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4-2 ACCRUAL ACCOUNTING CONCEPTS Financial Accounting, Seventh Edition 4

4-3 Illustration: Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand. Supplies1,500 Supplies Expense1,500Oct. 31 Adjusting Entries for “Prepaid Expenses” LO 4 Prepare adjusting entries for deferrals. Illustration 4-6 (Partial) ($2,500 – 1,000 = $1,500)

4-4 Illustration: On October 4, Sierra Corporation paid $600 for a one- year fire insurance policy. Coverage began on October 1. Sierra recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month. Prepaid Insurance50 Insurance Expense50Oct. 31 Adjusting Entries for “Prepaid Expenses” LO 4 Prepare adjusting entries for deferrals. Illustration 4-7 (Partial)

4-5 Depreciation  Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired.  Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life.  Depreciation does not attempt to report the actual change in the value of the asset. Adjusting Entries for “Prepaid Expenses” LO 4 Prepare adjusting entries for deferrals.

4-6 Illustration: For Sierra Corporation, assume that depreciation on the office equipment is $480 a year, or $40 per month. Accumulated Depreciation-Equipment40 Depreciation Expense40Oct. 31 Adjusting Entries for “Prepaid Expenses” LO 4 Prepare adjusting entries for deferrals. Illustration 4-8 (Partial)

4-7 LO 4 Prepare adjusting entries for deferrals. Illustration: Sierra Corporation received $1,200 on October 2 from R. Knox for guide services for multi-day trips expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. From an evaluation of the service Sierra performed for Knox during October, the company determines that it has earned $400 in October. Service Revenue400 Unearned Service Revenue400Oct. 31 Illustration 4-12 (Partial) Adjusting Entries for “Unearned Revenues”

4-8 Illustration: In October, Sierra Corporation performed guide services for $200 that were not billed to clients before October 31. Service Revenue200 Accounts Receivable200Oct. 31 LO 5 Prepare adjusting entries for accruals. Illustration 4-15 Adjusting Entries for “Accrued Revenues”

4-9 LO 5 Prepare adjusting entries for accruals. Illustration: Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an annual rate of 12%. Interest Payable50 Interest Expense50Oct. 31 Illustration 4-19 (Partial) Illustration 4-18 Adjusting Entries for “Accrued Expenses”

4-10 LO 5 Prepare adjusting entries for accruals. Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 x 3 days). Salaries and Wages Payable1,200 Salaries and Wages Expense1,200Oct. 31 Illustration 4-21 Adjusting Entries for “Accrued Expenses”

4-11 The Adjusted Trial Balance LO 6 Illustration 4-26 Adjusted trial balance

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