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Chapter 3: Q8Q (page 127)

Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain.

Short Answer

Expert verified

It indicates a current liability and therefore, it must be listed in the term in which it has been incurred.

Step by step solution

01

Meaning of Balance Sheet

The balance sheet is defined as the statement that aims to determine the nature and amount of different assets and liabilities so that the financial position could clearly be known to all those concerned. Hence, the primary role of the balance sheet is to depict a fair picture of the business at a certain date.

02

Representation of the amount of the wages earned

The wages of the first three days of the week to be paid to employees on December 31 specify current liability. Expenses associated with it must be 'matched' to this period so as to properly indicate the expenses incurred.

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Most popular questions from this chapter

Question: The Amato Theater is nearing the end of the year and is preparing for a meeting with its bankers to discuss the renewal of a loan. The accounts listed below appeared in the December 31, 2017, trial balance.

Debit

Credit

Prepaid advertising

\(6,000

Equipment

192,000

Accumulated depreciation

\)60,000

Note payable

90,000

Unearned service revenue

17,500

Ticket revenue

360,000

Advertising expenses

18,680

Salaries and wages expenses

67,600

Interest expenses

1,400

Additional information is available as follows.

1. The equipment has an estimated useful life of 16 years and a salvage value of \(40,000 at the end of that time. Amato uses the straight-line method for depreciation.

2. The note payable is a one-year note given to the bank January 31 and bearing interest at 10%. Interest is calculated on a monthly basis.

3. Late in December 2017, the theater sold 350 coupon ticket books at \)50 each. Two hundred of these ticket books have been used by year-end. The cash received was recorded as Unearned Service Revenue.

4. Advertising paid in advance was \(6,000 and was debited to Prepaid Advertising. The company has used \)2,500 of the advertising as of December 31, 2017.

5. Salaries and wages accrued but unpaid at December 31, 2017, were $3,500.

Accounting

Prepare any adjusting journal entries necessary for the year ended December 31, 2017.

Analysis

Determine Amato鈥檚 income before and after recording the adjusting entries. Use your analysis to explain why Amato鈥檚 bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal.

Principles

Although Amato鈥檚 bankers are willing to wait for the adjustment process to be completed before they receive financial information, they would like to receive financial reports more frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful representation, are inherent in preparing financial statements for shorter accounting time periods?

Do the following events represent business transactions?

Explain your answer in each case

  1. A computer is purchased on account.
  2. A customer returns merchandise and is given credit on account.
  3. A prospective employee is interviewed
  4. The owner of the business withdraws cash from the business for personal use.
  5. Merchandise is ordered for delivery next month.

Why are revenue and expense accounts called temporary or nominal accounts?

When the accounts of Daniel Barenboim Inc. are examined, the adjusting data listed below are uncovered on December 31, the end of an annual fiscal period.

  1. The prepaid insurance account shows a debit of \(5,280, representing the cost of a 2-year fire insurance policy dated August 1 of the current year.
  2. On November 1, Rent Revenue was credited for \)1,800, representing revenue from a subrental for a 3-month period beginning on that date.
  3. Purchase of advertising materials for \(800 during the year was recorded in the Advertising Expense account. On December 31, advertising materials of \)290 are on hand.
  4. Interest of $770 has accrued on notes payable.

Instructions

Prepare the following in general journal form.

  1. The adjusting entry for each item.
  2. The reversing entry for each item where appropriate.

What are the characteristics of high-quality information in a company鈥檚 first IFRS financial statements?
See all solutions

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