Identifying accrual basis revenues


Assignment:

1. Identifying Accrual Basis Revenues:

For following transactions of ZZZ Bowling Inc. in July, determine if revenue is recognized in July and indicate the amount. Otherwise, explain why revenue is NOT recognized in July:

Activity

Revenue recognized in   July?

Amount or explain why   not recognized

Company collected $12,000 from customers for services related to   games played in July.

 

 

Company billed a customer for $250 for a party held at the   bowling center on July 31st. Bill is to be paid in August.

 

 

The bowling leagues gave the company advance payments of $1,500   for the fall season that starts in September.

 

 

Company received $1,000 from credit sales made in June.

 

 

2.Identifying Accrual Basis Expenses:

The following transactions are July activities of Bill's Bowling Inc., which operates bowling centers. If an expense is recognized in July, indicate the amount. If not recognized, explain why.

Activity

Expense recognized in   July?

Amount or explain why   not recognized

Bill's paid $1,500 to   plumbers for repairing a broken pipe in the restrooms.

 

 

Bill's paid $2,000 for   the June electricity bill and received the July bill for $2,500, which will   be paid in August.

 

 

Bill's paid $5,475 to   employees for work in July.

 

 

3.From a Trial Balance to Financial Statements:

From the following accounts from ERI Corp as of December 31, create an I/S, Statement of Retained Earnings and a B/S:

Account Name

Debits

Credits

Cash

$59,750

 

Accounts Receivable

3,300

 

Prepaid Insurance

4,700

 

Equipment

64,600

 

Land

23,000

 

Accounts Payable

 

$29,230

Unearned Revenue

 

1,500

Notes Payable   (long-term)

 

74,000

Common Stock

 

5,000

beginning Retained   Earnings as of Jan 1

14,500

Dividends

0

 

Service Revenue

 

35,700

Salaries and Wages   Expense

3,900

 

Repairs and   Maintenance Expense

410

 

Office Expenses

270

 

   Totals

$159,930

$159,930

ERI Corp.

Income Statement

For the Year Ended December 31

Revenues:

 

Service Revenue

 

Total Revenues

 

Expenses:

 

             Salaries and Wages Expense

 

Repairs and Maintenance Expense

 

Office Expenses

 

Total Expenses

 

Net Income

 

ERI Corp.

Statement of Retained Earnings

For the Year Ended December 31 

Retained Earnings,   Jan. 1

 

Add: Net Income

 

Subtract: Dividends

 

Retained Earnings,   Dec. 31

 

ERI Corp.

Balance Sheet

At December 31

Assets

 

Current Assets

 

Cash

 

Accounts Receivable

 

Prepaid Insurance

 

     Total Current Assets

 

Equipment

 

Land

 

Total Assets

 

Liabilities

 

Current Liabilities

 

Accounts Payable

 

Unearned Revenue

 

     Total Current Liabilities

 

 Notes Payable   (long-term)

 

               Total Liabilities

 

Stockholders' Equity

 

Common Stock

 

Retained Earnings

 

                Total Stockholders' Equity

 

Total Liabilities and   Stockholders' Equity

 

4.Net Profit Margin: 

Calculate the net profit margins for the following two companies and comment on them: 

 

Net Income

Total Assets

Total Liabilities

Total Revenues

Expedia

$280

7,090

4,800

4,030

Priceline

1,420

6,570

2,670

5,260

5.Net Profit Margins in years t and t-1:

Compute the net profit margin of this year and compare that with last year's net profit margin of 15%.

Total assets

$100,000

Total liabilities

60,000

Common stock

10,000

Dividends

5,000

Expenses

80,000

Retained earnings   (beginning of year)

15,000

Helpful Tip: Debit and credit still confuse many students. Just think of debit and credit as left and right. Luckily, credit has an "R" for right. In an income statement, you see revenues and expenses. Luckily again, revenue has an "R" for right.

A recap of B/S: Asset items show on the left side of the B/S, hence increase in asset item is recorded on the left, i.e., the debit. Decrease in asset will be on the right hand side. Liability and equity items are credit items, and increase of L or SE shows up on the right. Again, decrease in L or SE item will show up on the left side.

The whole income statement (I/S) boils down to one item in the B/S, Retained earnings. Remember Revenues minus expenses equal to net income, and net income - dividends = retained earnings. IOW, all the revenues and expenses of a firm in an accounting period (like a month, quarter or a year) is summarized in one number (=net income), which is the change in Retained earnings item in the B/S at the end of the period.

Journal entries and T-accounts work about the same way for income statement items.

Example (1), ABC Corp makes a cash sale of $500.

1. You know cash and revenue are account titles here. Cash is asset, and its increase is a "left" side item.

2. Revenue is credit, and its increase is written on the right side of journal and T-account.

Result in the Journal

Cash                   500

Revenue                        500

Result in T-accounts

           Cash              

         Revenue           

500 |

 

 

|          500

|

 

 

|

 

 

|

 

 

Example (2), ABC Corp receives cash $500 before its delivery.

1. Cash is asset, and its increase is a "left" side item.

2. Since product is not delivered yet, ABC doesn't recognize revenue yet. Instead, we use a title called "Unearned revenue," which is a liability of ABC. Increase in liability will be on the right side of journal and T-account.

Result in the Journal

Cash                   500

Unearned Revenue           500

Result in T-accounts

           Cash              

   Unearned revenue    

500 |

 

 

|          500

|

 

 

|

 

 

|

 

 

When the product is actually delivered, this is what happens:

Unearned Revenue           500

Revenue                              500

Result in T-accounts

  Unearned revenue    

   Revenue    

500 |

500

 

|          500

|

 

 

|

 

 

|

 

 


 

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