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1

The Simple Interest Formula for accrued interest expense is:

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

Face Amount x Interest Rate x Fraction Of Year

 

Please note, the Simple Interest Formula is the same for Accrued Interest Revenue and Accrued Interest Expense.

2

The general entry to record an accrued expense is:

[Various] Expense (DR)

               [Various] Payable (CR)

 

Since the company has incurred the expense, there must be an increase in expenses on the books which is reflected with a debit to the expense account, and since the company has not yet paid, there must be an increase in a liability, which is reflected with a credit to the associated payable account.

3

A debit to an expense account has an increasing/decreasing effect?

The normal balance of an expense account is a debit. Anytime an increase needs to be shown in an expense account, there must be a debit.

 

A credit has the opposite effect and reduces the balance. Generally, expense accounts are credited when an expense amount has been reduced or at the end of the period then the temporary accounts (revenues and expenses) are being closed.

4

Accrued expenses might include:

  • Interest - Interest Expense / Interest Payable
  • Rent - Rent Expense / Rent Payable
  • Commissions and Royalty - Commissions Expense / Commissions Payable
  • Utility bills - Utilities Expense / Utilities Payable
  • Salary and wages - Salaries Expense / Salaries Payable
  • Property and other taxes - Property Taxes Expense / Property Taxes Payable

5

Accrued expenses are:

Expenses that have been incurred but not yet paid

6

If expenses are not accrued, assets would be overstated.

 

True or False

False.

Whether the entry for accrued expenses was recorded or omitted, assets are not affected.

 

Accrued revenue affects expenses, net income, and liabilities.

7

Insurance Expense appears on which Financial Statement?

Income Statement

8

Your company borrows $28,500 on a 6 month, 15% note on September 1st.

 

At year-end on December 31st, what is the adjusting journal entry to record the accrued interest expense?

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* $28,500 * 15% = $4,275
  • Step 2. Divide Annual Interest by 12 to calculate the monthly amount. $4,275/12 = $356.25
  • Step 3. Multiply the monthly amount by the number of months of interest has accrued $356.25 x 4 (Sep 1st - Dec 31st) = $1,425

 

Adjusting Entry

Interest Expense (DR) $1,425

               Interest Payable (CR) $1,425

9

Every adjusting entry for accrued expense credits an expense account, increasing expenses on the income statement.

 

True or False

False.

A credit to an expense account reduces the balance in the account. A debit increases an expense account.

10

A company pays its employees every Friday. This year, the company's year ends on a Tuesday.

 

If the company fails to accrue salaries for the week, how will the financial statements be affected?

Balance Sheet                           Income Statement

Assets - No Effect                     Revenue - No Effect   ​

Liabilities - Understated          Expenses - Understated                                                      Net Income - Overstated

11

What effect do expenses have on the Income Statement?

Expenses are subtracted from net income in order to find the net income or (net loss), therefore, expenses have a decreasing effect.

 

**As a helpful tip, keep in mind, if an entry has an effect on Revenue, it will have the same effect on Net Income. However, if an entry has an effect on Expenses, it will have an inverse (opposite) effect on Net Income.

12

Your company has a 5-day workweek and pays employees every Friday. The pay period for 20x7 ends on Tuesday.

 

If, for the last week of the year, gross payroll is $55,000, what is the adjusting journal entry at year end?

  • Step 1: Determine weekly payroll amount and divide by the days in work-week to find a daily rate. $55,000/5 = $11,000
  • Step 2: Given in the problem, on which day did the period end? (If on a Tuesday, account for 2 days. If on a Thursday, account for 4 days.) The period ended on Tuesday (accrue for 2 days)
  • Step 3: After finding the daily rate, multiply it by the day on which the period ends. $11,000 x 2 = $22,000

 

Adjusting Entry

Salaries Expense (DR) $22,000

               Salaries Payable (CR) $22,000

13

Rent Payable is what type of account?

Liability

14

Your company borrows $30,000 on a 90-day, 9% note on November 1st.

 

At year-end on December 31st, what is the adjusting journal entry to record the accrued interest expense?

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* $30,000 * 9% = $2,700
  • Step 2. Divide Annual Interest by 12 to calculate the monthly amount. $2,700/12 = $225
  • Step 3. Multiply the monthly amount by the number of months of interest has accrued $225 x 2 (Nov 1st - Dec 31st) = $450

 

Adjusting Entry

Interest Expense (DR) $450

               Interest Payable (CR) $450

15

Failure to accrue expenses has the following effect:

Understates / Overstates / No effect

 

Assets

Liabilities

Revenue

Expenses

Net Income

Assets - No Effect

Liabilities - Understated

Revenue - No Effect

Expenses - Understated**

Net Income - Overstated**

 

**As a helpful tip, keep in mind, if an entry has an effect on Revenue, it will have the same effect on Net Income. However, if an entry has an effect on Expenses, it will have an inverse (opposite) effect on Net Income.

16

An expense is accrued by debiting an _____ account and crediting a _____ account.

Debiting an expense and crediting a liability.

17

A company prepays for a 6-month Insurance premium. This is an example of an Accrued Expense.

 

True or False

False. This is an example of a Deferred Expense.

 

Always remember, Deferrals include prepayments. In this case, the company prepaid for an expense.

18

Accounts Payable appears on which Financial Statement?

Balance Sheet

19

LORI Co has a 6-day workweek and pays employees every Saturday. The pay period for 20x6 ends on Saturday.

 

If, for the last week of the year, gross payroll is $25,000, what is the adjusting journal entry at year end?

Since the work week ended on the day the company pays salaries, there is no reason to accrue salaries expense. To make sense of this, remember, accrued expenses record expenses that have been incurred and not yet paid, thus no adjusting entry is needed, instead, we record an ordinary transaction entry.

 

Salaries Expense (DR)   $25,000

                          Cash (CR)              $25,000

 

20

Your company borrows $45,000, on a 9-month, 11% note on August 1st.

 

If at year-end no adjusting entry is made to accrue interest expense, how are the financial statements affected?

Balance Sheet                       Income Statement

Assets - No Effect                      Revenue - No Effect   ​

Liabilities - Understated           Expenses - Understated                                                       Net Income - Overstated

21

An expense recorded as incurred but not paid is presented as a(n) ______ on the balance sheet.

Liability.

22

MartyCo has a 5-day workweek and pays employees every Friday. The pay period for 20x9 ends on Wednesday.

 

If, for the last week of the year, gross payroll is $12,500, what is the adjusting journal entry at year end?

  • Step 1: Determine weekly payroll amount and divide by the days in work-week to find a daily rate. $12,500/5 = $2,500
  • Step 2: Given in the problem, on which day did the period end? (If on a Tuesday, account for 2 days. If on a Thursday, account for 4 days.) The period ended on Wednesday (accrue for 3 days)
  • Step 3: After finding the daily rate, multiply it by the day on which the period ends. $2,500 x 3 = $7,500

 

Adjusting Entry

Salaries Expense (DR) $7,500

               Salaries Payable (CR) $7,500

23

At year-end, MollyCo received a telephone bill for $226.

 

The adjusting entry to record the expense would be?

Adjusting Entry

Telephone Expense (DR) $226

               Accounts Payable (CR) $226

24

With an accrued expense, payment follows recognition of the expense.

 

True or False

True.

 

The expense has been incurred, however, is paid after it has been recognized on the books.