Classnotes 4 Flashcards
Around the world, companies are required to provide…
Quarterly reports (unaudited)
In the US, quarterly reports must be filed within 35 days of quarter end
Annual reports (audited)
In the US, annual reports must be filed within 60 days of year end
Adjusting entries have two common characteristics:
They occur at the end of a reporting, just before the construction of financial statements, and thus, are affected by the length of the accounting period
They (almost) never involve cash, as changes in cash require a transaction (remember…AJEs are NOT a transaction!)
*Deferred (Unearened) Revenues:
Allocate earned portion of unearned revenue to revenue to reflect revenues earned in the period.
*Amounts perviously recorded on the B/S, now recognized on I/S
Deferred (Prepaied) Expenses:
Allocate used or expired assets to expense to reflect expenses incurred in the period.
**Amounts not previously recorded on the B/S, now recognized on the I/S.
Accrued Revenues:
Record revenues to reflect revenues earned in the period that are not yet received in cash or recorded
*Amounts perviously recorded on the B/S, now recognized on I/S
Accrued Expenses:
Recorded expenses to reflect expenses incurred in the period that are not yet paid in ash or recorded.
**Amounts not previously recorded on the B/S, now recognized on the I/S.
AJE Examples:
Use of long lived assets (e.g., property plant and equipment)
Depreciation
Expiry of prepaid assets, e.g. Prepaid Rent
Earning “unearned revenue”, e.g. Advances from Tenants
At the end of the period, “did we perform the service?”
Accrual of unpaid interest on outstanding loans
Accrual of unpaid wages and taxes
Adjustments from taking a physical inventory
Expiry of Unearened Revenue: Digital Art, Inc. enters into a short-term rental agreement with BDC Properties, Ltd. on October 1st. Digital Art will rent office space from BDC Properties for the fourth quarter of the calendar year (October, November, and December) at a rate of $5,000 per month. Digital Art pays the full three month’s rent when they sign the agreement on October 1st. Digital Art closes its books quarterly. Provide all relevant journal entries for the company:
Oct 1: DR Prepaid Rent (+A) 15,000 CR Cash(-A) 15,000 Oct 31: No Entry Nov 30: No Entry Dec 31: DR: Rent Expense (+E,-SE) 15,000 CR: Prepaid Rent (-A) 15,000
Expiry of Unearened Revenue: Digital Art, Inc. enters into a short-term rental agreement with BDC Properties, Ltd. on October 1st. Digital Art will rent office space from BDC Properties for the fourth quarter of the calendar year (October, November, and December) at a rate of $5,000 per month. Digital Art pays the full three month’s rent when it signs the agreement on October 1st. BDC Properties prepares monthly financial statements. Provide all relevant journal entries for BDC Properties:
Oct 1: DR Cash (+A) 15,000 CR: Unearned Revenue (+L) 15,000 Oct 31: DR: Unearned Revenue (-L) 5,000 CR: Rent Revenue (+R, +SE) 5,000 Nov 30: DR: Unearned Revenue (-L) 5,000 CR: Rent Revenue (+R, +SE) 5,000 Dec 31: DR: Unearned Revenue (-L) 5,000 CR: Rent Revenue (+R, +SE) 5,000
Earning of unearned revenue - Mixing Accrual Structures:
- BDC Properties signs an agreement to rent office space to Innovation Partners for the fourth quarter at a rate of $5,000 per month
- Innovation Partners pays the full three months’ rent on November 1st, one month into the rental term.
- Recall that BDC closes its book monthly. Provide journal entries for the cash payment on November 1st and all required fourth-quarter adjusting entries.
Oct 1: No Entry Oct 31: DR Rent Receivable (+A) 5,000 CR: Rent Revenue (+R, +SE) 5,000 Nov 1: DR Cash (+A) 15,000 CR: Rent Receivable (-A) 5,000 CR: Unearned Revenue (+L) 10,000 Nov 30 & Dec 31: DR Unearned Revenue (-L) 5,000 CR: Rent Revenue (+R, +SE) 5,000
Accrual of Interest Example: On September 1st, Digital Art paid for $40,000 of computer equipment with a two-month 12% note payable. (12% is an annualized interest rate, implying one percent per month. Assume no compounding.) Provide journal entries for the adjusting entry for interest expense required at the end of the quarter as well as for the cash payment on October 31st.
Sept 1: DR Computer Equipment (+A) 40,000 CR Note Payable (+L) 40,000 Sept 30: DR Interest Expense (+E, -SE) 400 CR Interest Payable (+L) 400 Oct 31 DR Note Payable (-L) 40,000 DR Interest Payable (-L) 400 DR Interest Expense (+E, -SE) 400 CR (-A) 40,800
Taking a Physical Inventory:Digital Art was established in early January 2015 and immediately acquired office supplies for $5,000 cash. On March 31st, a physical inventory of office supplies revealed that a balance of $3,500 remained. What office supplies expense would the company report for the first quarter of 2015?
Early Jan: DR Office Supplies (+A) 5,000
CR: Cash (-A) 5,000
Mar 31: DR Supplies Expense (+E, -SE) 1,500
CR: Office Supplies (-A) 1,500
How much inventory purchased in 2013?
Inventories 2012: 33,2070
Inventories 2013: 34,530
Cost of Sales: 366,357
2012 + X – CoS = 2013
X = 367,617
How much inventory purchased in 2013?
Beginning Inventory – Cost of Sales + Purchases = Ending Inventory
The Accounting Cycle
Analyze -> Record -> Adjust -> Report -> Close
Report/Close:
Produce income statement, statement of cash flows and statmement of SE. Then close, then produce ending balance sheet.
