries for each of the following transactions. Noting the effect on Assets (A), Liabilities (L), Equity (E), and Net Income (NI) where appropriate. Paid employees $7,500 in wages earned during the month.
NI Dec. -- Wage Expense 7,500 -------------------Asset Dec. Cash 7,500
Paid $5,000 for monthly rent.
NI Dec. ---Rent Expense 5,000 Asset Dec. ----------------Cash 5,000
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): A company purchased a patent on July 1, 20x2, paying $3,000,000. The patent has a useful life of 15 years and no expected salvage value. The company uses a straight-line method to allocate costs for its patents
$3,000,000 / 15 = $200,000 * ½ (partial year)=100,000 Deferred Expense NI dec. Amortiz Exp 100,000 A dec.-------------Patent 100,000
Made $1,000 of credit sales (sales on account, not credit card sales). The merchandise sold had a cost of $300.
Asset In. --Account Rec. 1,000 NI In. -------------Sales Revenue 1,000 NI Dec. --COGS 300 Asset Dec. -----Inventory 300
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): On November 1, 20x2, signed a two-year note that entitles the company to a $50,000 cash payment at the end of two years plus annual interest at 12%. The first interest payment will be due October 31, 20x3
$50,000*(.12)*(2/12) = 1,000 Accrued Revenue A inc. Interest Receiv 1,000 NI inc.--------Interest Rev 1,000
Determine the amount of Advanced Inc. has at 12/31/x9, if its total liabilities at that date are $950,000 and total equity (capital stock plus retained earnings) is equal to $1,375,000.
$950k + $1,375,000 = $2,325,000 total assets
Journalize: The owner, Kris, began financing operations on January 1, 2019 with an initial personal investment of $250,000.
--Cash 250,000 ------Capital 250,000
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): On June 1, 2012, a client retains your financial consulting services for the period of two years with a $1,500,000 payment. Work is expected to be performed evenly over the course of the contract.
1,500,000/24 = 62,500 per month * 7 months = 437,500 Deferred Revenue L dec. Unearned Rev 437,500 NI Inc.------Consulting Rev 437,500
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): Paid $100,000 in advance for rent on July 1, 2012. The $100,000 will cover the company's rental expenditures until May 1, 2013.
100,000/10 = $10,000 per month * 6 months=60,000 Deferred Expense NI dec. Rent Expense 60,000 A dec.--------Prepaid Rent 60,000
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): Straight-line depreciation expense for a building with a historical cost of $2,000,000 a residual value of zero and a twenty year useful life would be recorded as:
2,000,000/20 = 100,000 Deferred Expense NI dec. Dep. Expense 100,000 A dec.-------Acc deprec 100,000
Adjust the entry @ March 31: On Jan 1: · Viezuchter purchased a computer for $2,300 as well as a $200 license to a software system that enables him to keep track of client service requests, invoices and bookkeeping for the business. The computer is estimated to have a useful life of three years and the software two years.
2300/3= 766.6/4= 192 200/2=100/4= 25 Depreciation Expense 192 -----Accumulate Depreciation 192 Amortization Expense 25 ---------Software License 25
Adjust the entry @ March 31: On Jan 1: · The corporation immediately acquired a shop for $230,000 as a base of operations, putting $30,000 down in cash and signing a $200,000, 10-year 4% note for the remainder of the payment. The note was issued at par with interest payable on January 1 of each year and the entire principal due upon maturity (the shop has a useful life of 30 years).
230000/30=7666/4=1,972 200K/10=20k/4=5000*.4= 2000 Depreciation Expense 1,972 --------Accumulated Depreciation 1,972 Interest Expense 2000 --------- Interest Payable 2000
Adjust the entry @ March 31: On Feb 1: · After developing its trademark, the company decided to put its brand to use and prepaid $24,000 cash for 12 months of advertising in an effort to boost sales.
24,000/12=2000*2=4000 Advertising Expense 4,000 ------ Prepaid Advertising 4,000
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): Signed a two-year $250,000 8% note in an exchange for a fixed asset on May 1, 2012. Interest will be paid in full on May 1, 2014 when the note matures.
250,000*(0.08)*(8/12) = 13,333.33 Accrued Expense NI dec. Interest Expense 13,333 L inc.-------Interest Payable 13,333
Adjust the entry @ March 31: On Jan 1: · Viezuchter Co. prepaid $36,000 for a three-year insurance contract covering the business for common protections.
36,000/3=12,000/4= 3000 Insurance Expense 3,000 -------Prepaid Insurance 3,000
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): $75,000 paid in advance to a tax consulting firm for services to be rendered over five months. The contract was initiated on December 1, 2012.
75,000/5 = 15,000 per month * 1 month = 15,000 Deferred Expense NI dec. Service Exp 15,000 A dec.-----Prepaid service 15,000
Adjust the entry @ March 31: On Jan 1: · Viezuchter purchased equipment for $75,000 cash that Kris estimates can be reused in repairs and restorations for up to 5 years. Additionally, he purchased $10,000 of garage supplies (oil, lubricant, auto parts) that are single-use in the ordinary course of repairs and restorations. The garage supplies were purchased on credit with a supplier that extended Viezuchter terms that allow Kris to defer payment on all orders for up to 60 days.
75K/5=15000/4= 3750 Depreciation Expense 3750 -------Accumulated Depre 3750
Journalize: Kris had $9,500 of garage supplies remaining after performing repairs and restorations and paid off $22,000 of its outstanding payables with its garage supply provider.
Accounts Pay 22,000 -------------------- Cash 22,000
Journalize: On 1/31, Viezuchter Co. paid all outstanding vendor payables for garage supplies according to the terms of credit arrangement. (had 10,000 on accounts payable)
Accounts Payable 10.000 ------------------------- Cash 10,000
Journalize: · Viezuchter Co. opened for business on January 2 and at the end of January, Viezuchter Co. prepared invoices for the following repairs and restorations for provided to customers: Repairs to diesel engines: $80,000 Restoring cars: $5,000 · $55,000 of these services were paid by customers in cash with $30,000 paid on credit by a local business who contracted to use Viezuchter's services on credit terms.
Accounts Receiv 30,000 Cash 55,000 ---------------------- Rev-Repair 80,000 ----------------------- Rev-Restoration 5,000
Journalize: · The company experienced an uptick in sales due to word of mouth from previous customers as well as overall awareness of business from advertising efforts. By month end, invoices were prepared for the following amounts associated with repairs and restorations for customers: Repairs to diesel engines $140,000 Restoring cars $15,000 · $105,000 of these sales were paid by customers in cash, while $50,000 were paid in credit by local businesses with credit agreements.
Accounts Receiv 50,000 Cash 105,000 ---------- -------Rev-Repair 140,000 ------------ Rev-Restoration 15,000
Journalize: · The company's invoices indicated the following repairs and restorations: Repairs to diesel engines: $210,000 Restoring cars: $17,500 $160,000 of the services rendered were paid in cash and $67,500 paid on credit. The services used $45,000 of garage supplies.
Accounts Receiv 67,500 Cash 160,000 -----------------Rev-Repairs 210,000 ---------------Rev-Restoration 17,500 Supplies Expense 45,000 -------Garage Supplies 45,000
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): At 12/31/x2, employees earned wages of $25,000 that will be paid on January 3, 20x3.
Accrued Expense NI dec. Wage Exp 25,000 L inc.--------Wages payable 25,000
What is the AICPA & what does it do?
American Institute of Certified Public Accountants -It regulates the construction and administration of the CPA exam -It also provides additional guidance and interpretations of applying accounting standards (guidance to industry accounting)
Define Assets:
Are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
Define Liabilities:
Are probable sacrifices of economic benefits that arise from present obligations of a particular entity to transfer assets or provide services to others as a result of past transactions or events.
Provide journal entries for each of the following transactions. Noting the effect on Assets (A), Liabilities (L), Equity (E), and Net Income (NI) where appropriate. Invested $25,000 of cash from a personal savings account into the business.
Asset In. -- Cash 25,000 -----------------Equity In. Capital 25,000
Your company sells inventory that cost $78,000. The retail price of the sale was $135,000. 80% of the sales were cash sales and 20% were sales on credit. Your company uses the perpetual inventory system.
Asset In. ------Cash 108,000 (80% of sales price) Asset In. -------Acc Rec 27,000 (20% of sales price) NI In. -----------------Sales Revenue 135,000 NI dec. -------COGS 78,000 Asset dec. --------Inventory 78,000
Received $5,000 cash in advance for a one-year contract. The contract specifies the delivery of services to be provided by the business over the course of one year.
Asset In. ---Cash 5,000 Liability In. -------Deferred Rev 5,000
Made $7,000 of cash sales on merchandise. The merchandise sold had a cost $3,000.
Asset In. ---Cash 7,000 NI In. ------------Sales Revenue 7,000 NI Dec.---- COGS 3,000 Asset Dec. -----------Inventory 3,000
Paid $2,000 for a two-year insurance contract.
Asset In. ---Prepaid Asset 2,000 Asset Dec. ----------------Cash 2,000
Sold a piece of machinery for $12,000 cash. The machine had originally cost the company $20,000 and had accumulated depreciation of $7,500 recorded at the date of sale.
Asset In. --Cash 12,000 (the amount you get) Asset In. --Acc Dep. 7,500 (removing it from the books) NI Dec. -----------Loss on Sale of Asset 500 (plug)* Asset Dec. ---------Machine 20,000 (historical cost) *Plug arises from Sale price - book value of equipment (historical cost - accumulated depreciation)
You are a landlord. A tenant pays rent of $2,500 in advance which will cover the months of July and August.
Asset In. --Cash 2,500 Liability In. ------Deferr Rent Rev 2,500
One 4/5, a company sold an old piece of equipment for $300,000. It had accumulated depreciation of $75,000 up to the date of sale and was originally purchased for $350,000.
Asset In. --Cash 300,000 (Sale price) Asset In. --Acc Dep. 75,000 (Remove accumulated dep.) NI In. ------------Gain on sale 25,000 (plug)* Asset Dec.------- Equipment $350,000 (historical cost) Plug arises from Sale price - book value of equipment (historical cost - accumulated depreciation)
On 5/25, issued 100,000 shares of $1 par value stock for $5 a share.
Asset In. --Cash 500,000 (shares * market price) Equity In. -------Comm Stock $100,000 (shares * par value) Equity In. -------------APIC-CS 400,000 (plug)* *shares*(market price - par value)
Provide journal entries for each of the following transactions. Noting the effect on Assets (A), Liabilities (L), Equity (E), and Net Income (NI) where appropriate. Purchased a $15,000 piece of equipment paying $10,000 in cash and obtaining a $5,000 loan (assume it is issued at par).
Asset In.-- Equipment 15,000 -----------------Asset Dec. Cash 10,000 -----------------Liability In. Note Payable 5,000
Provide journal entries for each of the following transactions. Noting the effect on Assets (A), Liabilities (L), Equity (E), and Net Income (NI) where appropriate. Purchased $5,000 of merchandise on account.
Asset Inc.--- Inventory 5,000 Liability In. ----------Account Payable 5,000
Disclose the 2012 year-end adjusting entries for each transaction by identifying it as an accrual or deferral and providing the appropriate journal entry to record. (Hint: Remember, adjusting entries never involve cash and always involve one nominal and one real account): The supplies account had a balance of $550 on January 1, 2012 and purchases of supplies for 2012 amounted to $350. If a physical count of supplies at December 31, 2012 revealed $400 of supplies remaining, record the necessary adjustment.
Beg Supplies + Purchases =Supplies available during the year $550 + 350 = $900 If we have $400 remaining, we must have used $500 ($900-400) Deferred Expense NI dec. Supp Exp 500 A dec.---------Supplies 500
Difference between Revenues and Gains:
Between revenue and gain, the difference is that revenue always arises in the course of the business' ordinary activities (e.g., sales of goods or sales of services), while gain represents other items that are considered as income which may or may not arise in the ordinary activities of the business or entity (e.g., gain from sale of an old property or gain from the sale of investments). -revenues are inflows or other enhancement of assets of an entity or settlement of its liabilities during a period from the entity's ongoing major or central operations. -Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity.
Journalize: By the end of February, Viezuchter collected $60,000 cash on all credit sales made to customers from services performed in both January and February.
Cash 60,000 --Accounts Receiv 60,000
Journalize: Viezuchter collected $63,000 of outstanding customer credit accounts.
Cash 63,000 ----- Accounts Receiv 63,000
Describe the key differences between the cash system and accrual system of accounting as well as the principles that differentiate them:
Cash basis accounting records revenues when cash is received and expenses when cash is paid. Revenues and expenses are only recorded with exchange of cash. Under the accrual system, we may record revenues and expenses without the exchange of cash. The matching principle and revenue recognition principle facilitate this deviation.
Journalize: =Viezuchter purchased a computer for $2,300 as well as a $200 license to a software system that enables him to keep track of client service requests, invoices and bookkeeping for the business. The computer is estimated to have a useful life of three years and the software two years.
Computer 2,300 -----------Cash 2,300 Software License 200 -----------------Cash 200
Describe what assumption, principle or constraint that would justify or condemn the practice described: If it is probable that a company will experience a loss, it must record a contingent liability and a loss equal to this liability before the loss occurs.
Correct; Conservatism. In this case, we are given two alternatives: 1) wait for the loss to be paid, or 2) record the loss in advance because it is probable that it will occur. Matching also would fit this question, we raised revenues by selling the item, which is now potentially up for recall.
Describe what assumption, principle or constraint that would justify or condemn the practice described: When credit sales are made (sales in which the customer promises to pay), the company will record bad debt expense for an estimate of those sales which may not be paid off prior to any customers notifying the company that they are unable to pay.
Correct; Matching Principal/ Relevance. Relevance is a characteristic of accounting information. Hence, it is not an appropriate answer to the question asked "principle/assumption/constraint". Sales on credit (accounts receivable) generate additional revenues, so we must match potential expenses to these revenues. In this case, that the credit sale will not be repaid.
Describe what assumption, principle or constraint that would justify or condemn the practice described: Even though certain office supplies such as markers and pens will be used by the firm for several months, the company does not apply depreciation to these supplies because of their relatively low cost.
Correct; Materiality. When an accounting decision will not alter the relevance of an outside investor, we may record the transaction outside of GAAP. Incorrect; Matching. Strictly speaking, without the constraint of materiality, we should attempt to match expenses to the revenues they generate.
Describe what assumption, principle or constraint that would justify or condemn the practice described: Quarterly financial statements that express the results of three months of operations are as useful in determining the financial operations of an entity over that time as an annual statement is useful in determining the financial operations of an entity over a year of operations.
Correct; Periodicity. We can separate the life cycle of a corporation into arbitrary units of time and produce equally informative reports over those periods of time.
On 3/12 dividends of $200,000 were declared but not paid until 4/1. Provide journal entries for 3/12 and 4/1.
Day of Declaration - 3/12 Equity Dec. --Dividends 200,000 Liability In. ------------Div Payable 200,000 Day of payment - 4/1 Liability Dec. ----Div Payable 200,000 Asset Dec. -------------------Cash 200,000
Journalize: Viezuchter purchased equipment for $75,000 cash that Kris estimates can be reused in repairs and restorations for up to 5 years. Additionally, he purchased $10,000 of garage supplies (oil, lubricant, auto parts) that are single-use in the ordinary course of repairs and restorations. The garage supplies were purchased on credit with a supplier that extended Viezuchter terms that allow Kris to defer payment on all orders for up to 60 days.
Equipment Repair 75,000 ----------------------Cash 75,000 Garage Supplies 10,000 ---------- Accounts Payable 10,000
Declared $1,000 of dividends to the shareholders of the company. The amount has not yet been paid to shareholders.
Equity Dec. ----Dividends 1,000 Liability In.--------- Dividends Pay. 1,000 Note that the company becomes obligated to the dividend upon declaration. The payable would be removed on payment.
Journalize: Viezuchter expanded its garage by purchasing a neighboring garage bay for $50,000 cash (estimating the useful life of the bay at 15 years and a salvage of $5,000 at the end of its useful life) and hiring employees to accommodate its expanding clientele.
Facility- Garage Bay 50,000 ---------------------- Cash 50,000
Journalize: The corporation immediately acquired a shop for $230,000 as a base of operations, putting $30,000 down in cash and signing a $200,000, 10-year 4% note for the remainder of the payment. The note was issued at par with interest payable on January 1 of each year and the entire principal due upon maturity (the shop has a useful life of 30 years).
Facility-Shop 230,000 ---------Cash 30,000 ---------Mortgage Pay 200,000
Journalize: Purchased $25,000 of garage supplies on account to replenish the shop.
Garage Supplies 25,000 ------ Accounts Payable 25,000
Journalize: Viezuchter also ordered $50,000 worth of garage supplies on credit and paid $27,000 of its outstanding payables with the vendor.
Garage Supplies 50,000 ------Accounts Payable 50,000 Accounts Payable 27,000 ----------------------Cash 27,000
If the equity accounts of a particular company increased by $1 million dollars, and during the same period, their liability accounts fell by $2 million dollars, then assets must have increased/decreased by what amount?
If A=L+E at a point in time, then the changes in these amounts over time must also be equal ∆A = ∆L + ∆E (note: ∆ indicates a change in the variable) ∆A= (2,000,000) +1,000,000 => notice the amount is directional because liabilities decreased ∆A= (1,000,000) Assets Fell by 1,000,000
Define Relevance:
Implies that information is capable of making a difference in a decision. Typically, this is information that is predictive or confirmatory. Predictive value- information that can be used as an input to forecast future information Confirmatory value- information that either confirms or corrects prior expectations
Define Faithful Representation:
Implies there is a congruence between the reported information and the economic events they represent (e.g. events that give rise to sacrifices of benefits should be recorded as liabilities and be reported at a reasonable value) -completeness, neutral, & free from material error
Describe what assumption, principle or constraint that would justify or condemn the practice described: The owner of a business reports her individual IRS tax refund (not the company's tax refund) as a receivable on her company's balance sheet.
Incorrect; Economic Entity Assumption. The owner of a business does not list personal assets/liabilities on the financial statements of his or her business.
Describe what assumption, principle or constraint that would justify or condemn the practice described: A company refuses to book revenues without receiving cash, even though it has performed a portion of the work associated with the revenue, since it faces the possibility of bankruptcy before it is able to finish its contract and collect the cash.
Incorrect; Going-Concern Assumption/ Revenue Recognition. 1) We do not alter our accounting based on the probability of bankruptcy as we assume that every firm is a "going-concern". 2) We recognize revenue when we have completed an exchange of goods/services for consideration to those goods/services
Describe what assumption, principle or constraint that would justify or condemn the practice described: A company is not recording rent expense for the month of July until it pays cash even though the bill has arrived, the business occupied the rental location during the month of July and it is July 31st.
Incorrect; Matching Principle. Because we have operated our business from this location, we must match any expenses to the revenues they generate. We do not wait for cash payments wait to recognize expenses (that would be a "cash basis" system, not "accrual basis").
Describe what assumption, principle or constraint that would justify or condemn the practice described: A business lists the synergy of its managerial team and high employee morale as assets on its balance sheet.
Incorrect; Monetary Unit Assumption. All items on the financial statements must have a quantitative value (i.e. be able to be expressed in a form of currency).
Describe what assumption, principle or constraint that would justify or condemn the practice described: A company refuses to book revenues until cash is received.
Incorrect; Revenue Recognition. We recognize revenue when we have completed an exchange of goods/services for consideration to those goods/services.
Adjust the entries based off of unadjusted trial balance (case #3): The Interest Payable Liability must be for interest incurred for the time period of the note outstanding in 2020. Interest expense formula Expense= Principal * Rate* Time 500= 10,000 * Rate* 3/12 (months) Rate= 20% Expense = 10,000* 20%*12/12 Expense =2,000 NI dec. Interest Expense 2,000 L inc.----------- Interest Payable 2,000 Accrued expense
Interest payable is due exclusively to the outstanding note payable. The note was issued on October 1, 2020. Interest for the note will be paid when the note matures in three years.
Define Conservatism:
Is an old constraint that is no longer an "official" constraint. When two outcomes are equally feasible, choose the reporting technique that will be least likely to overstate assets and income. -expensing immediately (decreases NI) -Intentionally understating assets or income is not acceptable -Leads to an accelerated recognition of losses and expenses in some cases (recognize losses before we recognize gains)
Define Equity:
Is residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. (net assets, assets minus liabilities (A-L))
Define Comprehensive income:
Is the change in equity (A-L) during a period, except the portion of change resulting from investments by owners and distributions to owners (i.e., catch-all for equity after that doesn't include stocks or dividends). -increases or decreases in equity from non-owner transactions.
Journalize: After developing its trademark, the company decided to put its brand to use and prepaid $24,000 cash for 12 months of advertising in an effort to boost sales.
Prepaid Advertising 24,000 ----------------------Cash 24,000
Journalize: William, a financial broker, became Kris' consultant. Viezuchter paid William $100,000 in advance for his financial consultation, which would provide payment for William's financial services evenly over the next 12 months.
Prepaid Consulting 100,000 ----------------------- Cash 100,000
Journalize: Viezuchter Co. prepaid $36,000 for a three-year insurance contract covering the business for common protections.
Prepaid Insurance 36,000 ---------------------Cash 36,000
Provide adjusting entries based off of unadjusted trial balance: (Sales Revenue above) 425,000+(adjustment) 20,000= 445,000 (Expense Total above) 200,000+ (adjustment total) 68,667= (268,667) Operating Income Amount 176,333 Tax rate 40% Tax Expense 70,533 Net Income 105,800 (176,333-70,533) Adjusting entry for tax expense and taxes payable: NI dec. Tax expense 70,533 L inc.------ Taxes payable 70,533 Accrued expense
Provide the two closing entries to retained earnings. (Note: I do not want the zeroing out of revenues and expenses, just the entries that involve the retained earnings account). Assume a 40% tax rate.
What is the PCAOB & what does it do?
Public Company Accounting Oversight Board -Created in response to Sarbanes-Oxley Act of 2002 (post-Enron) -It oversees and monitors public auditing firms, establishes auditing standards and concepts
Adjust the entries based off of unadjusted trial balance (case #3): Pretax Income 325,000 (on book) 7,500 (adjust) (15,000) (utilities) (45,000) (wages) (20,000) (depreciation) (16,000) (amortization) (2,000) (insurance) (2,000) (interest) 232,500 Pretax Income 40% Tax Rate 93,000 Tax Expense NI dec. Tax Expense 93,000 L inc.-------- Taxes Payable 93,000 Accrued expense
Ralphie Co. faces a 40% tax rate and has a December 31st fiscal year end.
Describe the difference between real (permanent) and nominal accounts (temporary).
Real (permanent) accounts- are never closed, these are balance sheet accounts. ex: Cash. Accounts receivable. Fixed assets. Accounts payable. Retained earnings. Nominal (temporary) accounts-closed at the end of the accounting period, these are income statement accounts. Dividend is nominal, but not income statement. ex: service revenue, sales revenue, wages expense, utilities expense, supplies expense, and interest expense
Define Materiality:
Refers to a standard of relevance -When an item is immaterial it may be recorded outside of GAAP. But it MUST be reported -In other words, if a transaction could be (1) recorded according to GAAP or (2) an expedient, but non-GAAP manner, and the user of the accounting report would make the same decision, then the item is immaterial. (judgement by the accountant) -Need not be a quantitative (dollar value) effect, may be qualitative ex: depreciation on a marker
Define Comparability:
Refers to transactions being measured and reported similarly across firms at the same point in time. -We can compare companies at the same point in time and know similar standards were used to compute totals and compile reports. -two firms at SAME time
Define Consistency:
Refers to transactions being measured and reported similarly from year-to-year for the SAME corporation. -We can compare the performance of a company this year with is prior years and not need to make any significant adjustments -ONE company over long period of time
Journalize: Garage supplies in the amount of $7,500 were consumed while providing services to customers.
Supplies Expense 7,500 -------------- Garage Supplies 7,500
Describe the function of the Securities and Exchange Commission and the Financial Accounting Standards Board. How are these regulatory bodies related? How are they distinct?
The SEC is a regulatory agency that is created and controlled by the government. All public companies must register annual reports with the SEC to trade on the US Markets. The FASB is a private body that issues accounting standards that form the basis for GAAP. The SEC may issue enforcement actions against companies that it deems have made significant departures from GAAP. If the company does not rectify the accounting issues, the SEC may issue a stop order that halts trading of the company's stock.
Provide adjusting entries based off of unadjusted trial balance: Because the building is listed at historical cost, we can figure out the adjustment, or in this case depreciation expense, needed 1,000,000/20 years= 50,000 depreciation expense per year NI dec. Depreciation Expense 50,000 A dec.-----Accumulated Depreciation 50,000 Deferred Expense Using the Accumulated Depreciation account, we can establish when the building was purchased. 300,000 Unadjusted Balance 50,000 journal entry above 350,000 Total depreciation expense/50,000 per year = bought 7 years ago The building was bought in 2013
The building has no anticipated salvage and an estimated useful life of 20 years. Provide the adjusting entry at 12/31/20 and determine the date of the building's purchase.
Adjust the entries based off of unadjusted trial balance (case #3): 200,000/10 Years= 20,000 Expense per year NI dec. Depreciation Expense 20,000 A dec.--- Accumulated Depreciation 20,000 Deferred expense
The building is being depreciated on a straight-line basis and was purchased on January 1, 2018. Its useful life is assumed to be 10 years with no salvage.
Provide adjusting entries based off of unadjusted trial balance: 200,000* .04*4/12 months= 2,667 NI dec. Interest Expense 2,667 Linc.--------- Interest Payable 2,667 Accrued expense
The note payable was issued on September 1, 2020 and bears an annual stated rate of 4%. Interest is payable on October 31 of each year. Provide the adjusting entry at 12/31/20.
Difference between Expenses and Dividends:
The cost of dividends is not included in the company's income statement because they're not an operating expense, which are the costs to run the day-to-day business.
Provide adjusting entries based off of unadjusted trial balance: L dec. Deferred Revenue 20,000 NI inc.--------- Sales Revenue 20,000
The deferred revenue account represents gift cards purchased throughout the year. At 12/31/20, $20,000 of gift cards had been redeemed. Provide the adjusting entry at 12/31/20.
Difference between Expenses & Losses:
The main difference between expenses and losses is that expenses are incurred in order to generate revenues, while losses are related to essentially any other activity. Another difference is that expenses are incurred much more frequently than losses, and in much more transactional volume.
Adjust the entries based off of unadjusted trial balance (case #3): 80,000/5=16,000 yearly expense NI dec. Amortization Expense 16,000 A dec.---------------------- --Patent 16,000 Deferred expense
The patent was obtained on January 1, 2021 and will be amortized evenly over the course of 5 years with no salvage
Adjust the entries based off of unadjusted trial balance (case #3): 24 months- 6 months used in 2020 = 18 months left 3,000/18=167 Per month *12 months= 2,000 expense per year 2,000 *2 years= 4,000 original amount. NI dec. Insurance Expense 2,000 A dec.--------- Prepaid insurance 2,000 Deferred expense
The prepaid insurance account reflects a two-year contract that was originally paid for on July 1, 2020. For how much was the prepaid insurance contract originally purchased?
Provide adjusting entries based off of unadjusted trial balance: 24,000/18 months = 1,333 per month * 12 months for this year= 16,000 NI dec. Insurance Expense 16,000 A dec.------- Prepaid Insurance 16,000 Deferred expense
The prepaid insurance contract balance reflects 18 months of the remaining contract. Provide the adjusting entry at 12/31/20.
Adjust the entries based off of unadjusted trial balance (case #3): L dec. Deferred Revenue 7,500 NI inc.----------Sales Revenue 7,500 Deferred revenue
The unearned revenue was booked on July 1, 2021 of this year when the client prepaid for services that will be rendered evenly over the course of one year.
On 1/1/x9, Sharpe Inc. determined it had assets of $2,050,000 and total liabilities of $925,000. During 20x9, Sharpe increased its capital stock by issuing common stock for $270,000. Sharpe recorded net income of $800,000 and paid dividends of $300,000. There were no other equity transactions for the year. If Sharpe Inc. had total assets of $2,500,000 at 12/31/x9, determine the change in liabilities during the year and the total amount of liabilities at 12/31/x9.
This approach utilizes changes to simplify some of the work. You know the change in assets is $2,500k - $2,050k = $450k. The change in equity is simply the effects that occurred during the year: $270k + $800k - $300k = $770k ∆A = ∆L + ∆E $450k = ∆L + $770k ∆L = -$320k, liabilities fell by $320,000. Now apply this change to the beginning value of liabilities: $925k - $320k = $605k liabilities at 12/31/x9.
Describe the objective of financial accounting information according to the SFAC:
To assist in the efficient functioning of the economies and the efficient allocation of resources in capital markets. 1. Useful in investment and credit decisions. (all the statements) 2. Useful in assessing future cash flows. (income statement & statement of cash flows) 3. About enterprise resources (assets), claims on resources (liabilities & equity), and changes in them (income). (Balance sheet & income statement)
Journalize: Spent $2,000 in collaboration with a visual designer to develop a trademark and to file the proper legal fees for a company trademark. Trademarks have legal lives of 10 years but are indefinitely renewable.
Trademark 2,000 -----------Cash 2,000
Journalize: Kris purchased $24,500 in Treasury bill maturing April 30th of current year with a face value of $25,000 as short-term investment
Treasury Bill 24,500 -------------------Cash 24,500
Journalize: ·Throughout the month, Viezuchter Co. paid its employees each Friday. Total wages paid amounted to $10,000. However, employees earned an additional $1,000 during the last week, that would not be paid until 4/1 of the next quarter. Viezuchter wrote a check paying for the $20,000 of utility bills it incurred during the first 3 months of the year.
Wages Expense 10,000 ----------------------Cash 10,000 Wages Expense 1,000 --------- Wages Payable 1,000 Utilities Expense 20,000 ----------------Cash 20,000
Define Revenue Recognition Principle:
instructs that companies "recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.