ACCT 1A Lecture Notes - Lecture 18: Deferral, Accrual, Retained Earnings

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amaranthgrasshopper262

26 Aug 2020

School

Irvine Valley College

Department

Accounting

Course

ACCT 1A

Professor

Bradshaw

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Document Summary

Cash is paid before expense = deferred expense is incurred. Companies often pay cash before they incur an expense. When a company pays for a resource before they use is = deferred expense. Recording of the expense must be deferred until the expense is incurred. When a company pays cash before it incurs an expense company should always increase an asset account for the amount paid. = deprecation is the process of spreading out over their useful lives the cost of non-current assets. As a result both assets and equity are decreasing. The deprecation expense and accumulated depreciation adjusted so they properly reflect the expenses incurred: accrued expense. Cash received after revenue earned = accrued expense is incurred. Companies often incur expenses and pay for them later (e. g. employee salaries) When a company incurs an expense before it pays cash the company should increased payable (liabilities) Payable account should be adjusted up (increased) Expense account should be adjusted up (increased)

Related Questions

NEED ANSWERS ASAP

Question 23

If a resource has been consumed but a bill hasnot been received at the end of the accountingperiod, then

		an expense should be recorded when the bill is received.
		an expense should be recorded when the cash is paid out.
		an adjusting entry should be made recognizing the expense.
		it is optional whether to record the expense before the bill isreceived.

3 points

Question 24

Prepaid expenses are

		paid and recorded in an asset account before they are used orconsumed.
		paid and recorded in an asset account after they are used orconsumed.
		incurred but not yet paid or recorded.
		incurred and already paid or recorded.

3 points

Question 25

If a business has received cash in advance of services performedand credits a liability account, the adjusting entry needed afterthe services are performed will be

		debit Unearned Service Revenue and credit Cash.
		debit Unearned Service Revenue and credit Service Revenue.
		debit Unearned Service Revenue and credit Prepaid Expense.
		debit Unearned Service Revenue and credit AccountsReceivable.

3 points

Question 26

The preparation of adjusting entries is

		straight forward because the accounts that need adjustment willbe out of balance.
		often an involved process requiring the skills of aprofessional.
		only required for accounts that do not have a normalbalance.
		optional when financial statements are prepared.

3 points

Question 27

On January 1 of the current year, Doolittle Company purchasedfurniture for $7,560. The company expects to use the furniture for3 years. The asset has no salvage value. The book value of thefurniture at December 31of this year is

		$0.
		$2,520.
		$5,040.
		$7,560.

3 points

Question 28

Husker Du Supplies Inc. purchased a 12-month insurance policy onMarch 1 of the current year for $1,800. At March 31, the adjustingjournal entry to record expiration of this asset will include a

		debit to Prepaid Insurance and a credit to Cash for $1,800.
		debit to Prepaid Insurance and a credit to Insurance Expense for$200.
		debit to Insurance Expense and a credit to Prepaid Insurance for$150.
		debit to Insurance Expense and a credit to Cash for $150.

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

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.

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ACCT 1A Lecture Notes - Lecture 18: Deferral, Accrual, Retained Earnings

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