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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Case 2-68 Accounting for Partially Completed Events: 3 Prelude to Chapter 3

Ehrlich Smith. the owner of The Shoe Bone has asked you to help him understand the proper way to account for certain accounting items as he prepares his 2019 financial statements. Smith has provided the following information and observations:

(Continued)

a. A 3-year fire insurance policy was purchased on 2019, for $2,400. Smith believes that a part of the cost of the insurance policy should be allocated to each period that benefits from its coverage.

b. The store building was purchased for 580,000 in January 2011. Smith expected then (as he does now) that the building will be serviceable as a shoe store for 20 years from the date of purchase. In 2011, Smith estimated that he could sell the property for $6,000 at the end of its serviceable life. He feels that each period should bear some portion of the cost of this long-lived asset that is slowly being consumed.

c. The Shoe Box borrowed 520300 on a 1-year, 8% note that is due on September 1 next year) Smith notes that $21,600 cash will be required to repay the note at maturity. The $1,600 difference is, he feels, a cost of using the loaned funds and should be spread over the periods that benefit from the use of' the loan funds;

Required:

Describe how each of the three items should be reflected in the 2019 income statement and the December 31, 2019 balance sheet to accomplish Smith’s objectives.

To determine

Introduction:

Matching Concept: According to this principle all the expenses should be recorded in same accounting period in which its revenue is recognized. The primary purpose behind this principle is to show an accurate net income or loss during an accounting period.

Describe the three items reflected in the income statement and the balance sheet.

Explanation

  A. Insurance Expense as of December 31, 2019            Insurance Expense =  3 years Insurance Policy 3 years                                             =  $2,400 3 years                                              = $800           Prepaid Insurance = $2,400  $800                                         = $1,600

  B

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