U 6200 Accounting for International and Public Affairs

Session 4: Pre-Class Assignment

Accrual Accounting
(a) When Company A purchases inventory, it records the transaction as follows:
(Asset) Inventory
(Liability) Accounts payable

xxx
xxx

At the beginning of the year, the balance in the inventory account was $250,000. Sales
during the year totaled $6,000,000. Purchases of inventory during the year totaled
$3,800,000. At the end of the year, the company takes a physical inventory and
determines that the cost of the inventory on hand totals $295,000. (Note: company uses
the periodic inventory method vs. the perpetual inventory method). What adjusting entry
will the company make in order to prepare its year-end financial statements?

How much gross profit will the company report in its year-end income statement?

(b) Company B rents office space on an annual lease which runs from November 1, 2015
to October 31, 2016. Lease payments are made semi-annually, with the first payment
due at the inception of the lease period. For the period November 1, 2015 October 31,
2016, the annual lease cost is $50,000. As of November 1, 2016, the company renews the
lease at an annual cost of $60,000.
(i) How much rent expense will the company report in its 12/31/15 income statement and
how much prepaid rent will it report on its 12/31/15 balance sheet?

(b) Company B contd.

(ii) How much rent expense will the company report in its 12/31/16 income statement
and how much prepaid rent will it report on its 12/31/16 balance sheet?

(c) Company C has a loan outstanding (long-term) of $1,000,000 with interest @ 10%
per annum, payable semi-annually on February 1 and August 1. Note: Unlike rent or
insurance, which is generally paid in advance, interest is generally paid in arrears.
(i)

How much interest expense will the company report in its income statement for
the year ending December 31, 2015?

(ii)

How much will the company report as liabilities on its December 31, 2015
balance sheet related to the borrowings?

(d) Company D reports retained earnings as of December 31, 2014 of $2,500,000.

During 2015, the company has revenues (sales) of $5,000,000, expenses of $4,200,000
and pays dividends to shareholders of $300,000.
(i)

What amount will the company report as net income in its income statement for
the year ending December 31, 2015?

(ii)

What amount will the company report as retained earnings on its December 31,
2015 balance sheet?

(e) Company E operates health clubs, which offer discounted membership for those who
pay 12 months of membership up-front. On March 1 a member pays $1,200 for a 12month membership. How will the transaction impact the year-end December 31 balance
sheet? The year-end December 31 income statement?