Book 2 - Chapter 4 - Page S2 /css/

Reinforcement Problems, continued
LG 4-1, continued

Information Example

The key information
type is . . .

To determine the cost used up, you need to . . .

7. On December 31, year end, the Prepaid Insurance account of Moraine Park Company shows:
		Prepaid Insurance
	Beg. Bal. Jan. 1	2,500
	Oct. 1	9,000
	The beginning balance is the unexpired part of a one-year policy purchased in the prior year. The October amount is for a three-year policy.

Combination: cost used
up and cost per unit

  One-year policy
    was bought last
    year, so it will be
    completely used
    up in this year.

  Three months of
    the Oct. 1
    payment have
    been used up.

100% of the first
policy

  Calculate the
     expense per
     month.

Note: You could
also see this as a
“portion” of 3/12.

8. At the beginning of the year, the Prepaid Rent account had a balance of $1,300, and during the year $10,700 of additional prepayments were made. The amount of Prepaid Rent in force at year end is $3,000.

The asset cost
remaining

Subtract the asset cost remaining from the unadjusted balance of the Prepaid Expense account.

9. At year end, the Prepaid Rent account balance shows as $12,000. 75% of this balance expired during the year. The remaining 25% will be used next year.

The asset cost
used up

Determine portion (75%)
used up.

10. The June 30 trial balance of Waukesha Company shows prepaid interest of $5,000 for money borrowed on June 1. Interest expense is incurred at $1,500 per month. No interest expense has been recorded.

The cost per unit
of the asset (units
of time)

Use the cost per unit of the asset. ($1,500 per month is already calculated for you.)

11. Springfield Company, which has a December 31 year end, shows the following in the Prepaid Advertising account:
		Prepaid Advertising
	Jan. 11	2,000
	May 1	4,500
	Nov. 1	4,500
	The advertising is purchased and consumed semiannually.

  Combination: cost used
   up and cost per unit

  Six-month
      prepayments
      from Jan. 1 and
      May 1 are fully
      used up by
      December 31.

   Cost per unit
       (month) of
       Nov. 1        prepayment

By interpreting the “purchased semiannually” information, the amounts used up are:
   All of the beginning
     balance
    All of the May 1
    purchase
  Two months of the
    Nov. 1 purchase

Note: You could also see
this as a “portion”
of 2/12.

Learning Goal 4, continued

SOLUTIONS

Section I · Adjusting the Accounts

Home

Home || Book Publications || Professor’s Office || Student Info & Resources || Useful Links

Worthy & James Publishing is a provider of basic accounting books covering fundamental accounting principles, business accounting, and business math. Topics in financial accounting and business accounting covered include the balance sheet, the income statement, financial ratios, and bank reconciliation.