33:010:272 Lecture Notes - Lecture 5: Accrual, Accounting, Financial Statement

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pearmammoth379

28 Dec 2019

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Time period assumption (periodicity assumption: accountants divide the economic life of a business into artificial time periods, generally a month, a quarter, or a year, alternative terminology, the time period assumption is also called the periodicity assumption. Recognizing revenues and expenses: revenue recognition principle, recognize revenue in the accounting period in which the performance obligation is satisfied. Types of adjusting entries: trial balance = each account is analyzed to determine whether it is complete and up-to-date for financial statement purposes. Preparing adjusting entries for deferrals: deferrals are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged, there are two types, prepaid expenses, unearned revenues. Prepaid expenses: payments of expenses that will benefit more than one accounting period, cash payment before expense recorded, prepayments often occur in regard to. Insurance: supplies, advertising, rent, buildings & equipment, expire either with the passage of time or through use, adjusting entry:

Related Questions

Listed below are several terms and phrases associated with basic assumptions, broad accounting principles, and constraints. Pair each item from List A with the item from List B that is most appropriately associated with it.

List A =

1. Expense recognition

2. Periodictiy

3. Historical cost principle

4. Materiality

5. Revenue recognition

6. Going concern assumption

7. Monetary unit assumption

8. Economic entity assumption

9. Full-disclosure principle

List B =

1. A common denominator is the dollar

2. All information that could affect decisions should be reported

3. Concerns the relative size of an item and its effect on decisions

4. Criteria usually satisfied for products at point of sale

5. Record expenses in the preiod the related revenue is recognized

6. The enterprise is separate from its owners and other entities.

7. The entity will continue indefinitely

8. The life of an enterprise can be divided into artificial time periods.

9. Thje original transaction value upon acquistion.

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1. Which of the following identifies the proper order of theaccounting cycle?

A. Analyze, Journalize, Unadjusted Trial Balance

B. Analyze, Post, Unadjusted Trial Balance

C. Journalize, Post, Adjusted Trial Balance

D. Unadjusted Trial Balance, Adjusted Trial Balance, Close

E. Adjusted Trial Balance, Adjustments, Financial Statements

2. Interim financial statements refer to financial reports:

A. That cover less than one year, usually spanning one, three orsix-month periods

B. That are prepared before any adjustments have beenrecorded

C. That show the assets above the liabilities and theliabilities above the equity

D. Where revenues are reported on the income statement when cashis received and expenses are reported when cash is paid

E. Where the adjustment process is used to assign revenues tothe periods in which they are earned and to match expenses withrevenues

3. The accounting principle that requires revenue to be reportedwhen earned is the:

A. Matching principle

B. Revenue recognition principle

C. Time period principle

D. Accrual reporting principle

E. Going-concern principle

4. Adjusting entries:

A. Affect only income statement accounts

B. Affect only balance sheet accounts

C. Affect both income statement and balance sheet accounts

D. Affect only cash flow statement accounts

E. Affect only equity accounts

5. The system of preparing financial statements based onrecognizing revenues when the cash is received and reportingexpenses when the cash is paid is called:

A. Accrual basis accounting

B. Operating cycle accounting

C. Cash basis accounting

D. Revenue recognition accounting

E. Current basis accounting

6. If throughout an accounting period the fees for legalservices paid in advance by clients are recorded in an accountcalled Unearned Legal Fees, the end-of-period adjusting entry torecord the portion of those fees that has been earned is:

A. Debit Cash and credit Legal Fees Earned

B. Debit Cash and credit Unearned Legal Fees

C. Debit Unearned Legal Fees and credit Legal Fees Earned

D. Debit Legal Fees Earned and credit Unearned Legal Fees

E. Debit Unearned Legal Fees and credit Accounts Receivable

7. A company had no office supplies available at the beginningof the year. During the year, the company purchased $250 worth ofoffice supplies. On December 31, $75 worth of office suppliesremained. How much should the company report as office suppliesexpense for the year? A. $75 B. $125 C. $175 D. $250 E. $325 8. OnJanuary 1 a company purchased a five-year insurance policy for$1,800 with coverage starting immediately. If the purchase wasrecorded in the Prepaid Insurance account and the company recordsadjustments only at year-end, the adjusting entry at the end of thefirst year is:

A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800

B. Debit Prepaid Insurance, $1,440; credit Insurance Expense,$1,440

C. Debit Prepaid Insurance, $360; credit Insurance Expense,$360

D. Debit Insurance Expense, $360; credit Prepaid Insurance,$360

E. Debit Insurance Expense, $360; credit Prepaid Insurance,$1,440

9. Unearned revenue is reported on the financial statementsas:

A. A revenue on the balance sheet

B. A liability on the balance sheet

C. An unearned revenue on the income statement

D. An asset on the balance sheet

E. An operating activity on the statement of cash flows

10. Which of the following assets is not depreciated?

A. Store fixtures

B. Computers

C. Land

D. Buildings

E. Vehicles

11. On April 30, 2011, a three-year insurance policy waspurchased for $18,000 with coverage to begin immediately. What isthe amount of insurance expense that would appear on the company'sincome statement for the year ended December 31, 2011? A. $500 B.$4,000 C. $6,000 D. $14,000 E. $18,000 12. Expenses incurred butunpaid that are recorded during the adjusting process with a debitto an expense and a credit to a liability are:

A. Intangible expenses

B. Prepaid expenses

C. Unearned expenses

D. Net expenses

E. Accrued expenses

13 The difference between the cost of an asset and theaccumulated depreciation for that asset is called

A. Depreciation Expense

B. Unearned Depreciation

C. Prepaid Depreciation

D. Depreciation Value

E. Book Value

14. A company purchased a new truck at a cost of $42,000 on July1, 2011. The truck is estimated to have a useful life of 6 yearsand a salvage value of $3,000. How much depreciation expense willbe recorded for the truck for the year ended December 31, 2011?

A. $3,250

B. $3,500

C. $4,000

D. $6,500

E. $7,000

15. A company's Office Supplies account shows a beginningbalance of $600 and an ending balance of $400. If office suppliesexpense for the year is $3,100, what amount of office supplies waspurchased during the period?

A. $2,700

B. $2,900

C. $3,300

D. $3,500

E. $3,700

chocolatereindeer731

Architect, a cash basis TP, has been conducting a business as a sole proprietorship for several years. Architect decides to incorporate, and on July 1 of the current year he forms Design, Inc., to which he transfers the following assets:

Assets AB FMV

Accounts Receivable $0 $60,000

Supplies 0 20,000

Unimproved Land 60,000 120,000

Total $60,000 $200,000

The land was subject to contingent environmental liabilities that Architect had not taken into account (i.e., had not deducted or capitalized) for tax purposes at the time of the incorporation. The supplies were acquired nine months ago and their cost was immediately deducted by Architect as an ordinary and necessary business expense.

In exchange, Architect receives 100 shares of Design common stock with a FMV of $100,000. In addition, Design assumes $70,000 of accounts payable to trade creditors of Architect's sole proprietorship and a $30,000 bank loan incurred by Architect two years ago for valid business reasons, and it assumed the environmental liabilities associated with the land.

Design elects to become a cash method, calendar year TaxPayer. During the remainder of the current year, it pays $30,000 of the accounts payable and collects $40,000 of the accounts receivable transferred by Architect. In the following taxable year, Design paid $20,000 in environmental remediation expenses that qualified for a current deduction when paid or accrued under Section 162.

(a)What are the tax consequences (gain or loss recognized, basis and holding period) of the incorporation to Architect and Design, Inc.?

(b) Who will be taxable upon collection of the accounts receivable: Architect, Design or both?

(c) When Design pays the accounts payable assumed from Architect and incurs the environmental remediation costs, may it properly deduct these expenses?

(d)Assume that Architect is in the highest marginal individual tax bracket and Design, Inc. anticipates no significant TI for the current year:

â¢What result, if Architect decides to pay (and deduct) personally all the accounts payable. and transfers the accounts receivable to the C?

(e) Would your answers be any different if Architect had been an accrual method Taxpayer?

(f) Is Design, Inc. limited in its choice of accounting method (i.e., cash or accrual) or taxable year? See Â§Â§ 441; 448

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33:010:272 Lecture Notes - Lecture 5: Accrual, Accounting, Financial Statement

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