Week Two Exercise: Revenue And Expenses Recognition

Week Two Exercise Assignmentrevenue And Expenses1recognition Of Conce

Week Two Exercise Assignment Revenue and Expenses 1. Recognition of concepts. Jim Armstrong 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:

• Interest owed on the company's bank loan, to be paid in early July
• Professional fees earned but not billed as of June 30
• Office supplies on hand at year-end
• An advance payment from a client for a performance next month at a convention
• The payment in part from the client's point of view
• Amounts paid on June 30 for a 1-year insurance policy
• The bank loan payable in part
• Repairs to the firm's copy machine, incurred and paid in June

2. Understanding the closing process. Examine the following list of accounts: Note Payable, Accumulated Depreciation: Building, Alex Kenzy, Drawing, Accounts Payable, Product Revenue, Cash, Accounts Receivable, Supplies Expense, Utility Expense. For each account, determine:

• Which appear on a post-closing trial balance
• Which are commonly known as temporary, or nominal, accounts
• Which generate a debit to Income Summary in the closing process
• Which are closed to the capital account in the closing process

3. Adjusting entries and financial statements. The following information pertains to Sally Corporation: The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one half of this amount had been earned. Sally Corporation provided $1,500 of services to Artech Corporation; no billing had been made by December 31. Salaries owed to employees at year-end amounted to $1,000. 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 Sally Corporation’s headquarters, beginning on November 1. Sally Corporation’s accounting year ends on December 31. Instructions: Analyze the five preceding cases individually and determine the following:

• 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)
• The year-end journal entry to adjust the accounts
• The income statement impact of each adjustment (e.g., increases total revenues by $)

4. Adjusting entries. You have been retained to examine the records of Mary’s Day Care Center as of December 31, 20X3, the close of the current reporting period. You discover the following: On January 1, 20X3, the Supplies account had a balance of $1,350. 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, credited to the Unearned Tuition Revenue account. The account was credited for $65,500 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 $24,000. Mary wrote a check to the owner of the building and recorded it 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. Mary’s Day Care paid insurance premiums as follows, each time debiting Prepaid Insurance: Date Paid, Policy No., Length of Policy, Amount — Feb. 1, 20X2, 1033MCM19, 1 year, $540; Jan. 1, 20XHP, 1 year, $912; Aug. 1, 20X3, XQ943675ST, 2 years, $840. Instructions: Prepare the adjusting entries necessary under the accrual basis of accounting.

Paper For Above instruction

Accurate financial reporting hinges on the proper recognition of revenues and expenses, especially at period-end. The first case involves classifying various items as prepaid expenses, unearned revenues, accrued expenses, accrued revenues, or none. For example, interest owed on a bank loan to be paid in July is an accrued expense, as the obligation has been incurred but not yet paid. Professional fees earned but not billed are accrued revenues, recognizing income earned but not yet invoiced. Office supplies on hand are current assets, not requiring adjustment if already recorded. An advance payment from a client before a performance is a unearned revenue until the service is performed. Payments made on June 30 for a one-year insurance policy are prepaid expenses, as the benefit extends beyond the current period. The loan payable is a liability, not a recognition item. Repairs paid in June are typically expenses, unless capitalized. Proper classification ensures accurate financial statements and adherence to revenue recognition principles.

The second task involves understanding the closing process, particularly the classification of accounts into permanent and temporary categories. Permanent accounts, like Note Payable, Accumulated Depreciation, Capital Accounts, and Assets, remain open after closing. Temporary accounts, such as Product Revenue, Expenses, and Drawings, are closed to the capital account. Accounts like Cash, Accounts Receivable, and Notes Payable appear on the post-closing trial balance, representing financial position rather than performance. Temporary accounts generate a debit to Income Summary during closing, which then balances with credits from expenses and revenues. Accounts closed to the capital account serve to update the owner’s equity, reflecting the net income or loss for the period.

In analyzing Sally Corporation’s case, adjusting entries are necessary for various accrued and deferred items. For instance, the unearned revenue from prepayments needs to be adjusted to recognize earned portions. Half of the $1,500 received in advance has been earned, requiring an appropriate debit to Unearned Revenue and credit to Revenue. Services provided but unbilled must be accrued as revenue. Salaries owed are accrued expenses, needing a debit to Salaries Expense and a credit to Salaries Payable. Supplies on hand must be adjusted from the recorded balance to actual remaining supplies, affecting Supplies Expense. The rent paid in advance is a prepaid expense, needing proportionate recognition of expense for the current period. Each adjustment impacts the income statement either through increases in revenues or expenses, thus affecting net income.

Similarly, in Mary’s Day Care Center’s scenario, multiple adjustments are necessary. Supplies purchased but partially used require an adjustment from Supplies to Supplies Expense. Accrued interest must be recognized to match the expense with the period. Tuition received in advance should be deferred and then recognized proportionately as revenue. Depreciation on assets needs to be recorded to allocate cost over useful life. Prepaid rent and insurance must be adjusted to reflect the amounts used during the period, aligning expenses with the period’s activity. Accurate adjustments ensure the financial statements present a true view of the company’s financial health at year-end.

The bank reconciliation process involves matching the bank’s statement with company records, identifying timing differences such as deposits in transit and outstanding checks. For Palmetto Company, deposits in transit and outstanding checks must be considered to reconcile the balances, along with charges or collections by the bank, such as service charges, interest, or NSF checks. Adjusting entries are then recorded for bank fees, interest income, or NSF checks to reflect the true cash position of the company.

The direct write-off method for Harrisburg Company indicates removing uncollectible accounts when identified, such as writing off Tom Mattingly’s account after bankruptcy. While simple, this method can distort net income and receivables’ valuation, especially when uncollectibles are significant or arise frequently. In contrast, the allowance method estimates uncollectibles based on receivables aging, providing a more accurate valuation. Using the allowance approach, the expected uncollectible amounts are provisioned in advance, aligning expense recognition with revenue generation, leading to more reliable financial statements. Sonic Sound’s case demonstrates the importance of estimating allowances accurately to match the bad debt expense with sales.

In conclusion, proper recognition, classification, and adjustment of various accounting elements are critical for accurate financial reporting. Understanding the distinctions between different types of accounts and adjusting entries enhances the reliability of financial statements, aiding stakeholders in decision-making. Regular reconciliation and application of appropriate methods for uncollectible accounts further ensure that the company’s financial health is realistically represented.

References

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