Timing issues Flashcards
(48 cards)
Lyle, Inc. is preparing its financial statements for the year ended December 31, Year 1. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:
At December 31, Year 1, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle's specifications. Checks in the amount of $100,000 were written to vendors and recorded on December 29, Year 1. The checks were mailed on January 5, Year 2.
What amount should Lyle report as accounts payable in its December 31, Year 1, balance sheet?
1- 50,000 debit balance is recorded as an asset (prepaid expense).
the correct JE should be
dr: prepaid expense 50
cr: cash 50
so the 50,000 debit must be added back to Acct payable balance.
2- because the checks were mailed in Jan. 2, that means it has no impact on the acct payable balance as of 12/31/Y1
to total acct payable balance = 360+50+100=
Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne’s past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?
When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly during the year (July 1 is average date), only ½ of the 40% of repairs will be in the current year.
Current year deferral ($600 x 1,000) $ 600,000
Earned in the current year (600,000 x 40% x 1/2) (120,000)
Deferral 12-31 $ 480,000
How to account for R&D under US GAAP
Expense every direct costs except:
- Materials, Equipment and Facilities that have alternate future use ( instead capitalise and depreciate over theiruseful life
- if you’re doing R&D for someone else
-
What is not R&D under US GAAP
Marketing Research Quality Control testing routine design testing reformulation of chemical compound Also any software cost that is internally developed for in-house use. Although it is expensed, it's not considered R&D
What is Computer Software expense under US GAAP
nder U.S. GAAP, Research and development includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed. not for those intended for interanal use.
How to account for costs related to Computer software development cost
expense any cost incurred until software is technically feasible, capitalize the rest until the software is ready to be sold
How to account for intangible assets
1- if Purchased then capitalize and amortize over the patent useful life’
2- if internally developed, then expense everything except
a- legal fees of successful defense of the patent
b-registration or consulting fees
c-design cost
d- Other direct costs to secure asset
Note: Expense all costs associated with a Patent that you didn’t defend successfully, even if bought.
how to convert from cash basis accounting to accrual basis acounting when account receivable and account payable are given
1- start with Cash basis income
2- add increase in account receivable
3- add decrease in account payable
On February 12, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 during the year. In its year-end income statement, what amount should VIP report as royalty expense?
Royalty expense is the larger of minimum royalties of $60,000, or 10% of $800,000 sales, $80,000.
Dana Co.’s officers’ compensation expense account had a balance of $224,000 at December 31, Year 1, before any appropriate year-end adjustment relating to the following:
No salary accrual was made for December 30-31, Year 1. Salaries for the two-day period totaled $3,500. Year 1 officers' bonuses of $62,500 were paid on January 31, Year 2.
In its Year 1 income statement, what amount should Dana report as officers’ compensation expense?
Compensation
Expense
Compensation exp. before year-end adjustments $ 224,000
Add: Salary accrual for Dec. 30-31, Year 1 3,500
Add: Year 1 bonuses not paid until Jan. 31, Year 2 62,500
Note: Y1 bonuses are added here because they are being recognized.
Compensation exp. after year-end adjustments $ 290,00
On the first day of each month, Bell Mortgage Co. receives from Kent Corp. an escrow deposit of $2,500 for real estate taxes. Bell records the $2,500 in an escrow account. Kent’s Year 2 real estate tax is $28,000, payable in equal installments on the first day of each calendar quarter. On December 31, Year 1, the balance in the escrow account was $3,000. On September 30, Year 2, what amount should Bell show as an escrow liability to Kent?
Escrow
Liability
Begin balance 12/31/ Year 1 $ 3,000
Add deposits ($2,500 x 9 months) 22,500
Sub Total 25,500
Deduct payments ($28,000/4 qtrs x 3 payments) (21,000)
Ending balance 9/30/ Year 2 $ 4,500
How to find revenue using receivables
beg Receiv.
add reveunue (X)
substract amount collected
= ending receivable
How to account for goodwill
if acquired through purchase then capitalize at acquisition cost
if incurred internally, then expense
Note any cost associated with maintaining goodwill is expensed.
Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, Year 2. Additional information is as follows:
Rents receivable - November 30, Year 2 $ 1,060,000
Rents receivable - November 30, Year 1 800,000
Uncollectible rents written off during the fiscal year 30,000
Under the accrual basis, Marr should report rental revenue of:
Rents receivable at begin 11/30/Year 1 $ 800,000
Add: Billings accrued 2,500,000
Sub Total 3,300,000
Less: Cash collections (2,210,000)
Write-offs (30,000)
Rents receivable at end 11/30/Year 2 $ 1,060,000
Tara Co. owns an office building and leases the offices under a variety of rental agreements involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. Tara's balance sheets contained the following data: Rent Receivable Year 1$ 9,600 $ 12,400 Year 2 Unearned Rent Year 1 32,000 Year 2 24,000 During Year 2, Tara received $80,000 cash from tenants. What amount of rental revenue should Tara record for Year 2?
start with beg rec+ (-cash collection) + add decrease in liabilities( unearned revenue)+ SQZ earned revenue = ending receivables
On December 31, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work-in-process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31 balance sheet?
understated accrued liab. and No effect in Retained Earnings. Since the unrecorded liability affects work-in-process inventory (rather than cost of sales/retained earnings), there is no effect on retained earnings, but accrued liabilities (and inventory) are understated.
how to calculate accrued liabilities during the year
beg acct payable
add any expenses that can increase the payable
deduct any payment made
ending payable
At December 31, Year 1, a $1,200,000 note payable was included in Cobb Corp.’s liability account balances. The note is dated October 1, Year 1, bears interest at 15%, and is payable in three equal annual payments of $400,000. The first interest and principal payment was made on October 1, Year 2. In its December 31, Year 2 balance sheet, what amount should Cobb report as accrued interest payable for this note?
1- remove the capital amount paid for Y1 = 1200 - 400= 800
calculate total interests to be paid for the year (800.15)= 120,
remove interest accrued as f 12/31 (1203)/12
how to find sales net of taxes when sales with taxes are provided
(sales inclusive of tax)/1.06 if 6% is sales tax rates
then calculate tax paid,
when to recognize revenue when there is an unlimited right of return
When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following:
The sales price is substantially fixed (it seems like it is in this question). The buyer assumes all risk of loss (no information). The buyer has paid some form of consideration (no information). The amount of returns can be reasonably estimated (which they can in this question)
Franchise revenue
recognize revenue when the service is rendered.
Jersey, Inc. is a retailer of home appliances and offers a service contract on each appliance sold. Jersey sells appliances on installment contracts, but all service contracts must be paid in full at the time of sale. Collections received for service contracts should be recorded as an increase in a:
Collections received for service contracts should be recorded as an increase in a “deferred revenue account.”
what is the impact of service contract on deferred revenue and Service revenue
When service contracts are sold, deferred revenue increases, but service revenue does not increase until services are performed.
What are Start-up costs and how are they accounted for ?
they are expenses incuured in the formation of a corporation. they should be always expensed.
