Identifying Accrual Basis Revenues

Identifying Accrual Basis Revenues:

For following transactions of ZZZ Bowling Inc. in July, determine if revenue is recognized in July and indicate the amount. Otherwise, explain why revenue is NOT recognized in July:

Activity Revenue recognized in   July? Amount or explain why   not recognized
Company collected $12,000 from customers for services related to   games played in July.    
Company billed a customer for $250 for a party held at the   bowling center on July 31st. Bill is to be paid in August.    
The bowling leagues gave the company advance payments of $1,500   for the fall season that starts in September.    
Company received $1,000 from credit sales made in June.    

 

2.                  Identifying Accrual Basis Expenses:

The following transactions are July activities of Bill’s Bowling Inc., which operates bowling centers. If an expense is recognized in July, indicate the amount. If not recognized, explain why.

Activity Expense recognized in   July? Amount or explain why   not recognized
Bill’s paid $1,500 to   plumbers for repairing a broken pipe in the restrooms.    
Bill’s paid $2,000 for   the June electricity bill and received the July bill for $2,500, which will   be paid in August.    
Bill’s paid $5,475 to   employees for work in July.    

 

3.                  From a Trial Balance to Financial Statements:

From the following accounts from ERI Corp as of December 31, create an I/S, Statement of Retained Earnings and a B/S:

Account Name Debits Credits
Cash $59,750  
Accounts Receivable 3,300  
Prepaid Insurance 4,700  
Equipment 64,600  
Land 23,000  
Accounts Payable   $29,230
Unearned Revenue   1,500
Notes Payable   (long-term)   74,000
Common Stock   5,000
beginning Retained   Earnings as of Jan 1   14,500
Dividends 0  
Service Revenue   35,700
Salaries and Wages   Expense 3,900  
Repairs and   Maintenance Expense 410  
Office Expenses 270  
   Totals $159,930 $159,930

 

ERI Corp.

Income Statement

For the Year Ended December 31

Revenues:  
Service Revenue  
Total Revenues  
Expenses:  
             Salaries and Wages Expense  
Repairs and Maintenance Expense  
Office Expenses  
Total Expenses  
Net Income  

 

ERI Corp.

Statement of Retained Earnings

For the Year Ended December 31

Retained Earnings,   Jan. 1  
Add: Net Income  
Subtract: Dividends  
Retained Earnings,   Dec. 31  

 

ERI Corp.

Balance Sheet

At December 31

Assets  
Current Assets  
Cash  
Accounts Receivable  
Prepaid Insurance  
     Total Current Assets  
Equipment  
Land  
Total Assets  
Liabilities  
Current Liabilities  
Accounts Payable  
Unearned Revenue  
     Total Current Liabilities  
 Notes Payable   (long-term)  
               Total Liabilities  
Stockholders’ Equity  
Common Stock  
Retained Earnings  
                Total Stockholders’ Equity  
Total Liabilities and   Stockholders’ Equity  

 

4.                  Net Profit Margin:

Calculate the net profit margins for the following two companies and comment on them:

  Net Income Total Assets Total Liabilities Total Revenues
Expedia $280 7,090 4,800 4,030
Priceline 1,420 6,570 2,670 5,260

 

5.                  Net Profit Margins in years t and t-1:

Compute the net profit margin of this year and compare that with last year’s net profit margin of 15%.

Total assets $100,000
Total liabilities 60,000
Common stock 10,000
Dividends 5,000
Expenses 80,000
Retained earnings   (beginning of year) 15,000

 

 

Helpful Tip: Debit and credit still confuse many students. Just think of debit and credit as left and right. Luckily, credit has an “R” for right. In an income statement, you see revenues and expenses. Luckily again, revenue has an “R” for right.

 

A recap of B/S: Asset items show on the left side of the B/S, hence increase in asset item is recorded on the left, i.e., the debit. Decrease in asset will be on the right hand side. Liability and equity items are credit items, and increase of L or SE shows up on the right. Again, decrease in L or SE item will show up on the left side.

The whole income statement (I/S) boils down to one item in the B/S, Retained earnings. Remember Revenues minus expenses equal to net income, and net income – dividends = retained earnings. IOW, all the revenues and expenses of a firm in an accounting period (like a month, quarter or a year) is summarized in one number (=net income), which is the change in Retained earnings item in the B/S at the end of the period.

Journal entries and T-accounts work about the same way for income statement items.

Example (1), ABC Corp makes a cash sale of $500.

1. You know cash and revenue are account titles here. Cash is asset, and its increase is a “left” side item.

2. Revenue is credit, and its increase is written on the right side of journal and T-account.

 

Result in the Journal

Cash                   500

Revenue                        500

 

Result in T-accounts

           Cash          Revenue
500 |     |          500
|     |
|     |
|     |

 

Example (2), ABC Corp receives cash $500 before its delivery.

1. Cash is asset, and its increase is a “left” side item.

2. Since product is not delivered yet, ABC doesn’t recognize revenue yet. Instead, we use a title called “Unearned revenue,” which is a liability of ABC. Increase in liability will be on the right side of journal and T-account.

Result in the Journal

Cash                   500

Unearned Revenue           500

 

Result in T-accounts

           Cash    Unearned revenue
500 |     |          500
|     |
|     |
|     |

 

 

When the product is actually delivered, this is what happens:

Unearned Revenue           500

Revenue                              500

 

Result in T-accounts

  Unearned revenue    Revenue
500 | 500   |          500
|     |
|     |
|     |

 


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