Aweek Two Exercise Assignment Revenue And Expenses 1 Recogni

Aweek Two Exercise Assignmentrevenue And Expenses1recognition Of Conc

A week Two Exercise Assignment: Revenue and Expenses

1. Classify each of the following items as either prepaid expense, unearned revenue, accrued expense, accrued revenue, or none of the above:

a. Amounts paid on June 30 for a 1-year insurance policy.

b. Professional fees earned but not billed as of June 30.

c. Repairs to the firm’s copy machine, incurred and paid in June.

d. An advance payment from a client for a performance next month at a convention.

e. The payment in part (d) from the client’s point of view.

f. Interest owed on the company’s bank loan, to be paid in early July.

g. The bank loan payable in part (f).

h. Office supplies on hand at year-end.

2. Examine the following accounts: Interest Payable, Accumulated Depreciation: Equipment, Alex Kenzy, Drawing, Accounts Payable, Service Revenue, Cash, Accounts Receivable, Supplies Expense, Interest Expense

a. Which appear on a post-closing trial balance?

b. Which are temporary or nominal accounts?

c. Which generate a debit to Income Summary during closing?

d. Which are closed to the capital account during closing?

3. For Fixation Enterprises, analyze the following:

- An advance payment of $1,500, with one-third earned by December.

- $2,500 of services provided to Artech, not yet billed.

- Salaries owed of $1,650.

- Supplies balance of $8,800, with only $3,300 actual supplies on hand.

- Rent paid on October 1 for six months, beginning November 1, totaling $18,000.

Determine the type of adjusting entry (A, B, C, D), the journal entry, and its income statement impact.

4. For Kathy’s Day Care Center, as of December 31, 20X3, record necessary adjusting entries based on:

- Supplies starting balance of $2,350, purchases of $5,520, ending balance of $1,620.

- Unrecorded interest owed totaling $275.

- Unearned tuition revenue credited for $75,500 on August 31, with $15,500 for future periods.

- Depreciation of the van: $3,000.

- Prepaid rent of $21,000 for six months beginning August 1.

- Salaries for two employees earning $400 for a 5-day week, paid weekly.

- Insurance premiums paid on various dates, active for 1 or 2-year periods.

Prepare all necessary adjusting entries under accrual accounting.

5. Palmetto Company’s January bank statement shows a balance of $6,150; the company’s books show $3,580. Record the bank reconciliation and necessary journal entries, including bank charges, deposits in transit, interest, and NSF checks.

6. Harrisburg Company, with $40,000 accounts receivable including a $550 bad debt from Tom Mattingly who filed for bankruptcy, uses the direct write-off method.

a. Record the journal entry to write off Mattingly’s account.

b. Comment on how the direct write-off method affects valuation of receivables at year-end.

7. Sonic Sound’s receivables at year-end: total $12,444,056, with an allowance for uncollectible accounts of $23,000 (credit). Accounts aged as follows: Under 31 days ($5,321), 31–60 days ($3,890), 61–90 days ($1,067), Over 90 days ($2,166).

a. Estimate uncollectible accounts as of December 31, 20X2.

b. Determine the uncollectible accounts expense for 20X2.

c. Calculate net realizable value of receivables at the end of 20X1 and 20X2.

d. Analyze the percentage of net realizable value relative to receivables and comment on the credit evaluation decision.

Paper For Above instruction

Introduction

Accounting is a fundamental aspect of business management, providing vital information through systematic recording, classifying, and summarizing of financial transactions. This essay addresses various core accounting topics, including the classification of certain transactions, the closing process, adjusting entries, bank reconciliation procedures, and different methods of handling uncollectible accounts. Understanding these processes enables accurate financial reporting, which supports effective decision-making and compliance with accounting standards.

Classification of Transactions

Proper classification of transactions ensures accurate financial statements. Nursery-specific classifications include prepaid expenses (such as insurance paid for in advance), unearned revenues (advance payments from clients), accrued expenses (expenses incurred but not yet paid, like interest owed), and accrued revenues (services performed but not yet billed). For instance, amounts paid on June 30 for a year-long insurance policy constitute a prepaid expense because they are paid in advance and used over time. Conversely, professional fees earned but not billed at year-end are accrued revenues, reflecting income earned but not yet received. Repair costs paid in June are considered expenses, while advance payments received for future performances are unearned revenues until the service is provided. Likewise, interest owed but unpaid at year-end is an accrued expense, and interest payable or the loan itself is recognized accordingly.

The Closing Process and Key Accounts

The accounting cycle culminates in the closing process, which resets temporary accounts to zero for the next period. Accounts such as Service Revenue, Supplies Expense, and Interest Expense are temporary, generating a debit or credit to Income Summary. Permanent accounts like Cash, Accounts Receivable, Accounts Payable, and Property, Plant, and Equipment (including Accumulated Depreciation) appear on the post-closing trial balance and carry forward into the next accounting period. Temporary accounts are closed to capital or retained earnings during closing, consolidating the income statement results and maintaining clarity of ongoing account balances.

Adjusting Entries and Financial Impacts

Adjusting entries are essential under accrual accounting to ensure revenues and expenses are recognized in the period they occur. For Fixation Enterprises, adjusting entries involve recognizing unearned revenue, accrued revenue, accrued expenses, and the depreciation of assets. For example, recognizing one-third of the advance payment as earned revenue increases total revenues, impacting the income statement positively. Similarly, accruing salaries owed and supplies consumed adjusts expenses and liabilities appropriately. The rent paid in advance requires expense recognition over subsequent periods, and the supplies used are recorded through adjusting entries that reflect actual supplies on hand. These adjustments are crucial for accurate financial reporting, impacting net income and asset values.

Adjusting Entries for Kathy’s Day Care Center

For Kathy’s Day Care, adjusting entries include recognizing supplies used, interest owed, unearned tuition revenue earned, depreciation, prepaid rent expenses, salaries, and insurance adjustments. For supplies, the initial balance and purchases indicate the supplies expense, while the ending balance reflects supplies on hand. The interest owed is accrued as an expense, while unearned revenue is partially earned over time. Depreciation is recognized based on the asset’s useful life, and rent expense is recorded to allocate prepayment over the months used. Insurance expenses are apportioned based on policy durations. These entries ensure adherence to the matching principle and accurate reflection of financial position and results.

Bank Reconciliation Procedure

Bank reconciliation reconciles the company’s records with the bank statement, accounting for timing differences such as deposits in transit, outstanding checks, bank charges, interest income, and NSF checks. For Palmetto Company, the reconciliation involves adjusting the book balance by subtracting bank service charges, NSF checks, and adding interest and deposits in transit, resulting in a reconciled balance that matches the bank. Corresponding journal entries include recording bank charges as expenses, interest income, and adjusting for NSF checks, ensuring the books reflect the actual cash position accurately.

Handling Uncollectible Accounts: Direct Write-off vs. Allowance Method

The direct write-off method records bad debts only when accounts are deemed uncollectible, which may distort receivable valuation on the balance sheet due to the lack of matching expenses with revenues. Harrisburg Company’s experience with writing off Tom Mattingly’s account exemplifies this approach. While simple, it doesn’t adhere to the matching principle and can overstate receivables. Conversely, the allowance method estimates uncollectible accounts at period-end, matching bad debt expenses with revenues earned, providing a more accurate asset valuation. Sonic Sound’s aging analysis exemplifies estimating uncollectibles, resulting in a more realistic view of receivable collectability and enhanced financial statement reliability.

Estimation and Analysis of Uncollectible Accounts

Using aging analysis, Sonic Sound estimates its uncollectible accounts by applying percentage estimates to various aging categories. This method results in an estimated uncollectible accounts balance, which influences the uncollectible accounts expense and net realizable value of receivables. As receivables age, the likelihood of collection diminishes, requiring increased allowances. Analysis of these figures shows the importance of effective credit management; the decision to disband credit evaluation departments must consider the potential risks of higher uncollectible rates, which can impact financial health and stakeholder confidence.

Conclusion

Effective management of the various aspects of accounting—from proper classification and journal entries to reconciliation and credit management—is vital for producing accurate financial statements. These practices ensure transparency, compliance with accounting principles, and better decision-making by stakeholders. As demonstrated, methodologies like aging analysis and allowance estimates are crucial for realistically assessing receivables, reflecting sound financial health and guiding strategic planning.

References

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