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Flashcards in Section 2 - Accrued Revenue Deck (29)
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1

Some examples of accrued revenue include:

  • Interest earned on customer notes and investments - Interest Receivable / Interest Revenue
  • Commissions and royalties - Commissions Receivable / Commissions Revenue
  • Space leased - Rent Receivable / Rent Revenue

2

Your company has a 9-month $24,000, 11% note receivable dated June 1st.

 

What adjusting entry must be recorded on December 31st if no payment has been received?

When answering a question that requires you to calculate interest, remember (FAIR FOY)

(Face Amount x Interest Rate*) x Fraction Of Year 

 

  • Step 1. Multiply the Face amount (Principal) by the Interest rate to calculate Annual Interest* $24,000 * 11% = $2,640
  • Step 2. Divide annual interest by 12 to calculate the monthly amount. $2,640/12 = $220
  • Step 3. Multiply the monthly amount by the number of months interest has accrued $220 x 7 (June 1st - Dec 31st) = $1,540

 

Adjusting Entry

Interest Receivable (DR) $1,540

               Interest Revenue (CR) $1,540

 

Note** The maturity (9-months) of the note has no significance as interest is stated on an annual basis.

3

If revenue is not accrued, assets will be overstated.

 

True or False

False. If revenue is not accrued, assets would be understated because the omitted entry would've increased the receivable account.

 

Omitted entry:

Accounts Receivable (DR) - (Entry increases Accounts Receivable)

               Revenue (CR) - (Entry increases Revenue)

4

The journal entry to accrue $600 commissions revenue is:

Commissions Receivable (DR) $600

               Commissions Revenue (CR) $600

5

The general entry to record accrued revenue is:

Accounts [or Other] Receivable (DR)

                                  Revenue (CR)

6

Failure to make the entry to accrue revenue _____ net income.

Understates.

 

The entry to accrue revenue requires a debit to a Receivable, which increases assets and a credit to Revenue which increases both Revenue and Net income. If a company fails to make the required journal entry, Assets on the Balance Sheet, as well as Revenue and Net Income on the Income Statement would be understated.

7

As of year-end, your firm earned $7,500 for services provided but only received $3,600 which was recorded in Revenue.

 

By what amount must the balance in the Revenue account be adjusted at year end?

The company earned $7,500, however, only $3,600 was received and recorded. Even though the additional $3,900* was not received, it must be recorded because it was earned.

 

$7,500 (Amount earned)- $3,600 (Amount Received) = $3,900*

 

Adjusting Journal Entry

Accounts Receivable (DR) $3,900

                       Revenue (CR) $3,900

8

Failure to accrue revenue has the following effect:

Understates / Overstates / No effect

 

Assets

Liabilities

Revenue

Net Income

Whenever a problem asks you about the effect on the Financial Statements, think of the journal entry itself. In the case presented above, the general entry to accrue revenue requires a debit to Account Receivable which increases assets and a credit to Revenue which increases Revenue and Net Income.

 

If a company fails to record the entry, assets, revenue and net income would be understated.

 

Assets - Understates

Liabilities - No Effect

Revenue - Understates

Net Income - Understates

9

A company omitted its adjusting entry to accrue rental revenue.

 

What effect does it have on liabilities at year end?

No effect. 

 

Whenever a problem asks you about the effect on the Financial Statements, think of the journal entry itself. In the case presented above, the general entry to accrue revenue requires a debit to Account Receivable which increases assets and a credit to Revenue which increases Revenue and Net Income. If a company fails to record the entry, assets, revenue, and net income would be understated, therefore an adjusting entry related to accrued revenue has no effect on liabilities whether the entry is made or not.

 

 

10

Rent Receivable appears on which Financial Statement?

Balance Sheet

 

All Assets, Liabilities and Owner's Equity accounts appear on the Balance Sheet.

 

As a helpful aid to remember which accounts appear on the Balance Sheet, think of "ALOE vera," a popular medicinal plant with many benefits and often helps to balance out the body.

11

LORI LLC holds a customer's $2,500, 6-month note which is dated September 1st and bears interest of 15%.

As of December 31st, how much interest has accrued?

When answering a question that requires you to calculate interest, remember (FAIR FOY)

 

(Face Amount x Interest Rate*) x Fraction Of Year 

  • Step 1. Multiply the Face amount (Principal) by the Interest rate to calculate Annual Interest* $2,500 * 15% = $375 annual interest
  • Step 2. Divide annual interest by 12 to calculate the monthly amount. $375/12 = $31.25 per month
  • Step 3. Multiply the monthly amount, by the number of months interest, has accrued $31.25 x 4 (Sep 1st - Dec 31st) = $125.00

 

Adjusting Entry

Interest Receivable (DR) $125

               Interest Revenue (CR) $125

12

The adjusting entry to accrue revenue increases the balance in the Cash ledger.

 

True or False

False.

 

If cash were received, there would be no reason to accrue revenue. To understand why, remember, the purpose of accruing revenue is to record revenue that has been earned but not yet received. Therefore, whenever cash payment has not been received, the balance in the Accounts receivable ledger is increased as a placeholder until cash is received in the future.

 

Note: Cash is never adjusted**

13

Commissions Receivable appears on which Financial Statement?

Income Statement

 

All Revenue and Expense accounts appear on the Income Statement.

14

The receipt of cash for accrued revenue takes place _______ the revenue is earned.

After.

 

The revenue has been earned, however, payment is received at a later date.

15

Every adjusting entry for accrued revenue increases assets on the Balance Sheet.

 

True or False

True.

The general entry to record accrued revenue debits a receivable account, increasing assets on the Balance sheet, and credits a Revenue account increasing revenue and net income on the Income Statement for that period.

 

Accrued Revenue Journal Entry

Accounts [or Other] Receivable (DR)

                      Revenue (CR)

16

Yanna Co contracts to sell widgets for a customer in return for a 16% commission on sales. As of Yanna's year end, $155,000 has been produced in sales but only $9,000 has been received.

 

What adjusting journal entry must be recorded at year end?

  • Step 1: Determine how much in commissions was earned for the year (Sales x Commision Rate) $155,000 * 16% = $24,800
  • Step 2: Determine how much commissions have been either received or recorded, if any. $9,000 has been received
  • Step 3: Subtract the amount of commissions received/recorded from the amount earned.  $24,800 - $9,000 = $15,800

 

Adjusting Entry

Commissions Receivable (DR) $15,800

                        Commissions Revenue (CR) $15,800

17

Your company has performed bookkeeping services for ARTY Co, but as of year-end, no payment has been received.

 

If no journal entry is recorded at year-end, how are the financial statements affected?

Balance Sheet                     Income Statement         Assets - Understated           Revenue - Understated

Liabilities - No Effect            Expenses- No Effect 

                                           Net Income - Understated

 

Omitted entry:

Accounts Receivable (DR) - (Entry increases Accounts Receivable)

               Revenue (CR) - (Entry increases Revenue)

18

Accrued Revenue is:

Revenue earned* but not yet received.

 

*A company has earned revenue when the service has been provided or goods have been sold.

19

A company rents space to a tenant for $1,100.

 

Rent for the month of December has not yet been received. At year-end, the journal entry to record the accrued revenue is?

Rent Receivable (DR) $1,100

          Rent Revenue (CR) $1,100

20

If revenue is not accrued, liabilities are not affected.

 

True or False

True.

 

The entry to accrue revenue requires a debit to a Receivable, which increases assets and a credit to Revenue which increases both Revenue and net income. Whether the accrual of revenue is recorded or not, liabilities are not affected.

21

Your company performed work for a customer, but as of year-end no payment has been received.

 

If no adjusting entry was recorded, what is the effect on the Balance Sheet and Income Statement?

Omitted entry:

Accounts Receivable (DR) - (Entry increases Accounts Receivable)

               Revenue (CR) - (Entry increases Revenue)

 

Balance Sheet                       Income Statement

Assets - Understated                  Revenue - Understated

Liabilities - No Effect               Expenses - No Effect 

                                              Net Income - Understated

22

If revenue is not accrued, net income would be understated.

 

True or False

True.

 

Net income is increased by entries to the Revenue account, therefore, if accrued revenue is not recorded, revenues and net income would be understated as the omitted entry increases the revenue account.

 

Omitted entry:

Accounts Receivable (DR)

                    Revenue (CR)

23

Interest Receivable is what type of account?

Asset

24

Your company has a 90-day $4,000, 15% note receivable dated Nov 1st.

What adjusting entry must be recorded on December 31st if no payment has been received?

When answering a question that requires you to calculate interest, remember (FAIR FOY)

 

Face Amount x Interest Rate*) x Fraction Of Year

  • Step 1. Multiply the Face amount (Principal) by the Interest rate to calculate Annual Interest*   $4,000 * 15% = $600
  • Step 2. Divide annual interest by 12 to calculate the monthly amount  $600/12 = $50
  • Step 3. Multiply the monthly amount, by the number of months interest has accrued $50 x  2 (Nov 1st - Dec 31st) = $100

 

Adjusting Entry

Interest Receivable (DR) $100

               Interest Revenue (CR) $100

 

Note** The maturity (90 days) of the note has no significance as interest is stated on an annual basis.

25

The Simple Interest Formula for accrued revenue is:

(Face Amount x Interest Rate) x Fraction Of Year

(FAIR FOY)

26

At year-end, your firm was owed $2,300 for work completed, however, only $1,100 was received, which was credited to Revenue. By what amount must the Revenue account be adjusted at year end?

The company has rightfully earned $2,300, however, at year-end, only $1,100 has been earned and recorded as Revenue. Therefore, the adjusting journal entry must recognize a debit to Accounts receivable for $1,200 and an associated credit to Revenue of $1,200.

27

With no regard to what type of revenue is being accrued, the journal entry for accrued revenue will always debit to a receivable and credit an associated revenue account.

 

True or False 

True.

 

The journal entry for accrued revenue will ALWAYS debit Accounts or another receivable and credit an associated Revenue account.

28

The entry to record accrued revenue _______ assets.

 

Increases or Decreases

Increases.

 

General Entry for accrued revenue:

Accounts [or Other] Receivable (DR)

      Revenue (CR)

 

A debit to a receivable (an asset account) increases the balance.

29

Your company, which has a fiscal year-ending Oct 31, sells widgets for a 2% commission As of Oct 31st, total sales are $600,000, for which 9,000 in commissions has been received and credited to Revenue.

 

As of the fiscal year-end, how much additional revenue must be recognized?

As we know accrued revenue is revenue earned but not yet received. In this case, the company has earned $12,000 ($600,000 *2%).

 

Since only $9,000 has been received, the company must record the additional $3,000 they have earned but not yet collected.