Accounting questions

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ACCRUAL

ACCOUNTING

CONCEPTS

Financial Accounting, Seventh Edition

4

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Illustration: Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand.

Supplies

1,500

Supplies Expense

1,500

Oct. 31

Adjusting Entries for “Prepaid Expenses”

LO 4 Prepare adjusting entries for deferrals.

Illustration 4-6 (Partial)

($2,500 – 1,000 = $1,500)

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Illustration: On October 4, Sierra Corporation paid $600 for a one-year fire insurance policy. Coverage began on October 1. Sierra recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month.

Prepaid Insurance

50

Insurance Expense

50

Oct. 31

Adjusting Entries for “Prepaid Expenses”

LO 4 Prepare adjusting entries for deferrals.

Illustration 4-7 (Partial)

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Depreciation

Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired.

Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life.

Depreciation does not attempt to report the actual change in the value of the asset.

Adjusting Entries for “Prepaid Expenses”

LO 4 Prepare adjusting entries for deferrals.

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Illustration: For Sierra Corporation, assume that depreciation on the office equipment is $480 a year, or $40 per month.

Accumulated Depreciation-Equipment

40

Depreciation Expense

40

Oct. 31

Adjusting Entries for “Prepaid Expenses”

LO 4 Prepare adjusting entries for deferrals.

Illustration 4-8 (Partial)

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LO 4 Prepare adjusting entries for deferrals.

Illustration: Sierra Corporation received $1,200 on October 2 from R. Knox for guide services for multi-day trips expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. From an evaluation of the service Sierra performed for Knox during October, the company determines that it has earned $400 in October.

Service Revenue

400

Unearned Service Revenue

400

Oct. 31

Illustration 4-12 (Partial)

Adjusting Entries for “Unearned Revenues”

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Illustration: In October, Sierra Corporation performed guide services for $200 that were not billed to clients before October 31.

Service Revenue

200

Accounts Receivable

200

Oct. 31

LO 5 Prepare adjusting entries for accruals.

Illustration 4-15

Adjusting Entries for “Accrued Revenues”

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LO 5 Prepare adjusting entries for accruals.

Illustration: Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an annual rate of 12%.

Interest Payable

50

Interest Expense

50

Oct. 31

Illustration 4-19 (Partial)

Illustration 4-18

Adjusting Entries for “Accrued Expenses”

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LO 5 Prepare adjusting entries for accruals.

Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 x 3 days).

Salaries and Wages Payable

1,200

Salaries and Wages Expense

1,200

Oct. 31

Illustration 4-21

Adjusting Entries for “Accrued Expenses”

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The Adjusted Trial Balance

LO 6

Illustration 4-26

Adjusted trial balance

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