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Unformatted text preview: Page 49 New Material Inventory Valuation Methods: FIFO = First in,First out LIFO = Last in, Last out Companies may select whichever method they prefer, but once a method is opted for, For companies using FIFO, they will calculate Cost of Goods Sold using the cost of the still in inventory as the ones first sold or as the ones first out. For Beamer Yr. 2, they s COGS will consist of 2 @ $40,000 each (the cost of the 2 beamers left over from Yr 1) 6 purchased). For companies using LIFO, they will calculate Cost of Goods Sold using the cost of the first item sold. Therefore, if Beamer opted to use LIFO, the cost of goods sold would b Rent: Remember the "Matching Concept" when recording rent expense. The amount debited to rent expense should b incurred for the period, which will not necessarily be equal to the amount the company paid. For example: If a com and they occupied the facility for 12 months and we are doing an income statement for a year, we need to debit ren credit cash for the actual amount of checks written for rent. We will then check our beginning balances to see if the "Rent Payable" balance at the end of the prior accounting period. If there was, we will clear that account to -0- with debit if it is a "Rent Payable" in our rent journal entry. If our journal entry does not balance at this point, we will look whether we need a debit or a credit to balance. If we need a debit to balance this entry, we will debit "Prepaid Ren and will go on the balance sheet after inventory. If we need a credit to balance, we will credit "Rent Payable", whic balance sheet. Prepaid Expenses: Many times a company will write a check for an expense in advance of the accounting period to which it applies. F due in the landlord's hands on the first day of the month. Most companies will write the check at the end of the mo applies. Therefore, June's rent check will be written in May. Under the "Matching Concept", we want to record thi Income Statement, not on May's Income Statement. Therefore, when we write the check, we will debit "Prepaid Re since it is going to be used up within 12 months and will appear in the current asset section of the Balance Sheet a same concept applies to insurance. Insurance is always paid in advance and it is very common for a business take for it in advance. When the policy is purchased, we debit "Prepaid Insurance", which is a current asset account, ev the next 12 months because a company can always cancel the policy and receive and refund at any time, and will Inventory, and we will credit "Cash". When we prepare an Income Statement, we will then debit "Insurance Expens was "used up" and credit "Prepaid Insurance". Principal & Interest Payments: When a company finances the purchase of a fixed asset, the amount still owed on the original purchase is called th are made, interest is always brought current first and then the rest of the payment is applied to the principal, which Interest is calculated by multiplying the unpaid principal balance by the annual interest rate and then multiplying t that is being covered. For example: If you are making an annual payment, you would multiply the unpaid principal and then multiply that answer by 12/12. If you are making a monthly payment, you would multiply the unpaid princ Current Portion of Long-Term Debt: The last item in the Current Liabilities' Section on the Balance Sheet will be "Current Portion of Long-Term Debt". T It is calculated by looking at all of our long-term liability accounts and determining how much in principal payment All of these amounts for all of our long-term liabilitiies and then added together and shown on the Balance Sheet un Debt. Under Long-Term Debt on the Balance Sheet, we will then list each long-term liability separately with the am within 12 months of the date of the Balance Sheet. ut once a method is opted for, it cannot be changed. oods Sold using the cost of the items first put into inventory that are t out. For Beamer Yr. 2, they sold 8 beamers in year 2, so the 2 beamers left over from Yr 1) + 6 @ $44,000 ( the cost of the next oods Sold using the cost of the last item purchase as the cost of the the cost of goods sold would be 8@$44,000 each. bited to rent expense should be the total amount of rent expense ny paid. For example: If a company's rent is $1,000 per month for a year, we need to debit rent expense for $12,000. We will then eginning balances to see if there was a "Prepaid Rent" or a ill clear that account to -0- with a credt if it is a "Prepaid Rent" or a alance at this point, we will look at our amounts and determine try, we will debit "Prepaid Rent", which is a current asset account will credit "Rent Payable", which is a current liability account on the g period to which it applies. For example: Most rent checks are the check at the end of the month just before the month for which it oncept", we want to record this as rent expense on the June heck, we will debit "Prepaid Rent", which is a current asset account section of the Balance Sheet after Inventory, and credit cash. The ry common for a business take out a multi-year policy and pay h is a current asset account, even if it will not be used up within nd refund at any time, and will appear on the Balance Sheet after ill then debit "Insurance Expense" for the amount of insurance that e original purchase is called the principal balance. As payments applied to the principal, which then reduces the amount owed. rest rate and then multiplying this amount by the fraction of the year ld multiply the unpaid principal balance by the annual interest rate ould multiply the unpaid principal balance by the annual interest rate and then multiply that answer by 1/12. If a 7 month period is being r Portion of Long-Term Debt". There is NO T-Acct. for this number. w much in principal payments are dure within the next 12 months. hown on the Balance Sheet under "Current Portion of Long-Term liability separately with the amounts of the principal payments NOT due 7 month period is being recorded, you would multiply by 7/12 and so on. ...
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This note was uploaded on 09/12/2010 for the course ACCT 101 taught by Professor Drkirch during the Spring '10 term at Ohio University- Athens.
- Spring '10