Unformatted text preview: —l ,050 — l ,050 Adiustment (b)
Dec.3| SuppliesExpense........................... |.050 Supplies.............................. |,050
To record supplies used. Supplies Expense Supplies The balance of the Supplies account is 58,670 aﬁer posting—equaling the cost of the remaining supplies. Not making the adjustment on or before December 31 would (1) understate expenses by 51,050 and overstate net income by 51,050 for the December income statement and (2) overstate both supplies and equity (because of net income) by 51,050 in the
December 3]. balance sheet. The following table highlights the adjustment for supplies. Before Adjustment Adjustment After Adjustment Supplies = $9,720 Deduct “.050 from Supplies Supplies = $8,610
Add $l,050 to Supplies Expense Reports $9,720 in supplies. Record “.050 in supplies used and $|.050 Reports $8,670 in supplies.
as supplies expense. Other Prepaid Expenses Point: We assume that prepaid and unearned items are recorded in balance sheet accounts. An alternative is to record them in income statement accounts; Amdix 3A discum this
alternative. The adjusted ﬁnancial statements are identical. Other prepaid expenses, such as Prepaid Rent, are accounted for exactly as Insurance and Supplies are. We should note that some prepaid expenses are both paid for and frilly used up
within a single accounting period. One example is when a company pays monthly rent on the ﬁrst day of each month. This payment creates a prepaid expense on the ﬁrst day of each month that frilly expires by the end of the month. In these special cases, we can record the cash paid with a debit to an expense account instead of an asset account. This practice is
described more completely later in the chapter. 1 Decision Maker lnvator A small publishing company signs a well—known athlete to write a book. The company pays the athlete $500,000 to sign plus future book royaltiﬁ. A note to the
company's ﬁnancial statements says that “prepaid expenses include 5500,01!) in author signing fees to be matched against future expected sales.” ls this accounting for the signing bonus acceptable? How does it affect your analysis? [Answer—p. L23] SE Depreciation Point: Depreciation does not necessarily measure decline in market value. Point: An asset's expected value at the end of its useful life is called salvage value. A special category of prepaid expenses is plant assets which refers to long-term tangible assets used to produce and sell products and services. Plant assets are expected to provide
beneﬁts for more than one period. Examples of plant assets are buildings, machines, vehicles, and ﬁxtures. All plant assets, with a general exception for land, eventually wear out or
decline in usefulness. The costs of these assets are deferred but are gradually reported as expenses in the income statement over the assets' useful lives (beneﬁt periods). DgEreciation is
the process of allocating the costs of these assets over their expected useful lives. Depreciation expense is recorded with an adjusting entry similar to that for other prepaid expenses. To illustrate, recall that FastForward purchased equipment for 526,000 in early December to use in earning revenue. This equipments cost must be depreciated. The equipment is
expected to have a useful life (beneﬁt period) of four years and to be worth about 58,000 at the end of four years. This means the net cost of this equipment over its useful life is 518,000
(526,000 7 53,000). We can use any of several methods to allocate this 518,000 net cost to expense. FastForward uses a method called straight-line dggreciation, which allocates equal amounts of the asset's net cost to depreciation during its useful life. Dividing the 518,000 net cost by the 48 months in the asset's useful life gives a monthly cost of S375 (518,000r'48).
The adjusting entry to record monthly depreciation expense, along with T—account postings, follows: Depreciation Der-2. 3 Purchase anrrinmm‘l‘ and ...
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