ACCT 121 Lecture Notes - Lecture 3: Dry Cleaning, The Need, Uptodate

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11 May 2020

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Expense recognition principle: accountants follow a simple rule in recognizing expenses: let the expenses follow the revenues. thus, expense recognition is tied to revenue recognition. In the dry cleaning example, this means that dave"s should report the salary expense incurred in performing the june 30 cleaning service in the same period in which it recognizes the service revenue. The critical issue in expense recognition is when the expense makes its contribution to revenue. This may or may not be the same period in which the expense is paid. If dave"s does not pay the salary incurred on june 30 until july, it would report salaries payable on its june 30 balance sheet: this practice of expense recognition is referred to as the expense recognition principle. It requires that companies recognize expenses in the period in which they make efforts (consume assets or incur liabilities) to generate revenue.

Related Questions

Hi there

Please answer the below in 15 mins, urgent. tahnks in advance:

1.The Tom Root Corporation guarantees its product againstdefects for one year. In what year should the corporation reportthe warranty expense?

Select one:

a. The cost of warranty is included in the product's sellingprice, and therefore warranty expense is never recorded.

b. in the year the product is sold

c. Expense is not disclosed because of the Liability forWarranty.

d. in the year the product becomes defective and is repaired orreplaced

2.Financial accounting focuses on the specific needs of decisionmakers external to the organization. Which of the following wouldnot be an external user?

Select one:

a. Internal Revenue Service

b. Vice President - Marketing

c. banks

d. stockholders

When dividends are paid,

Select one:

a. total assets remain the same.

b. total assets will decrease.

c. total assets will increase.

d. stockholders' equity will increase.

The basic rights usually attached to shares of common stockinclude:

Select one:

a. the guaranteed right to receive dividend payments eachyear.

b. the right to determine CEO's pay rate.

c. the right to vote on the matter brought before the annualshareholder meeting.

d. all of the above.

Outstanding shares of stock are:

Select one:

a. shares of stock owned by unknown individuals.

b. issued shares that are still in circulation.

c. also called treasury shares.

d. authorized shares that have not yet been issued.

Par value:

Select one:

a. specifies the exact amount for which an individual share ofstock must be sold.

b. is the maximum amount for which a share of stock may besold.

c. establishes the minimum price for the stock when issued.

d. is an amount determined by the marketplace when shares ofstock are sold.

Which of the following would not be a source of informationabout the financial condition of a company?

Select one:

a. the auditor's report

b. the company's 10K

c. articles in the business press

d. All of the above are sources.

In making investment and lending decisions:

Select one:

a. there is no relationship between risk and rate of return.

b. alternatives with the highest return generally have thelowest risk.

c. alternatives with the highest risk are selected.

d. alternatives with the lowest return generally have the lowestrisk.

8.ith which of the following would creditors be mostconcerned?

Select one:

a. dividends

b. profitability

c. future security prices

d. none of the above

A fiscal year:

Select one:

a. is any twelve consecutive months.

b. ends on December 31.

c. always ends at the end of the month.

d. end on June 30.

10.

The key components in measuring income are:

Select one:

a. assets and liabilities.

b. revenue and liabilities.

c. retained earnings and expenses.

d. revenue and expenses.

e. expenses and assets.

f. revenue and assets.

11.Which of the following help(s) determine when a sale shouldbe included in the income statement?

Select one:

a. recognition principle

b. cost recovery principle

c. matching principle

d. Both a. and c.

12.

The recording of expenses in the same time period as the relatedrevenues is called:

Select one:

a. matching.

b. accuracy.

c. allocation.

d. recognition.

carminetrout975

Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.

Hamish Ltd
Income statement for theyear ended 30 June 2018	$
*Income*	904,000
Revenue from Sales	850,000
Interest Revenue	18,000
Rent Revenue	36,000
*Expenses*	647,000
Administration and sellingexpenses	133,000
Wages and salary expenses	250,000
Doubtful debts expense	20,000
Goodwill impairment	20,000
Insurance expense	54,000
Depreciation expense - plant	90,000
Long-service leave expenses	35,000
Warrantee expenses	45,000

*Net Profit beforetax*	257,000

Hamish Ltd
Extract from the Balancesheet as at 30 June 2018	$
*Assets*
Cash	40,000
Inventory	90,000
Accounts receivable (net)	80,000
Prepaid insurance	?
Interest receivable	6,000
Goodwill	?
Plant	?
*Liabilities*
Accounts payable	50,000
Wages and salaries owing	30,000
Provision for long-service leaveexpenses	25,000
Rent revenue received inadvance	?
Provision for warranteeexpenses	30,000
Loan payable	200,000

The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:

At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.

The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.

Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.

The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).

Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.

During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.

Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.

During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense for tax purposes.

At the beginning of the year (i.e., at the 1st of July 2017),total taxable temporary differences amounted to $48,500 and totaldeductible temporary differences amounted to $5,000.

The tax rate was always 33% but changedto 28% during the current year.

Required:

Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.

Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.

Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9

Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.

salmonporcupine872

Question 16

Corresponds to CLO 3(d) Hemmingway Corporation paid salaries of$5,000 and advertising expense of $2,000. Which of the followingjournal entries correctly records these expenses?

		Debit: Cash $7,000 Credit: Salaries/Wages Expense$5,000 Credit: Advertising Expense $2,000
		Debit: Salaries/Wages Expense$5,000 Debit: Advertising Expense $2,000 Credit: Cash$7,000
		Debit: Salaries/Wages Expense$5,000 Debit: Advertising Expense $2,000 Credit: Salaries/Wages Payable$5,000 Credit: Accounts Payable$2,000
		Debit: Salaries/Wages Expense$5,000 Debit: Advertising Expense $2,000 Credit: Cash$8,000

3 points

Question 17

Corresponds to CLO 4(a) Which of the following statements iscorrect regarding accrued revenues and unearned revenues, beforeadjusting entries have been made?

		Accrued revenues have not been earned and unearned revenues havebeen earned.
		Accrued revenues have been paid and unearned revenues havenot.
		Accrued revenues have not been recorded and unearned revenueshave been recorded.
		Accrued revenues have been recorded and unearned revenues havebeen recorded.

3 points

Question 18

Corresponds to CLO 4(b) Hudson Law Corporation received $5,500cash for legal services to be rendered in the future. The fullamount was credited to the liability account Unearned ServiceRevenue. At the end of the period, Hudson determines that $3,000 ofthe legal services have been rendered. The appropriate adjustingjournal entry to be made at the end of the period is:

		debit Unearned Service Revenue, $3,000; credit Cash, $3,000.
		debit Unearned Service Revenue, $3,000; credit Service Revenue,$3,000.
		debit Unearned Service Revenue, $2,500; credit Service Revenue,$2,500.
		debit Service Revenue, $2,500; credit Unearned Service Revenue,$2,500.

3 points

Question 19

Corresponds to CLO 4(c) Ace Corporation purchased officesupplies costing $13,000 and debited Office Supplies for the fullamount. At the end of the accounting period, a physical count ofoffice supplies revealed $2,700 still on hand. The appropriateadjusting journal entry to be made at the end of the period is:

		debit Office Supplies Expense, $10,300; credit Office Supplies,$10,300.
		debit Office Supplies, $10,300; credit Office Supplies Expense,$10,300.
		debit Office Supplies Expense, $2,700; credit Office Supplies,$2,700.
		debit Office Supplies, $2,700; credit Office Supplies Expense,$2,700.

3 points

Question 20

Corresponds to CLO 4(d) On September 1, Northgate paid $18,000to Evans Management Company for 12 months of rent beginning onSeptember 1. The appropriate journal entry was made to record thistransaction. If financial statements are prepared for the 9 monthsended September 30, the adjusting entry to be made by Northgateis:

		debit Rent Expense, $13,500; credit Prepaid Rent, $13,500.
		debit Prepaid Rent, $1,500; credit Rent Revenue, $1,500.
		debit Prepaid Rent, $1,500; credit Rent Expense, $1,500.
		debit Rent Expense, $1,500; credit Prepaid Rent, $1,500.

3 points

Question 21

Corresponds to CLO 5(a) Lennox Corporation purchased a newdelivery truck for 35,000. The sales taxes are $2,700. The logo ispainted on the side of the truck for $800. The truck's annuallicense is $200. Annual insurance on the truck is $1,300. Whatshould Lennox record as the cost of the new truck?

		$40,000
		$38,500
		$37,700
		$35,000

3 points

Question 22

Corresponds to CLO 5(b) On April 1, 2013, Ballard Corporationpurchased equipment for $65,000. It is estimated that the equipmentwill have a $5,000 salvage value at the end of its 5 year usefullife. If Ballard uses the straight-line method of depreciation,what is the accumulated depreciation at December 31, 2013?

		$13,000
		$12,000
		$9,750
		$9,000

3 points

Question 23

Corresponds to CLO 5(c) Tyree Company purchased equipment with acost of $90,000 and an estimated salvage value of $18,000. Theequipment is expected to produce 150,000 units over its estimateduseful life of 10 years. If Tyree uses the units-of-activitymethod, what is the depreciation cost per unit to be used incalculating depreciation?

		$1.67
		$0.48
		$2.08
		$0.60

3 points

Question 24

Corresponds to CLO 5(d) Kerns Company purchased equipment with acost of $200,000 and an estimated salvage value of $10,000. Theequipment has an estimated useful life of 10 years. If Kerns usesthe double-declining balance method, what is the annualdepreciation rate to be used in calculating depreciation?

		5%
		10%
		20%
		40%

3 points

Question 25

Corresponds to CLO 6(a) Marshall Machinery made a sale for$150,000 on March 31. The customer is sent a statement on April 6and payment is received on April 15. Marshall prepares March'smonthly internal financial statements on April 20. Marshall followsGAAP and applies the revenue recognition principle. When is the$150,000 considered to be earned?

		March 31
		April 6
		April 15
		April 20

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ACCT 121 Lecture Notes - Lecture 3: Dry Cleaning, The Need, Uptodate

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