Prepayments and accruals occur when cash flow precedes or follows expense or revenue recognition. Deduct: 3. Communication Case 2—3 Requirement 1 Prepayments occur when the cash flow precedes either expense or revenue recognition. Accruals occur when the cash flow comes after either expense or revenue recognition.
Requirement 2 The appropriate adjusting entry for a prepaid expense is a debit to expense and a credit to the prepaid asset.
For deferred revenue, the appropriate adjusting entry is a debit to the deferred revenue liability account and a credit to revenue. Requirement 3 The required adjusting entry for accrued liabilities is a debit to expense and a credit to a liability. For accrued receivables, the appropriate adjusting entry is a debit to a receivable and a credit to revenue. Assuming this pertains to prepaid insurance, insurance expense must have exceeded the amount paid for insurance coverage, because the balance decreased during the year.
The appropriate adjusting entry for a prepaid expense is a debit to expense and a credit to the prepaid asset. Failure to record an adjusting entry for a prepaid expense will cause expenses to be understated and thus net income to be overstated. Each of these is in the opposite order from what we see in Illustration 2—14 based on U. If AF used U. GAAP, Issued share capital would be Common stock, Reserves and retained earnings would be separated into retained earnings and one or more other accounts, usually Accumulated other comprehensive income accounts.
Under U. GAAP balance sheet. The purpose of this chapter is to review the fundamental accounting process used to produce the financial statements. This review establishes a framework for the study of the concepts covered in intermediate accounting. Actual accounting systems differ significantly from company to company. This chapter focuses on the many features that tend to be common to any accounting system.
LO2—2 Record transactions using the general journal format. LO2—3 Post the effects of journal entries to general ledger accounts and prepare an unadjusted trial balance. LO2—4 Identify and describe the different types of adjusting journal entries. LO2—5 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance.
LO2—6 Describe the basic financial statements. LO2—7 Explain the closing process. LO2—8 Convert from cash basis net income to accrual basis net income. The Basic Model A. External events involve an exchange between the company and another entity; internal transactions do not involve an exchange transaction but do affect financial position.
Each transaction has a dual effect on the accounting equation. The double-entry system is used to process transactions. Elements of the accounting equation are represented by accounts in a general ledger. In the double-entry system, debit means left side of an account, and credit means right side of an account. Asset increases are entered on the debit side of accounts and decreases are entered on the credit side.
Liability and equity account increases are credits and decreases are debits. The Accounting Processing Cycle A. Step 1. Obtain information about transactions from source documents.
Step 2. Transaction analysis is the process of reviewing source documents to determine the dual effect on the accounting equation and the specific elements involved. Step 3. Record the transaction in a journal. Step 4. Post from the journal to the general ledger accounts. In addition to general ledger control accounts, a subsidiary ledger discussed in Appendix 2C contains a group of subsidiary accounts associated with particular general ledger control accounts.
Step 5. Prepare an unadjusted trial balance. A worksheet discussed in Appendix 2A can be used as a tool after and instead of step 5 in the processing cycle. Adjusting Entries A. Step 6. Record adjusting entries and post to the ledger accounts. Prepayments are transactions in which the cash flow precedes expense of revenue recognition. Prepaid expenses represent assets recorded when a cash disbursement creates benefits beyond the current reporting period.
Deferred revenues represent liabilities recorded when cash is received from customers in advance of providing a good or service. Accruals involve transactions where the cash outflow or inflow takes place in a period subsequent to expense or revenue recognition. Accrued liabilities represent liabilities recorded when an expense has been incurred prior to cash payment.
Accrued receivables involve situations when the revenue is recognized in a period prior to the cash receipt. Estimates often are made to comply with the accrual accounting model. Most estimates involve either prepayments or accruals. One situation involving an estimate that does not fit neatly into either the prepayment or accrual classification is accounting for bad debts. Step 7. Preparation of an adjusted trial balance.
Accountants sometimes use reversing entries discussed in Appendix 2B in conjunction with adjusting entries. Step 8. Prepare Financial Statements A. The income statement B. The statement of comprehensive income C. The balance sheet D. The statement of cash flows E. Step 9. Close the Temporary Accounts A.
Close the revenue accounts to income summary. Close the expense accounts to income summary. Close the income summary account to retained earnings. Step Prepare a post-closing trial balance. Add deduct increases decreases in assets. For example, an increase in accounts receivable means that the company recognized more revenue than cash collected. Add deduct decreases increases in accrued liabilities. For example, a decrease in interest payable means that the company incurred less interest expense than the cash interest paid, requiring the addition to cash basis-income.
Accessible PowerPoint Presentations. Accessibility is becoming even more important in the education marketplace. Students and instructors with disabilities use many different assistive technologies, and McGraw-Hill Education is working to increase compatibility and access that will not only help those with disabilities achieve better learning outcomes, but also serve the institutions that are teaching these students. Accessible PowerPoint allows slide content to be read by a screen reader and provides alternative text descriptions for any image files used that enrich the learning experience.
Accessible PowerPoint is also designed with high-contrast color palettes and uses texture when possible, instead of color to denote different aspects of the imagery used within the slide. Note: The slides are intended to provide comprehensive coverage of the chapter, but they can be easily edited to allow instructors to change numbers and content in illustrations or to delete slides pertaining to topics they choose to omit or deemphasize.
In addition to Exercise 2—20 and Problem 2—13, the requirements for Problems 2—2, 2—4, 2—6, 2—8, and 2—10 can be modified to include the use of software such as Excel. Professional Skills Development Activities The following are suggested assignments from the end-of-chapter material that will help your students develop their communication, analysis and judgment skills.
Communication Skills. In addition to Communication Case 2—3, Judgment Cases 2—1 and 2—2 can be adapted to ask students to write a memo. These Judgment Cases also do well as group assignments and create good class discussions. Analysis Skills. Exercises 2—15, 2—18 and Problems 2—7, 2—9 provide opportunities to develop and sharpen analytical skills.
Judgment Skills. This chapter includes Judgment Cases 2—1 and 2—2. Assignment Chart Questions 2—1 2—2 2—3 2—4 2—5 2—6 2—7 2—8 2—9 2—10 2—11 2—12 2—13 2—14 2—15 2—16 2—17 2—18 2—19 2—20 2— External and internal events 5 Dual effect of transactions on financial position 5 Purpose of journal and ledger 5 Permanent and temporary accounts 5 Debits and credits 5 Debits and credits 5 Accounting processing cycle 5 Transaction analysis 5 Posting 5 Journal entries 5 Trial balance 5 Adjusting entries 5 Closing entries 5 Adjusting entries—prepaid expenses 5 Adjusting entries—deferred revenue 5 Adjusting entries—accrued liabilities 5 Financial statements 5 Worksheet [Based on Appendix 2A] 5 Reversing entries [Based on Appendix 2B] 5 Special journals [Based on Appendix 2C] 5 Subsidiary ledger [Based on Appendix 2C] 5.
Topic Transaction analysis Journal entries T-accounts Journal entries Adjusting entries Adjusting entries; income determination Adjusting entries Income determination Adjusting entries Financial statements Financial statements Closing entries Cash versus accrual accounting.
Exercises 2—1 2—2 2—3 2—4 2—5 2—6 2—7 2—8 2—9 2—10 2—11 2—12 2—13 2—14 2—15 2—16 2—17 2—18 2—19 2—20 2—21 2—22 2—23 2—24 2— Transaction analysis 15 Journal entries 15 T-accounts and trial balance 15 Journal entries 20 The accounting processing cycle 15 Debits and credits 15 Transaction analysis; debits and credits 15 Adjusting entries 15 Adjusting entries 15 Adjusting entries; solving for unknowns 15 Adjusting entries 15 Financial statements and closing entries 20 Closing entries 10 Closing entries 10 Cash versus accrual accounting; adjusting entries 15 External transactions and adjusting entries 15 Accrual accounting income determination 15 Cash versus accrual accounting 20 Cash versus accrual accounting 20 Worksheet [Based on Appendix 2A] 35 Reversing entries [Based on Appendix 2B] 10 Reversing entries [Based on Appendix 2B] 10 Reversing entries [Based on Appendix 2B] 10 Special journals [Based on Appendix 2C] 15 Special journals [Based on Appendix 2C] Learning Est.
No reproduction or distribution without prior written consent of McGraw-Hill Education. The Basic Model Economic Events Cause changes in the financial position of the company External Events Involve an exchange transaction with another entity. Accounting Equation—Owner Investment 1. Accounting Equation—Borrowing Money from the Bank 2.
This transaction causes assets and liabilities to increase. A bank loan increases cash and creates an obligation to repay it. Accounting Equation—Supplies Purchased on Account 3. Accounting Equation—Services Performed on Account 4. Accounting Equation—Salaries Paid to Employees 5. Accounting Equation—Transaction Analysis 7. Salaries expense Accounts receivable Rent revenue All of these answers are incorrect The correct answer is b.
Accounts receivable is a permanent asset account. Transaction 1 1. Transaction 2 2. Transaction 3 3. Transaction 4 4. Transaction 5 5. Accounting Equation Assets , -5, 98, Transaction 6 6. Accounting Equation Assets , -5, 98, 97, Transaction 7 7. Accounting Equation Assets , -5, 98, 97, -1, 96, Each investor was issued 3, shares of common stock. Journal Entry — July 1 Prepaid rent Cash. Journal Entry — July 1 Office equipment Cash. Journal Entry — July 6 Supplies Cash. Journal Entry — July 16 Cash Deferred rent revenue.
Debiting a liability Debiting an expense Debiting cash Crediting an expense The correct answer is b. The journal entry to record the issuance of common stock in exchange for cash involves: a. A debit to common stock and a credit to cash b. A debit to cash and credits to common stock and retained earnings c. A debit to cash and a credit to common stock d. All of these answer choices are incorrect The correct answer is c.
Cash is an asset, so it is increased with a debit and common stock is a permanent equity account, so it is increased with a credit. To ensure that all revenues are recognized in the period goods or services are transferred to customers 2. Assume that its useful life is five years 60 months and it will be worthless at the end of that period. What is the liability amount for deferred subscription revenue that will appear in the balance sheet? The company could have debited rent expense, and the adjusting entry records the prepaid rent as of the end of July.
Journal Entry. Journal Entry — July Journal Entry — July 1 Salaries expense Salaries payable. Cash Flows from Investing Activities Purchase of office equipment Cash Flows from Financing Activities Issue of common stock Increase in notes payable Payment of cash dividend Net cash flows from financing activities Net increase in cash.
Will have a debit balance after closing Will have a debit balance prior to closing Will have a credit balance prior to closing All of these answer choices are incorrect The correct answer is a. Revenues are debited to reduce them to zero and the income summary account is credited. Expenses are credited to reduce them to zero and the income summary account is debited. So, a debit balance in income summary results from expenses for the period exceeding revenues. Step Prepare a Post-Closing Trial Balance Prepared at year-end only to verify that the closing entries were prepared and posted correctly.
You can determine insurance expense for the year. Determine the sales revenue. Accounts Receivable Beg. Credit sales End. Dan White Draperies maintains its records on a cash basis.
The correct answer is c: Cash receipts Less cash disbursements Cash basis net income Deduct: Depreciation expense Decrease in prepaid expenses Add: Increase in accounts receivable Decrease in accrued liabilities Accrual basis net income. The following adjusting entry for accrued salaries was prepared for the Dress Right Clothing Corporation to record accrued salaries at the end of July. The following reversing entry for accrued salaries is recorded for accrued salaries at the beginning of August.
Journalizing is made more efficient through the use of specifically designed formats 2. Individual transactions are not posted to the general ledger accounts, they are accumulated and a summary posting is made periodically 3.
The following transactions occurred during March year 1 for the Plare Corporation. The company owns and operates a wholesale warehouse. The company uses the perpetual inventory system.
Required: Analyze each transaction and show the effect of each on the accounting equation for a corporation. Post the below journal entries prepared in to T-accounts. Assume that the opening balances in each of the accounts is zero. Prepare a trial balance from the ending account balances. The company owns and operates a retail shoe store. Recorded the amount of prepaid insurance that expired for the month. Required: 1. Prepare the necessary adjusting entries at December 31, Year 1, for the Velto Company for each of the following situations.
Assume that no financial statements were prepared during the year and no adjusting entries were recorded. The company debited insurance expense for the entire amount. The payment, representing rent for December and January, was credited to deferred rent revenue. Date Dec. The company issues quarterly financial statements requiring the company to prepare adjusting entries at the end of each quarter.
Assuming all quarterly adjusting entries were properly recorded, prepare the necessary year-end adjusting entries at the end of June 30, year 2, for the following situations. Azmie owns a warehouse that it rents to another company. The December 31, year 1, adjusted trial balance for the Blueboy Cheese Corporation is presented below.
Prepare an income statement for the year ended December 31, year 1, and a classified balance sheet as of December 31, year 1. Sales revenue Cost of goods sold Salaries expense Rent expense Depreciation expense Advertising expense Interest expense.
Reverse order of Interest expense and its amount with Advertising expense, and its amount, so the order is consisten with what is provided at the top of the slide. Make sure the change is made in the narration as well. The following is a partial adjusted trial balance as of December 31, year 1. The Redel Shoe Store Company prepares monthly financial statements for its bank. The November 30 and December 31, year 1, trial balances contained the following account information:.
What was the amount of rent revenue recognized in December? Buy this textbook Buy launch. Intermediate Accounting. David Spiceland, Mark W. Nelson, Wayne M Thomas.
View More Textbook Editions. Solutions for Intermediate Accounting View Samples. Section Chapter Questions. Problem 1. Problem 1CCTC. Sample Solutions for this Textbook We offer sample solutions for Intermediate Accounting homework problems. See examples below:. Explanation: The function of financial accounting is the creation of financial statements, for the Explanation: External events are the events which involves an exchange transaction between the two Explanation: Following are the purposes of the balance sheet Summarized information of assets and Explanation: Income statement: The financial statement which reports revenues and expenses from Explanation: The five key steps to applying the revenue recognition principle are as follows: Explanation: The term interest is defined as follows: Interest is the amount of interest paid on the Explanation: Cash equivalents are the highly liquid investments with the maturity period of less The three types of inventory of a manufacturing company are: Raw Materials: It refers to the cost of Explanation: The difference between the tangible and intangible long-lived, revenue producing assets Explanation: The term depreciation, depletion and amortization are the similar methods used for Explanation: For, the purposes of reporting, the investments in debt securities are classified in Explanation: The three main characteristics of liabilities are as follows: Liabilities exist for the Explanation: The periodic interest payments determined by the outstanding liabilities The periodic Explanation: When accounting for leases, the legal form of agreement is irrelevant.
A finance lease Explanation: Income tax expense combines both current and deferred tax. Explanation: Definition of pension plan: This is the plan devised by corporations to pay the Paid in capital 2.
Explanation: Restricted Stock: Restricted stock is the portion of shares held up by the management, Explanation: Accounting changes are categorized into following types: 1. Change in principle: It
0コメント