Book 2 - Chapter 4

Reinforcement Problems, continued
LG 4-2, 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

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