Chapter 4

Question 1

What is the difference between a calendar year and a fiscal year?

Answer 1

(1) Calendar year = Jan 1 to Dec 31

2) Fiscal year = any 12 consecutive months (e.g., most retail mechants like Walmart do Feb 1 to Jan 31

Question 2

Why do retail firms choose non-December fiscal year end dates?

Answer 2

They are too busy to make a F/S in December.

Question 3

What is the ledger?

Answer 3

T-account for each account. It is the collection of all accounts used by a company

Question 4

Accounting recording process?

Answer 4

(1) Analyse each transaction to indeitfy an accounting event
(2) Journalizing: enter transaction in a journal
(3) Posting: transfer journal information to the ledger accounts
(4) Prepare a trial balance

Question 5

What is a trial balance?

Answer 5

A list of accounts and their balance at a given time.

Question 6

What happens after a trial balance?

Answer 6

We will do adjusting entries to ge the adjusted trial balance. Then, finally, we will do closing entries to close the book and start fresh for the next fiscal year

Question 7

On Jul 1, we loaned the money (1,000) to the other company with an interest rate of 10% per year. Both interest payment and principle repayment occur on Jul 1 next year. What happenes in terms of accrued revenues?

Answer 7

On Jul 1 when we loan the money: Notes receivable increases by 1000 (dr) and cash decreases by 1000 (cr)
On Dec 31 (fiscal year-end): Interest receivables increases by 50 (dr) and interest revenue goes up by 50 (cr)

Question 8

Equation for interest

Answer 8

Interest = principle amount * interest rate * time passage

Question 9

What does accrued revenue mean?

Answer 9

Same thing as interest receivable

Question 10

On Jul 1, 2018, a company loaned the money (1000) to the other company with an interest rate of 10% per year. Both interest payment and principal repayment occur on Jul 1, 2019. On Dec 31, 2018, the company forgot to do an adjusting entry for the accrued interests. This would result in…?`

Answer 10

Understate of assets by 50

Question 11

On Jul 1, we loaned the money (1,000) to the other company with an interest rate of 10% per year. Both interest payment and principle repayment occur on Jul 1 next year. What happens on Jul 1, 2019?

Answer 11

Everything gets setteled. So we get 1100 in cash (considering interest). As we collect cash we eliminate all the previous receivables: we get rid of the 1000 notes receivable, the 50 interest receivable and the 50 interest revenue

Question 12

On July 1, 2018 a company borrowed 1000 from the bank for one yeat at an annual interest rate of 10%. The principal repayment and the interest payment occur on July 1, 2019. The company has a Devember 31 year-end. What happens in terms of accrued expenses?

Answer 12

On July 1 Cash increases by 1000 (dr) and loan payable goes up by 1000. (cr)
On Dec 31 Interest expenses goes up by 50 (dr) and interest payable goes up by 50 (cr)

Question 13

On July 1, 2018 a company borrowed 1000 from the bank for one year at an annual interest rate of 10%. The principal repayment and the interest payment occur on July 1, 2019. The company has a Devember 31 year-end. How much non-current liability does the company have as at Dec 31, 2018?

Answer 13

0 since it is all current liability. The current liability would be 1050 since interest payment occurs within the year of the fiscal year end date. But since there are non-current liabilities it would be 0

Question 14

On July 1, 2018 a company borrowed 1000 from the bank for one year at an annual interest rate of 10%. The principal repayment and the interest payment occur on July 1, 2019. The company has a Devember 31 year-end. The company forgot to do an adjusting entry on Dec 31, 2018. What is the impact on B/S or I/S?

Answer 14

Overstatement of net income by 50

Question 15

On July 1, 2018 a company borrowed 1000 from the bank for one yeat at an annual interest rate of 10%. The principal repayment and the interest payment occur on July 1, 2019. The company has a Devember 31 year-end. On July 1, 2019 what happens?

Answer 15

Cash decreases by 1100 (cr)
Loan payable (1000), interest payable (50), and interest expenses (50 since Jan 1 to Jul 1) is settled (dr)

Question 16

On december 31, the company hired you for jan 1st delivery. The pay day is Jan 1st next year. The delivery job is worth 1 million. How much liabilities must be reported by the company on December 31st?

Answer 16

0. Even though you show up December 31st, no service is rendered by employees (they have no right to demand any cash) so there are no liabilities at this point. After you do the delivery then you can demand the money.

Question 17

On Dec 16, we paid 300 salaries to our employees for the past month (30 days). Salaries are paid on a monthly basis so the next payday is Jan 15th in the following year. What happens on Dec 16 and Dec 31?

Answer 17

(1) Dec 16: Salar epnsenses 300 (dr) but no cash transaction. Cash 300 (cr) so assets decreases
(2) Dec 31: Salary expenses increases by 150 (dr). Salary payable increases so liabilities increases by 150 (cr)

(150 because we are only capturing 15 days worth of work)

Question 18

On Dec 16, we paid 300 salaries to our employees for the past month (30 days). Salaries are paid on a monthly basis so the next payday is Jan 15st in the following year. What happens on Jan 15?

Answer 18

Salary expenses increases to 150 and salary payable decreases by 150 (dr) and cash decreases by 300 (cr)

Question 19

Time period (periodicity) assumption

Answer 19

An assumption that the economic life of a business can be divided into artificial time periods.

Question 20

When is there no reconigition of liabilities?

Answer 20

When payday is at the end of the month

Question 21

What is the matching principle?

Answer 21

All expenses related to the production of revenues should be recorded during the same time period as revenues. (For expense recognition)

Question 22

What is revenue recognition?

Answer 22

Revenue increases at the point of delivery of products and services

Question 23

What is the accounting principle that results in the recognition of salary expenses accrued but not yet paid?

Answer 23

Matching principle. We are talking about expense recognition so we use matching principle

Question 24

What is accrual-basis accounting?

Answer 24

Accrual basis talks about an accumulation of revenues and expenses. Revenue is recognized when earned and expense is recognized when incurred (goods are consumes or services used)

Question 25

What is cash-basis accounting?

Answer 25

Look at whenever there is a cash trail. Revenue is recognized whenever received and expenses are recognized whenever paid.

Question 26

Is cash-basis accounting allowed under IFRS and US GAAP and why?

Answer 26

No it is never allowed. It is too easy so. Accrual basis accounting is better in terms of reflecting a company’s true financial position and underlying operating performance.

Question 27

The company hired santa for delivery. The payday is Jan1st next year. The company forgot to record accrued and unpaid salaries of 1000 for Santa at the end of the fiscal year (Dec 31). This would result in what?

Answer 27

In adjusted entries we need to increase expenses by 1000 and salary payable by 1000. With no mistake we should increase expense by 1000 resulting in decrease of net income. So net income is overstates by 1000

Question 28

On Jul 1, 2018 we paid the insurance money (1000) for the entire on year (prepaid expense -> asset account). What happens on Jul 1 and Dec 31?

Answer 28

(1) Jul 1: prepaid expenses of 1000 increases (dr) and cash decreases by 1000 (cr)
(2) Dec 31: insurance expense goes up by 500 on income statement (dr) and prepaid expense reduces by 500 so reduction in asset (cr)

Question 29

On Jul 1 we paid the insurance money (1000) for the entire on year (prepaid expense -> asset account). On Dec 31 how much prepaid expenses are left? Are they considered as a curront or non-current asset?

Answer 29

$500 current

Question 30

On Jul 1, 2018 we paid the insurance money (1000) for the entire on year (prepaid expense -> asset account). What happens on Jul 1 2019.

Answer 30

Insurance expense of 500 in income statement (dr) and prepaid expenses of 500 so assets goes down (cr)

Question 31

On Feb1, 2018, a company paid 12000 to purchase a 12-month insurance policy, which is effective immediately. How much insurance expenses should be recognized on the company income statement for the year ended Dec., 31, 2018?

Answer 31

11,000.
We used from Feb1 to Dec 31 so we only used 11 months worth of insurance services so that the total prepaid asset was 12,000 but that is for 12 months. 11 months worth is 10,000

Question 32

On Jul 1, 2018 we recieved the money (1000) from a customer prior to performing the insurance coverage services that are expected to occur over the subsequent one year period. What happens on Jul 1, 2018, Dec 31, 2018, Jul 1, 2019?

Answer 32

(1) Jul 1, 2018: Cash of 1000 so assets increases (dr), unearned revenue increases by 1000 so liabilities increases (cr)
(2) Dec 31, 2018: Liabilities decreases as unearned revenues decreases by 500 (dr) and revenue increases by 500 (cr)
(3) Jul 1, 2019: Unearned revenues decreases by 500 (dr) and revenues increases by 500 (cr)

Question 33

On Jan 1, 2018, we paid 3000 to purchase equipment that is useful for the next 3 years. Zero value is left at the end of the 3 year period. Use the straight line depreciation method (= equal cost allocation over time). What happens on Jan 1, 2018, Dec 31, 2018 (fiscal year end)

Answer 33

(1) Jan 1, 2018: Increase in PPE (equipment) of 3000 so assets goes up (dr) but we pay cash of 3000 so assets goes down (cr)
(2) Dec 31, 2018: Depreciation expense of 1000 (dr) so equity decreases (dr) and accumulated depreciation of equipment increases by 1000 so net book value of equipment goes down by 1000 so assets goes down (cr)
(zero value left at end of 3-year period and straigh line derpreciation method so depreciation expense is 1000 for every 1 year)

Question 34

What kind of account is accumulated depreciation?

Answer 34

A contra-asset account. So we show an increase in A.D on the right hand side, which reduces the value of equipment.

Question 35

On Jan 1, 2018, we paid 3000 to purchase equipment that is useful for the next 3 years. Zero value is left at the end of the 3 year period. Use the straight line depreciation method (= equal cost allocation over time). What happens on Dec 31, 2019 and Dec 31, 2020?

Answer 35

(1) Dec 31, 2019: Depreciation expense goes up by 1000 because of one year use of PPE (dr) accumulated depreciation goes up to 2000 (cr)
(2) Dec 31, 2020: increase in depreciation expense by 1000 (dr) and accumulated deprication goes up to 3000 (cr)

Question 36

What is the net book value of equipment?

Answer 36

cost of equipment - accumulated depreciation

Question 37

What are the different adjusting entries to think about?

Answer 37

(1) Lendor/Borrower
(2) Employers/Employees
(3) Insurance buyer/ Seller
(4) Depreciation

Question 38

What is accrued interest revenue apart of?

Answer 38

Assets so it is a balance sheet item

Question 39

What is another name for accrued interest revenue?

Answer 39

Interest receivables

Question 40

What is another name for accrued interest expense?

Answer 40

Interest payable

Question 41

What are the steps regarding dividends?

Answer 41

(1) Dividend declaration
(2) Record date
(3) Actual cash payment

Question 42

What happens at the time of dividend declaration?

Answer 42

There are dividend payable (liability) increase and dividend declared account increases

Question 43

Is record date an accounting event?

Answer 43

No, thereis no journal entry for it

Question 44

What is reduced at the point of dividend declaration?

Answer 44

Retained earnings

Question 45

What is the closing process after adjusting entries?

Answer 45

Afte including all adjusting entries we get the adjusted trial balance and we can finally cllose the book and start fresh for the following year. We reset everything for the flow statements (so income statement and statement of retained earnings). We do not do this for the stock (balance sheet)

Question 46

What is the retained earnings before and after closing?

Answer 46

Before closing retained earnings is the beginning retained earnings (everything else before closing is ending balance). When we look after closing retained earnings are the ending retained earnings

Question 47

What are the three trial balances?

Answer 47

(1) Unadjusted trial balance -> all begining balance
(2) Adjusted trial balance -> all ending balance besides RE
(3) Post-closing trial balance -> all ending balance

Question 48

Does the post closing trial balance contain revenue and expense items?

Answer 48

Post-closing is after closing so this is when all income items are 0 (revenue, expense, dividend declared) so no.