HBX Financial Accounting Questions And
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Deferrals transactions where cash changes hands before revenue or expense is recorded
Accruals and deferrals always involve revenues or expenses are the essence of two
important concepts we have already covered—revenue recognition and the matching principle
As part of the 2013 year end close, your company evaluates any potential liabilities related to
2013 activities that will be paid in 2014. The company ran an advertising campaign in December
for which you agreed to pay $100,000, but you have not yet received the invoice.
What would the journal entry look like to record this obligation? In this case, your
company has not received a bill but based on their evaluation concludes that there are obligations
coming from 2013 activities that will have to be settled in 2014. These obligations are recorded
as liabilities in 2013 because they relate to 2013 activities. You should debit Advertising
Expenses for $100,000 and credit Accrued Expenses (a liability account) for $100,000.
Accruals transactions where cash changes hands after revenue or expense is recognized,
and you can think of them as either accruals related to revenue or accruals related to expenses.
Accruals Examples immediately records a journal entry recognizing the revenue from the
sale and recording the amount in accounts receivable, even though cash will not be received until
later. Accounts receivable is the most common example of this type of accrual.
immediately records a journal entry recognizing the expense and recording the amount in
accounts payable
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examples include interest payable, salaries payable, taxes payable, and utilities payable.
Accrued Liabilities A company recorded wages expense for May on May 31, and will pay
the wages on June 15.
Expense was recognized before cash was paid.
Deferrals related to revenue arise when a company receives cash before delivering goods
or performing a service. Deferred revenue is recorded as a liability when cash is received, and an
adjusting journal entry is made at the end of the period to convert the amount that has been
earned into revenue.
Deferrals related to expenses arise when a company pays for resources before receiving
the benefit from them
Deferrals may occur throughout the year whenever these kinds of transactions arise, but
they are only considered adjusting entries when they are implicit transactions recorded at the end
of the period, during the closing process. At the end of the period, a company will want to ensure
that all appropriate deferral entries have been made to accurately reflect the activities related to
that period.
In 2015, FASB released a new Accounting Standards Update to formalize this. They created a
revenue recognition process consisting of five easy steps: 1.Identify the contract with the
customer
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2.Identify the performance obligations in the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations in the contract
5.Recognize revenue when the reporting organization satisfies a performance obligation
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. 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.
Rent Expense$15,000 Prepaid Expense $15,000
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.
the gross book value is the amount for which a business records the asset in its books
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The salvage value is the amount the business expects to receive after the asset's useful life
is over.
Depreciation The calculation to determine how much expense we should recognize for
each period
Accumulated depreciation is called a contra-asset account because its typical balance is
contrary to other asset accounts; always a credit balance
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.
Yearly Depreciation formula grossbookvalue - salvage value/usefullife
Long-Lived Non-Physical Assets (intangible assets) include patents, trademarks, and
copyrights
When an intangible asset is acquired, it is recorded on the balance sheet as an asset. It will then
be converted into an expense over time using amortization.
Answers Verified By Experts
Deferrals transactions where cash changes hands before revenue or expense is recorded
Accruals and deferrals always involve revenues or expenses are the essence of two
important concepts we have already covered—revenue recognition and the matching principle
As part of the 2013 year end close, your company evaluates any potential liabilities related to
2013 activities that will be paid in 2014. The company ran an advertising campaign in December
for which you agreed to pay $100,000, but you have not yet received the invoice.
What would the journal entry look like to record this obligation? In this case, your
company has not received a bill but based on their evaluation concludes that there are obligations
coming from 2013 activities that will have to be settled in 2014. These obligations are recorded
as liabilities in 2013 because they relate to 2013 activities. You should debit Advertising
Expenses for $100,000 and credit Accrued Expenses (a liability account) for $100,000.
Accruals transactions where cash changes hands after revenue or expense is recognized,
and you can think of them as either accruals related to revenue or accruals related to expenses.
Accruals Examples immediately records a journal entry recognizing the revenue from the
sale and recording the amount in accounts receivable, even though cash will not be received until
later. Accounts receivable is the most common example of this type of accrual.
immediately records a journal entry recognizing the expense and recording the amount in
accounts payable
, HBX Financial Accounting Questions And
Answers Verified By Experts
examples include interest payable, salaries payable, taxes payable, and utilities payable.
Accrued Liabilities A company recorded wages expense for May on May 31, and will pay
the wages on June 15.
Expense was recognized before cash was paid.
Deferrals related to revenue arise when a company receives cash before delivering goods
or performing a service. Deferred revenue is recorded as a liability when cash is received, and an
adjusting journal entry is made at the end of the period to convert the amount that has been
earned into revenue.
Deferrals related to expenses arise when a company pays for resources before receiving
the benefit from them
Deferrals may occur throughout the year whenever these kinds of transactions arise, but
they are only considered adjusting entries when they are implicit transactions recorded at the end
of the period, during the closing process. At the end of the period, a company will want to ensure
that all appropriate deferral entries have been made to accurately reflect the activities related to
that period.
In 2015, FASB released a new Accounting Standards Update to formalize this. They created a
revenue recognition process consisting of five easy steps: 1.Identify the contract with the
customer
, HBX Financial Accounting Questions And
Answers Verified By Experts
2.Identify the performance obligations in the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations in the contract
5.Recognize revenue when the reporting organization satisfies a performance obligation
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. 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.
Rent Expense$15,000 Prepaid Expense $15,000
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.
the gross book value is the amount for which a business records the asset in its books
, HBX Financial Accounting Questions And
Answers Verified By Experts
The salvage value is the amount the business expects to receive after the asset's useful life
is over.
Depreciation The calculation to determine how much expense we should recognize for
each period
Accumulated depreciation is called a contra-asset account because its typical balance is
contrary to other asset accounts; always a credit balance
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.
Yearly Depreciation formula grossbookvalue - salvage value/usefullife
Long-Lived Non-Physical Assets (intangible assets) include patents, trademarks, and
copyrights
When an intangible asset is acquired, it is recorded on the balance sheet as an asset. It will then
be converted into an expense over time using amortization.
