Unformatted text preview: Salary expense incurred Payday Payday Point: An employer reoords salaries expense and a vacation pay liability when employees earn vacation pay. The ﬁnancial statements would be incomplete if FastForward fails to report the added expense and liability to the employee for unpaid salary from December 29, 30, and 31. The
adjusting entry to account for accrued salaries, along with T—account postings, follows: Assets = Liabilities + Equity
+210 —210 Adjustment (e)
Dec. 3| Salaries Expense ............................ 2| 0
Salaries Payable ......................... 210
To record three days’ accrued salary (3 X $70). Salaries Payable Dec.3l 2|0 Salaries Expense Point: Instead, assume: (1) the last payday for the year is Dec. 19, (2) the next payday is Jan. 2, and (3) Dec. 25 is a paid holiday. Reoord the Dec. 31 adjusting entry. Answer: We
must accrue pay for 8 working days (8 X $70): SalariesExpense...560 Salaries Payable... 560 Salaries expense of 51,610 is reported on the December income statement and $210 of salaries payable (liability) is reported in the balance sheet. Nor making the adjustment (1)
understates salaries expense and overstates net income by $210 in the December income statement and (2) understates salaries payable (liabilities) and overstates equity by $210 on the
December 3]. balance sheet. The following table highlights the adjustment for salaries incurred. Before Adjustment Adjustment After Adjustment
Salaries Payable = $0 Add $2I0 to Salaries Payable Salaries Payable = $2“!
Add $2l0 to Salaries Expense
Reports $0 from employee salaries Record 3 days’ salaries owed to Reports $2l0 salaries payable to
incurred but not yet paid in cash. employee, but not yet paid, at $70 employee but not yet: paid.
per day. Accrued Interest Expense Companies commonly have accrued interest expense on notes payable and other longeterm liabilities at the end of a period. Interest expense is incurred with the passage of time. Unless
interest is paid on the last day of an accounting period, we need to adjust for interest expense incurred but not yet paid. This means we must accrue interest cost from the most recent
payment date up to the end of the period. The formula for computing accrued interest is: Principal amount owed X Annual interest rate X Fraction of year since last payment date. Point: Interest computations assume a 360—day year; known as the bankers' rule. To illustrate, if a company has a $6,000 loan from a bank at 6% annual interest, then 30 days’ accrued interest expense is S30—computed as 56,000 X 0.06 X 303360. The adjusting entry
would be to debit Interest Expense for S30 and credit Interest Payable for S30. .' 99 Future Payment of Accrued Expenses Adjusting entries for accrued expenses foretell cash transactions in ﬁrture periods. Speciﬁcally, accrued expenses at the end of one accounting period result in cash payment in a future
period(s). To illustrate, recall that FastForward recorded accrued salaries of 5210. On January 9, the ﬁrst payday of the next period, the following entry settles the accrued liability (salaries payable) and records salaries expense for seven days of work in January: ...
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- Spring '09