FAR 2 Module 3

Question 1

what four situations require adjusting journal entries in order to properly present financial statements on the accrual basis?

Answer 1

1) cash is received before performance obligation has been met (deferred revenue)
2) cash is paid before the expense is incurred (prepaid expenses)
3) cash is received after the performance obligation has been met (receivables)
4) cash is paid after the expense has been incurred (accrued expenses)

Question 2

JE for deferred revenue

JE for earning on deferred revenue

Answer 2

Dr. Cash
Cr. Deferred Revenue

Dr. Deferred Revenue
Cr. Revenue

Question 3

what are the three rules for recording adjusting journal entries?

Answer 3

1) adjusting journal entries must be recorded by the end of the entity’s fiscal yr, before preparation of F/S
2) ADJEs never involved the cash account
3) All adjusting entries will hit one income statement and one balance sheet account

Question 4

accrual basis accounting

Answer 4

-matches revenues with expenses