Accrual Accounting And Income: Short Exercises

Chapter 3

Accrual Accounting & Income

Short Exercises

(10 min.) S 3-1

Millions
Sales revenue…………………………………………….
850
Cost of goods sold………………………………………
(290)
All other expenses……………………………………… (325)
Net income………………………………………………..
$ 235

Beginning cash…………………………………………..
$ 75
Collections ($850 − $27)………………………………..
823
Payments for: inventory……………………………….
(380)
everything else………………………. (255)
Ending cash………………………………………………
$ 263

(10 min.) S 3-2

Statement
Reports (Amounts in millions)
Income statement
Interest expense………………………
$ .8

Balance sheet
Notes payable ($4.1 + $1.7 − $1.6)….
$4.2

Interest payable……………………….
0.3

(10 min.) S 3-3

At the end of each accounting period, the business reports its performance through the preparation of financial statements. In order to be useful to the various users of financial statements they must be up-to-date. Accounts such as cash, Equipment, Accounts Payable, Common Stock and Dividends are up-to date and require no adjustment at the end of the accounting period. Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be up to date as of the last day of the accounting period. Why? Because certain transactions that took place during the month may not have been recorded.

The accrued salaries, which are owed to the employees but have not been paid, are an expense related to the current period but also represent a liability or debt that is owed by the business. The business must make an adjusting entry to record the accrued salary owed as both an increase in Salary Expense and an increase in Salaries Payable. If the business does not make this adjustment, the expenses will be understated, net income will be overstated, and liabilities will be understated.

(10 min.) S 3-4

The large auto manufacturer should record sales revenue when the revenue is earned by delivering automobiles to Budget or Hertz. The large auto manufacturer should not record any revenue prior to delivery of the vehicles, because the large auto manufacturer hasn’t earned the revenue yet. The revenue principle governs this decision.

When the large auto manufacturer records the revenue from the sale, at that time —not before or after — the large auto manufacturer should also record cost of goods sold, the expense. The expense recognition principle tells when to record expenses.

(10 min.) S 3-5

Depreciation is the periodic allocation of the cost of a tangible long-lived asset, less its estimated residual value, over its estimated useful life. All long-lived or plant assets, except for land, decline in usefulness during their life and this decline is an expense. Accountants must allocate the cost of each plant asset, except for land, over the asset’s useful life. Depreciation is the process of allocating the cost of a plant asset to expense. Depreciation also decreases the book value of the asset to reflect its usage.

(10 min.) S 3-6
a. The Expense Recognition Principle

b. The Time Period Concept

c. The Revenue Principle

d. The Revenue Principle

e. The Expense Recognition Principle

(10 min.) S 3-7

a.

Oct. 31
Rent Expense ($3,000 × 1/6)…………...
500

Prepaid Rent………………………….

500

To record rent expense.

Prepaid Rent

Rent Expense
Oct. 1
3,000
Oct. 31
500

Oct. 31
500

Bal.
2,500

Bal.
500

b.

Oct. 31
Supplies Expense ($950 − $400)………
550

Supplies………………………………..

550

To record supplies expense.

Supplies

Supplies Expense
Oct. 1
950
Oct. 31
550

Oct. 31
550

Bal.
400

Bal.
550

(10 min.) S 3-8

Req. 1

(a)
Jan. 1
Computer Equipment…………….………..
50,000

Cash……………………………………….

50,000

Purchased computer equipment.

(b)
Dec. 31
Depreciation Expense

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