The revenue recognition principle dictates that revenue should be recognized in the accounting records
when the performance obligation is satisfied
In a service-type business, revenue is considered recognized
when the service is performed
The expense recognition principle matches
expenses with revenues
Live Wire Hot Rod Shop follows the revenue recognition principle. Live Wire services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Live Wire on August 5. Live Wire receives the check in the mail on August 6. When should Live Wire show that the revenue was recognized?
A company spends $15 million dollars for an office building. Over what period should the cost be written off?
Over the useful life of the building
.A flower shop makes a large sale for $1,200 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,200 considered to be recognized?
Expenses sometimes make their contribution to revenue in a different period than when they are paid. When salaries and wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period?
Salaries and Wages Payable
Under accrual-basis accounting
events that change a company’s financial statements are recognized in the period they occur rather than in the period in which cash is paid or received
Which one of the following is not an application of revenue recognition?
Accepting cash from an established customer for services to be performed over the next three months
Crue Company had the following transactions during 2015:
Sales of $4,800 on account
Collected $2,000 for services to be performed in 2016 Paid $1,625 cash in salaries
Purchased airline tickets for $250 in December for a trip to take place in 2016
What is Crue’s 2015 net income using accrual accounting?
Adjusting entries are required
because some costs expire with the passage of time and have not yet been journalized
If a resource has been consumed but a bill has not been received at the end of the accounting period, then
an adjusting entry should be made recognizing the expense
A law firm received $3,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause
revenues to be understated
A liability—revenue relationship exists with
unearned revenue adjusting entries
Which of the following reflects the balances of prepayment accounts prior to adjustment?
Balance sheet accounts are overstated and income statement accounts are understated
Lake of Fire Company purchased supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of supplies revealed $1,900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be
Debit Supplies Expense, $5,100; Credit Supplies, $5,100
The balance in the supplies account on June 1 was $5,200, supplies purchased during June were $3,500, and the supplies on hand at June 30 were $3,000. The amount to be used for the appropriate adjusting entry is
REM Real Estate received a check for $27,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $27,000. Financial statements will be prepared on July 31. REM Real Estate should make the following adjusting entry on July 31:
Debit Unearned Rent Revenue, $4,500; Credit Rent Revenue, $4,500
If a company fails to make an adjusting entry to record supplies expense, then
expense will be understated
What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, $18,500, and unexpired amounts per analysis of policies of $6,000?
Debit Insurance Expense, $12,500; Credit Prepaid Insurance, $12,500
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