Mort 165 Ch 5

On the work sheet, before net income/loss is calculated, the Debit column of the income statement section totals $4,500 and the Credit column totals $4,700. The net income/loss of the business is...

$200 net income

An office machine was purchased for $9,000 cash on Jan 1. The machine has a useful life of 3 years and a scrap or salvage value of $1,500. The annual depreciation for this machine will be?

- $2,500 - ($9000-$1500)/3

An asset was purchased for $5,000, has an estimated 4 year like, and a $200 salvage or scrap value. What is the annual depreciation for this asset?

- $4,800 per year - ($5000 - $200)

On Dec. 31, unadjusted trial balance of the Supplies account is $500. If only $50 in Office Supplies remain at the end of the accounting period, what will be the amount of the adjusting entry to the Supplies Expense Account?

- $450 - $500 in supplies were available to use and $50 in supplies are on hand at the end of the accounting period. A total of $450 worth of supplies have been consumed. - An adjusting entry must be recorded with a debit to Supplies Expense and a credit to Supplies for $450

The balance of the Prepaid Insurance account at the beginning of the year totaled $325. During the year, policies were purchased at a total cost of $1,350. If the unexpired balance of the policies at the end of the year totals $1,000, what amount will be charged to the Insurance account?

- $675 - The beginning balance of $325 plus the cost of additional policies of $1350 will be $1,675. ($1675 - $1000 = $675)

Before the net income/loss has been extended to the Balance Sheet columns of the worksheet, the debit column total is $45,000 and the credit column total is $36,000. What is the amount of the net income or net loss for this business?

- $9,000 net income

Straight-line method

- A depreciation method in which the depreciable cost is divided by the estimated useful life - Depreciation cost / estimated useful life

Sum-of-the-years-digits depreciation method

- A depreciation method that recognizes depreciation each year by multiplying a fraction by the depreciable cost - The numerator of the fraction is the remaining life of the asset, measured from the beginning of the year - The denominator is the sum-of-the-years'-digits.

Modified Cash Basis

- A method of accounting that combines aspects of the cash and accrual methods - It uses the cash basis for recording revenues and most expenses - Exceptions are made when cash is paid for assets with useful lives greater than one accounting period

Matching Principle

- A principle that requires that all revenues earned and all expenses incurred be accounted for, which allows for the proper matching of the total revenues for the period against the total expenses for the period and provides a comparable net income/loss to prior periods - A principle that requires the matching of revenues earned during an accounting period with the expenses incurred to produce the revenues

Contra-Asset Accounts

- Accumulated depreciation - Trucks, Office Equipment

Plant Assets

- Assets of a durable nature that will be used for operation over several years - Examples include buildings, equipment and vehicles - Also called fixed assets or long-term assets

The office employees are paid weekly, earn a total of $500 each day, and work a 5-day week shift which ends on Friday. If the accounting period ends on Thursday, the adjusting entry for the unpaid wages will require a:

- Debit wages expense and credit Wages payable for $2,000 - $500 per day x 4 days worked

Expense Accounts

- Depreciation Expense - Trucks

Adjusting entries

- First entered on the worksheet, then when that is completed, they are then recorded in the general journal and posted to the general ledger - Journal entries made at the end of an accounting period to reflect changed in account balances that are not the direct result of an exchange with an outside party - Journalized the final day of the accounting period

Adjusting entry affects what accounts?

- Income statement -Balance sheet

At the beginning of the year, the Prepaid Insurance account had a $1,200 balance which represented an insurance policy that will expire in two years. On July 1, a 3-year $1,800 policy on a newly constructed building was purchased. The Dec. 31 year-end, adjusting entry will be:

- Insurance Expense debit $900 - Prepaid Insurance credit $900 - Prepaid insurance account will be reduced by $600($1,200/2) for the two year policy and $300(($1,800/3)/2) for the 3 year policy

Revenue recognition principle

- Revenues should be recognized when earned, regardless of when cash is received from the customer - Revenues are considered earned when a service is provided or a product is sold

Adjusted Trial Balance columns

- The 3rd pair of amount columns on the worksheet - They are used to prove the equality of the debits and the credits in the general ledger accounts after making all end-of-period adjustments

Undepreciated Cost

- The difference between the asset account and its related accumulated depreciation account - Also known as book value.

Book Value

- The difference between the asset account and its related accumulated depreciation account - The value reflected by the accounting records - Also known as undepreciated cost

Income Statement columns

- The work sheet columns that show the amounts that will be reported in the income statement - 4th columns on the worksheet

Current Assets

- Turnover several times over the accounting period - Examples include cash and accounts receivable

Fiscal year

A 12-month period for which financial reports are prepared

Modified Accelerated Cost Recovery System (MACRS)

A depreciation method in which rates determined by the IRS are multiplied by the cost of the asset to determine depreciation expense for the year

Straight-line depreciation method

A depreciation method that recognized an equal amount of depreciation each year

Double-declining balance depreciation Method

A depreciation method that recognizes depreciation each year by multiplying a rate (typically double the straight-line rate) by the book value of the asset

Worksheet

A form used to pull together all of the information needed to enter adjusting entries and prepare thefinancial statements

Cash Basis of Accounting

A method of accounting under which revenues are recorded when cash is received and expenses are recorded when cash is paid

Accrual Basis of Accounting

A method of accounting under which revenues are recorded when earned and expenses are recorded when incurred

Depreciation

A method of matching an asset's original cost against revenues produces over its useful life

Historical Cost Principle

A principle that require asses to be recorded at their actual cost

Contra Asset

An account with a credit balance that is deducted from the related asset account on the balance sheet

Understating an expense account will result in...

An overstatement of net income on the income statement

The adjusting entry for wages was overlooked at the end of the accounting period...

As a result of this error, there will be - An understatement of the Wages Expense account - An understatement of Wages Payable

Sum-of-the-years-digits

If an asset has a five-year life, the sum-of-the-years'-digits is computed as follows: 5 + 4 + 3 + 2 + 1 = 15

A check is issued to pay the rent for 6 months in advance. The cash account will be credited. What account will be debited for this transaction?

Prepaid rent will be debited.

The adjusting process is completed to account for all revenues of the period and all expenses of the period. Completion of this step in the accounting process is required under which accounting principle?

The Matching Principle

Market Value

The amount an item can be sold for under normal economic conditions

Depreciable Cost

The cost of an asset that is subject to depreciation

Salvage Value

The expected market value of an asset at the end of its useful life

Wages Payable

The liability account that presents on the trial balance (also the balance sheet) the amount that is currently owed to the employees of the business

Useful life

The period of time that an asset is expected to help revenues

The book value of a plant asset is...

The under depreciated value of the asset.

The adjusting entry for prepaid insurance was overlooked in the adjustment process.

This account will be overstated on the balance sheet