100%(3)3 out of 3 people found this document helpful
This preview shows page 15 - 18 out of 59 pages.
c.20122013TotalWage expense$42,000$28,000$70,000Cash outflow associated with wages070,00070,000d.The purpose of the adjusting journal entry on December 31, 2012 is to recognize an economic event that has not yet been captured by an exchange transaction. The economic event is that the Hurst Corporation consumed the benefits of its employees' labor, and in doing so, has become obligated to its employees. Hurst Corporation will not fulfill its obligation to its employees until the subsequent period when it actually pays the employees their wages. Consequently, an accrual adjusting entry is required on December 31 to record this economic event in the correct accounting period.E4–15a.12/31/09Depreciation Expense (E, –SE)150,000Accumulated Depreciation (–A)150,000Depreciated equipment for 2009.12/31/10Depreciation Expense (E, –SE)150,000Accumulated Depreciation (–A)150,000Depreciated equipment for 2010.12/31/11Depreciation Expense (E, –SE)150,000Accumulated Depreciation (–A)150,000Depreciated equipment for 2011.2009Book value, 1/1/09$450,0002009 Depreciation expense$150,000Accumulated depreciation, 12/31/09150,000Book value, 12/31/09$300,000
E4–15Concluded2010Book value, 1/1/09$450,0002009 Depreciation expense$150,0002010 Depreciation expense150,000Accumulated depreciation, 12/31/10300,000Book value, 12/31/10$150,0002011Book value, 1/1/09$450,0002009 Depreciation expense$150,0002010 Depreciation expense150,0002011 Depreciation expense150,000Accumulated depreciation, 12/31/11450,000Book value, 12/31/11$0b.2009 2010 2011 TotalDepreciation expense$ 150,000$150,000$150,000$450,000Cash outflow associated withthe purchase of the equipment450,00000450,000c.The purpose of the adjusting journal entry at the end of each period is to recognize the economic event of the portion of the fixed asset cost that expired during that year. Specifically, the purpose of the adjusting journal entries is to allocate the cost of the equipment to the periods that benefited from the equipment. Since the equipment has a useful life of three years, it is assumed that it will help generate revenues for three years. The cost of a fixed asset should be matched with the periods in which the fixed asset helps generate revenues. Consequently, an adjusting entry is required on December 31, 2009, 2010, and 2011 to allocate the economic event to the correct accounting periods.E4–16a.With cash-basis accounting, cash inflows and outflows are the critical events. A company will recognize revenue when it has cash inflows, and the company will recognize expenses when it has cash outflows. So in this case, Washington Forest Products would recognize the following expenses under cash-basis accounting.Insurance expense$29,000Supplies expense27,000Rent expense8,000With accrual-basis accounting, inflows and outflows of assets and liabilities are the critical events. That is, a company will recognize revenue when it has an inflow of assets or an outflow of liabilities associated with operating activities. Similarly, the company will recognize expenses when it has an outflow of assets or an inflow of liabilities associated with operating activities.
E4–16ConcludedConsider the revenues being generated when the company is entitled to cash. The company could collect the