Reconstruct The Correct Entries Under Accrual Accounting Pri

Reconstruct The Correct Entries Under Accrual Accounting Principles An

Reconstruct the correct entries under accrual accounting principles and post the effects to T accounts. Budi started a small boat repair service company during the current year. He is interested in obtaining a $100,000 loan from your bank to build a dry dock to store boats for customers. At the end of the year, he prepared the following statements based on information stored in a large filing cabinet.

BUDI COMPANY

Profit for the Current Year

• Service fees collected in cash during the current year: $55,000
• Cash dividends received: $10,000
• Total: $65,000

Expenses for operations paid during the current year: $22,000

- Cash stolen: $500

- New tools purchased during the current year (cash paid): $1,000

- Supplies purchased for use on service jobs (cash paid): $3,200

Total expenses: $26,700

Profit: $38,300

Assets Owned at the End of the Current Year

• Cash in checking account: $29,300
• Building (at current market value): $32,000
• Tools and equipment: $18,000
• Land (at current market value): $30,000
• Stock in ABC Industrial: $130,000
• Total assets: $239,300

The following is a summary of completed transactions:

1. Received contributions (at fair value) from the owner when starting the business in exchange for 1,000 shares of $1 par common stock:
   • Building: $21,000
   • Land: $20,000
   • Tools and equipment: $17,000
   • Cash: $1,000
2. Earned service fees during the current year totaling $87,000; $20,000 of this was for deposits from customers for work to be done next year.
3. Received cash dividends on shares of ABC Industrial stock purchased six years earlier (the stock was not owned by the company).
4. Incurred operating expenses during the current year totaling $61,000.
5. Supplies on hand (unused) at year-end determined to be $700.
6. A temporary employee subsequently fired stole $500 cash from the business; there was no insurance coverage for theft.
7. Purchased tools and equipment during the year.

Required: Reconstruct the correct journal entries under accrual accounting principles for the above transactions and their effects on T-accounts.

Paper For Above instruction

Under accrual accounting principles, recording transactions accurately requires recognizing revenues when earned and expenses when incurred, regardless of cash movement. This method ensures that financial statements reflect the company's true financial position at a specific point in time, aligning with the matching principle which associates expenses with related revenues in the same accounting period.

Initial Contributions and Asset Recognition

The owner’s initial contributions of building, land, tools, equipment, and cash aggregate to total capital invested in the business. The entries for these contributions include debiting assets such as building ($21,000), land ($20,000), tools and equipment ($17,000), and cash ($1,000), and crediting owner’s equity (Capital account). This reflects the owner's investment at fair value, establishing the basis for the company’s assets. The journal entries are:

Debit: Building ...................................................... $21,000
Debit: Land .......................................................... $20,000
Debit: Tools and Equipment ......................................... $17,000
Debit: Cash ........................................................... $1,000
Credit: Owner’s Capital ............................................. $59,000

This recognition aligns with the initial receipt of contributions and the fair valuation of assets contributed. It simultaneously increases both assets and equity, reflecting the owner’s funding and asset allocations.

Recording Business Operations and Revenue Recognition

During the year, service fees of $87,000 were earned, with $20,000 received as deposits for future services. Under accrual accounting, revenue is recognized when earned, not received, so total earned revenue is $87,000. Deposits received for future work are liabilities (Unearned Revenue) until the service is performed. The entries are:

Debit: Accounts Receivable / Cash .................................. $67,000
Debit: Cash (for deposits) ......................................... $20,000
Credit: Service Revenue ............................................ $87,000

At year-end, the deposits ($20,000) are recorded as liabilities, and earned revenue ($67,000) as income.

Dividend Income and Investment

Dividends received on ABC industrial stock are income, recognized when declared and received. Since the stock was not owned by the company but dividends were received, the appropriate entry is:

Debit: Cash .......................................................... $10,000
Credit: Dividend Income ............................................ $10,000

This increases cash and recognizes dividend income, which enhances the company's earnings.

Expenses and Theft

Operating expenses totaling $61,000 are recognized when incurred, regardless of payment status. The expenses are recorded as:

Debit: Operating Expenses ........................................... $61,000
Credit: Accounts Payable / Cash ................................... $61,000

The theft of $500 cash is a loss. Since no insurance coverage exists, the loss is recognized directly:

Debit: Loss from Theft .............................................. $500
Credit: Cash .......................................................... $500

Inventory of Supplies on Hand

Supplies purchased amounting to $3,200, with an ending balance of $700, indicate usage of supplies worth $2,500 during the year:

Debit: Supplies Expense ............................................. $2,500
Credit: Supplies .................................................... $2,500

The remaining supplies of $700 are assets on hand, recorded as supplies inventory.

Purchases and Assets Recognition

Tools and equipment purchased during the year are recorded at cost. For example, if additional tools/equipment were purchased, entries are:

Debit: Tools and Equipment .......................................... $X (purchase amount)
Credit: Cash ......................................................... $X

Similarly, new tools and equipment depreciate over time; however, without depreciation data, they are recorded at cost for now.

Financial Effects on T-Accounts

All these journal entries impact various T-accounts such as Assets (Cash, Building, Land, Tools & Equipment), Liabilities (Unearned Revenue), Equity (Owner's Capital), Revenue (Service Revenue), and Expenses (Operating Expenses, Supplies Expense, Loss from Theft). For example, the cash T-account is affected by contributions, service revenue, dividends, theft, expenses, asset purchases, and liabilities converted to cash.

Conclusion

Accurate financial reporting under accrual accounting begins with recognizing all revenues when earned and all expenses when incurred, regardless of cash flows. This comprehensive reconstruction of entries based on Budi's transactions ensures that the financial statements reflect a precise view of the company's financial health, aligning with standard accounting principles. Proper journal entries and maintaining detailed T-accounts are essential for transparent financial management and reporting.

References

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