Apple decides to allocate $950 of the purchase price toward the phone itself, and $50 toward the
software updates they will provide over the next year. Before the sale, the phone was in Apple’s
inventory valued at $500.
Create a journal entry for the date of the sale, October 1, 2018.
- In this case, Apple needs to first note the receipt of cash and the loss of inventory by
debiting Cash for $1000 and crediting Inventory for $500. Then they need to record the
revenue: debit Cost of Goods sold by $500, credit Revenue for $950, and then credit
Deferred Revenue (the software updates) for $50.
On April 1, 2014, Apex Insurance Company receives payment of $6,000 for an annual property
insurance policy from one of their corporate customers. How would Apex record the revenue related
to this policy for the month of September, 2014?
- The correct answer is to debit Deferred Revenue for $500 and credit Revenue for $500
as Apex has earned one month's worth of revenue during September.
As part of the 2013 year end close, your company evaluates the total pension obligation and
determines that it needs to be increased to properly reflect the obligation at the end of the year. The
shortfall is estimated to be $100,000. What would the journal entry look like to record this obligation?
- The correct answer is to debit Pension Benefit Expense for $100,000 and credit
Pension Obligation (a liability account) for $100,000.
On January 1, 2013, Company D rented a warehouse for two years. On December 31,
2013, the accountant of Company D recorded a journal entry as follows:
Which of the following best describes the transaction that occurred on December 31, 2013,
that would lead to this journal entry?
- Company D didn’t pay $15,000 for warehouse rental but recognized $15,000 of rent
expense.
- By December 31, 2013, half of the prepaid rent expense was amortized, and $15,000 of
rent expense was incurred. The cash was paid previously.
,We can use several methods to recognize depreciation for long-lived assets. One of the
most common is straight-line depreciation.
This method recognizes the expense for the asset in equal portions over the time
period that the business expects to use the asset. The calculation to determine how
much expense we should recognize for each period is straightforward: we need to know the
gross book value of the asset, its expected useful life, and its salvage value.
The original cost, also known as the gross book value, is the amount for which a
business records the asset in its books. When a company purchases an asset, it records
this asset at the price paid for the asset, plus any additional costs to prepare the asset for
service in the business. These extra costs include delivery, installation, and testing. This
accounting treatment is an example of the historical cost principle.
The useful life of an asset is the business’ estimate of how long the asset will provide
a benefit. This is a judgment call made by management.
The salvage value is the amount the business expects to receive after the asset’s
useful life is over. In practice, even after an asset is completely used up, it can still be sold
as scrap.
Straight-line depreciation is calculated as follows:
Yearly Depreciation=(GrossBookValue−SalvageValue)/UsefulLife
, Suppose your business purchased an asset that is expected to last for 10 years. At the end
of its expected life, however, there will be no salvage value and you will have to pay a
substantial amount to safely dispose of the asset. How should you treat these expected
disposal costs?
- Recognize the expense over the life of the asset
- Because the matching principle requires matching revenues and corresponding
expenses over the life of the asset
- A business should spread out the disposal costs over the life of the asset, because the
costs are necessary for the asset to help produce revenues over its useful life.
Estimated disposal costs are added to the amount to be depreciated, just as estimated
salvage value is subtracted from the amount to be depreciated.
Accumulated depreciation is called a contra-asset account because its typical balance is
contrary to other asset accounts. Accumulated depreciation increases with a credit and
decreases with a debit. The balance in a contra-asset account is always a credit balance.
The original cost of the asset less accumulated depreciation is the net book value of the
asset.
Be sure to notice the difference between depreciation expense and accumulated
depreciation.
Depreciation expense is a nominal, income statement expense account, which
resets every period and simply shows the expense recognized in that period.
Accumulated depreciation is a real account that holds the cumulative balance of all
depreciation expense recognized against the asset.
The net value of the asset would be the same, if the asset account were decreased directly
by the depreciation. But, the practice of putting accumulated depreciation into a separate
account has several benefits. For instance, it allows you to easily see the original cost of the
asset so you can compare it to the current or replacement cost at any point in time.
It can also provide the reader of the financial statements with a quick feel for how old the
assets of the business are, by looking at the relationship between the gross value or original
cost of the assets, and the value of the accumulated depreciation account.
While we are talking about long-lived physical assets and depreciation, keep in mind
that land is an exception to the rule. We do not depreciate land because it is not “used
up” by the business, and its value is typically not reduced or consumed.
software updates they will provide over the next year. Before the sale, the phone was in Apple’s
inventory valued at $500.
Create a journal entry for the date of the sale, October 1, 2018.
- In this case, Apple needs to first note the receipt of cash and the loss of inventory by
debiting Cash for $1000 and crediting Inventory for $500. Then they need to record the
revenue: debit Cost of Goods sold by $500, credit Revenue for $950, and then credit
Deferred Revenue (the software updates) for $50.
On April 1, 2014, Apex Insurance Company receives payment of $6,000 for an annual property
insurance policy from one of their corporate customers. How would Apex record the revenue related
to this policy for the month of September, 2014?
- The correct answer is to debit Deferred Revenue for $500 and credit Revenue for $500
as Apex has earned one month's worth of revenue during September.
As part of the 2013 year end close, your company evaluates the total pension obligation and
determines that it needs to be increased to properly reflect the obligation at the end of the year. The
shortfall is estimated to be $100,000. What would the journal entry look like to record this obligation?
- The correct answer is to debit Pension Benefit Expense for $100,000 and credit
Pension Obligation (a liability account) for $100,000.
On January 1, 2013, Company D rented a warehouse for two years. On December 31,
2013, the accountant of Company D recorded a journal entry as follows:
Which of the following best describes the transaction that occurred on December 31, 2013,
that would lead to this journal entry?
- Company D didn’t pay $15,000 for warehouse rental but recognized $15,000 of rent
expense.
- By December 31, 2013, half of the prepaid rent expense was amortized, and $15,000 of
rent expense was incurred. The cash was paid previously.
,We can use several methods to recognize depreciation for long-lived assets. One of the
most common is straight-line depreciation.
This method recognizes the expense for the asset in equal portions over the time
period that the business expects to use the asset. The calculation to determine how
much expense we should recognize for each period is straightforward: we need to know the
gross book value of the asset, its expected useful life, and its salvage value.
The original cost, also known as the gross book value, is the amount for which a
business records the asset in its books. When a company purchases an asset, it records
this asset at the price paid for the asset, plus any additional costs to prepare the asset for
service in the business. These extra costs include delivery, installation, and testing. This
accounting treatment is an example of the historical cost principle.
The useful life of an asset is the business’ estimate of how long the asset will provide
a benefit. This is a judgment call made by management.
The salvage value is the amount the business expects to receive after the asset’s
useful life is over. In practice, even after an asset is completely used up, it can still be sold
as scrap.
Straight-line depreciation is calculated as follows:
Yearly Depreciation=(GrossBookValue−SalvageValue)/UsefulLife
, Suppose your business purchased an asset that is expected to last for 10 years. At the end
of its expected life, however, there will be no salvage value and you will have to pay a
substantial amount to safely dispose of the asset. How should you treat these expected
disposal costs?
- Recognize the expense over the life of the asset
- Because the matching principle requires matching revenues and corresponding
expenses over the life of the asset
- A business should spread out the disposal costs over the life of the asset, because the
costs are necessary for the asset to help produce revenues over its useful life.
Estimated disposal costs are added to the amount to be depreciated, just as estimated
salvage value is subtracted from the amount to be depreciated.
Accumulated depreciation is called a contra-asset account because its typical balance is
contrary to other asset accounts. Accumulated depreciation increases with a credit and
decreases with a debit. The balance in a contra-asset account is always a credit balance.
The original cost of the asset less accumulated depreciation is the net book value of the
asset.
Be sure to notice the difference between depreciation expense and accumulated
depreciation.
Depreciation expense is a nominal, income statement expense account, which
resets every period and simply shows the expense recognized in that period.
Accumulated depreciation is a real account that holds the cumulative balance of all
depreciation expense recognized against the asset.
The net value of the asset would be the same, if the asset account were decreased directly
by the depreciation. But, the practice of putting accumulated depreciation into a separate
account has several benefits. For instance, it allows you to easily see the original cost of the
asset so you can compare it to the current or replacement cost at any point in time.
It can also provide the reader of the financial statements with a quick feel for how old the
assets of the business are, by looking at the relationship between the gross value or original
cost of the assets, and the value of the accumulated depreciation account.
While we are talking about long-lived physical assets and depreciation, keep in mind
that land is an exception to the rule. We do not depreciate land because it is not “used
up” by the business, and its value is typically not reduced or consumed.
