Revenue And Expenses: Recognition Of Conce

revenue And Expenses 1recognition Of Conce

Week Two Exercise Assignmentrevenue And Expenses1recognition Of Conce

Week Two Exercise Assignment Revenue and Expenses 1. Recognition of concepts. Ron Carroll operates a small company that books entertainers for theaters, parties, conventions, and so forth. The company’s fiscal year ends on June 30. Consider the following items and classify each as either (1) prepaid expense, (2) unearned revenue, (3) accrued expense, (4) accrued revenue, or (5) none of the foregoing. 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. Analysis of prepaid account balance. The following information relates to Action Sign Company for 20X2: Insurance expense $4,350. Prepaid insurance, December 31, 20X,900. Cash outlays for insurance during 20X,200. Compute the balance in the Prepaid Insurance account on January 1, 20X2.

3. Understanding the closing process. Examine the following list of accounts: Interest Payable, Accumulated Depreciation: Equipment, Alex Kenzy, Drawing, Accounts Payable, Service Revenue, Cash, Accounts Receivable, Supplies Expense, Interest Expense. Which of the preceding accounts a. appear on a post-closing trial balance? b. are commonly known as temporary, or nominal, accounts? c. generate a debit to Income Summary in the closing process? d. are closed to the capital account in the closing process?

4. Adjusting entries and financial statements. The following information pertains to Fixation Enterprises: · The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one third of this amount had been earned. · Fixation provided $2,500 of services to Artech Corporation; no billing had been made by December 31. · Salaries owed to employees at year-end amounted to $1,650. · The Supplies account revealed a balance of $8,800, yet only $3,300 of supplies were actually on hand at the end of the period. · The company paid $18,000 on October 1 of the current year to Vantage Property Management. The payment was for 6 months’ rent of Fixation’s headquarters, beginning on November 1. Fixation’s accounting year ends on December 31. Instructions Analyze the five preceding cases individually and determine the following: a. The type of adjusting entry needed at year-end (Use the following codes: A, adjustment of a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to record an accrued expense; or D, adjustment to record an accrued revenue.) b. The year-end journal entry to adjust the accounts c. The income statement impact of each adjustment (e.g., increases total revenues by $.

Adjusting entries. You have been retained to examine the records of Kathy’s Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following: · On January 1, 20X3, the Supplies account had a balance of $2,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31. · Unrecorded interest owed to the center totaled $275 as of December 31. · All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $75,500 on August 31. With the exception of $15,500 all amounts were for the current semester ending on December 31. · Depreciation on the school’s van was $3,000 for the year. · On August 1, the center began to pay rent in 6-month installments of $21,000. Kathy wrote a check to the owner of the building and recorded the check in Prepaid Rent, a new account. · Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday. · Kathy’s Day Care paid insurance premiums as follows, each time debiting Prepaid Insurance: Date Paid Policy No. Length of Policy Amount Feb. 1, 20XMCM year $540 Jan.\n1, 20XHP 1 year 912 Aug. 1, 20X3 XQ943675ST 2 years 840 Instructions The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary under the accrual basis of accounting.

6. Bank reconciliation and entries. The following information was taken from the accounting records of Palmetto Company for the month of January: Balance per bank $6,150. Balance per company records 3,580. Bank service charge for January 20. Deposits in transit 940. Interest on note collected by bank 100. Note collected by bank 1,000. NSF check returned by the bank with the bank statement 650. Outstanding checks 3,080. Instructions: a. Prepare Palmetto’s January bank reconciliation. b. Prepare any necessary journal entries for Palmetto.

7. Direct write-off method. Harrisburg Company, which began business in early 20X7, reported $40,000 of accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was $550 for a sale made to Tom Mattingly in July. On January 4, 20X8, the company learned that Mattingly had filed for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles. a. Prepare the journal entry needed to write off Mattingly’s account. b. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet.

8. Allowance method: estimation and balance sheet disclosure. The following pre-adjusted information for the Maverick Company is available on December 31: · Accounts receivable $107,000 · Allowance for uncollectible accounts 5,400 (credit balance) · Credit sales 250,000 a. Prepare the journal entries necessary to record Maverick’s uncollectible accounts expense under each of the following assumptions: (1) Uncollectible accounts are estimated to be 5% of Credit Sales. (2) Uncollectible accounts are estimated to be 14% of Accounts Receivable. b. How would Maverick’s Accounts Receivable appear on the December 31 balance sheet under assumption (1) of part (a)? c. How would Maverick’s Accounts Receivable appear on the December 31 balance sheet under assumption (2) of part (a)?

9. Direct write-off and allowance methods: matching approach. The December 31, 20X2, year-end trial balance of Targa Company revealed the following account information: Debits Credits. Accounts Receivable $252,000. Allowance for Uncollectible Accounts $ 3,000. Sales $855,000. Instructions a. Determine the adjusting entry for bad debts under each of the following conditions: (1) An aging schedule indicates that $12,420 of accounts receivable will be uncollectible. (2) Uncollectible accounts are estimated at 2% of net sales. b. On January 19, 20X3, Targa learned that House Company, a customer, had declared bankruptcy. Present the proper entry to write off House’s $950 balance using the allowance method. c. Repeat the requirement in part (b), using the direct write-off method. d. In light of the House bankruptcy, examine the allowance and direct write-off methods in terms of their ability to properly match revenues and expenses.

10. Allowance method: analysis of receivables. At a January 20X2 meeting, the president of Sonic Sound directed the sales staff “to move some product this year.” The president noted that the credit evaluation department was being disbanded because it had restricted the company’s growth. Credit decisions would now be made by the sales staff. By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department: 20XX1 Sales $23,987,000. $8,423,000 Accounts Receivable, 12/,444,,056,000. Allowance for Uncollectible Accounts, 12/31 ? 23,000 cr. The $12,444,000 receivables balance was aged as follows: Age of Receivable, Amount, Percentage Expected to Be Collected, Under 31 days, $5,321, 31260 days, $3,890, 60-90 days, $1,067, Over 90 days, $2,166. Assume that no accounts were written off during 20X2. Instructions: a. Estimate the amount of Uncollectible Accounts as of December 31, 20X2. b. What is the company’s Uncollectible Accounts expense for 20X2? c. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2. d. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.

Paper For Above instruction

The extensive financial accounting concepts presented in the Week Two Exercise Assignment offer a comprehensive view of core principles like recognition of revenue and expenses, classification of accounts, adjustments, bank reconciliations, valuation techniques, depreciation methods, and the handling of uncollectible accounts. These elements collectively form the foundation of proficient financial reporting and ensure compliance with generally accepted accounting principles (GAAP).

Recognition of Revenue and Expenses

Recognizing revenue and expenses accurately is crucial for presenting a true financial position of a company. Ron Carroll's scenario exemplifies how different transactions are classified based on their economic substance. For instance, amounts paid on June 30 for a one-year insurance policy should be recognized as a prepaid expense (asset) initially, then gradually expensed over the policy period. Professional fees earned but not yet billed are accrued revenues, reflecting earned income not yet collected, while repairs paid in June are expenses recorded when incurred. Advances received from clients for future performances are unearned revenues, shifted to revenue as the services are rendered.

Classification and Analysis of Accounts

Understanding which accounts appear on the post-closing trial balance or are designated as temporary or permanent is vital. Permanent accounts like Assets (Cash, Accounts Receivable) and Liabilities (Accounts Payable) carry forward, while temporary accounts such as Service Revenue and Supplies Expense are closed to capital during the closing process. Accounts like Interest Payable and Accumulated Depreciation are permanent, but accounts like Service Revenue are temporary, reflecting performance during a period. The process of closing ensures that temporary accounts reset to zero for the next period, influencing the company's reports and retained earnings.

Adjusting Entries and Financial Statements

The Fixation Enterprises case emphasizes the importance of proper adjusting entries. For unearned revenue, recognizing earned portions; for prepaid expenses, adjusting for period consumption; and for accrued expenses, recording liabilities not yet paid are key. For example, a third of the advance payment previously received must be recognized as revenue, while accrued salaries and supplies adjustments reflect expenses incurred but not paid or documented. These adjustments directly impact net income and the financial position, ensuring accuracy and compliance with the accrual method of accounting.

Bank Reconciliation

Bank reconciliations, like those prepared for Palmetto Company, reconcile differences between bank and book records. Items like outstanding checks, deposits in transit, bank charges, and interest income must be appropriately journalized. For Palmetto, adjusting the cash account ensures the ledger accurately reflects the actual cash position, vital for cash management and fraud prevention. Proper record-keeping allows detection of discrepancies or errors, maintaining integrity in financial statements.

Handling Uncollectible Accounts

Managing accounts receivable through methods like direct write-off or allowance involves strategic considerations. Harrisburg’s use of the direct write-off method, while simple, does not match expenses with revenues effectively, potentially overestimating receivables. The allowance method estimates uncollectible accounts upfront, providing more accurate net realizable value, as exemplified by Maverick and Targa companies' calculations. These techniques impact the balance sheet presentation of receivables and influence management’s credit policies.

Depreciation and Asset Management

Proper depreciation calculation ensures that asset costs are allocated over their useful lives. Methods such as straight-line, units-of-output, and double-declining-balance have distinct implications. The Betsy Ross Enterprises case illustrates how depreciation expense varies with method choice, affecting net income. Additionally, revising depreciation estimates, as in Aussie Imports’ scenario, highlights the importance of reflecting changes in usage and remaining life, ensuring the accuracy of asset valuation and expense recognition.

Inventory Valuation

Inventory valuation impacts gross profit and net income. Methods like specific identification, FIFO, LIFO, and weighted average reflect different assumptions about inventory flow. For example, Boston Galleries’ use of specific identification isolates costs for unique items, whereas FIFO prioritizes older costs, often resulting in lower cost of goods sold in rising prices. These choices influence financial ratios and tax liabilities, making method selection strategic. Comparing methods under varying market conditions guides managements' decisions on inventory reporting.

Conclusion

Overall, these exercises emphasize the importance of accurate and consistent application of accounting principles. Whether classifying transactions, adjusting accounts, managing receivables, or calculating depreciation, each process contributes to faithful financial reporting. In practice, the choice of methods—such as allowance vs. direct write-off—must align with company policies, regulatory standards, and strategic goals. Mastery of these concepts ensures that financial statements genuinely reflect the company's economic reality, facilitating informed decision-making.

References

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