Hi,
I am having trouble figuring out the below question. Can someone please provide some guidance.
Thanks!
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It’s December 31, 2007 and you are about to close the firm’s books for the year. Just as you think everything is done.
1.)The firm’s Sales Manager some to you with 75 completed customer service orders (valued at $63,000) that his sales technicians had just turned in to him. They had performed this work in December but had forgotten to turn them in immediately after completing the work as required.
2.)The firm’s Purchasing Manager comes to you and informs you that he had just negotiated a “great’ deal for the IT department. Sun Systems has agreed to sell the firm a new server for $1million. The original offer was for $1.25 million. The reduction reflected Sun’s desire to capture the sale in 2006. The purchasing manager also tells you that no advance payment is required and that the server will be delivered on March 1, 2008
Explain how you will handle each of these transactions, including any required adjusting entries, based on established accounting principles.
To handle each of these transactions and their required adjusting entries based on established accounting principles, you need to consider the timing and recognition of revenues and expenses.
1. For the completed customer service orders that were turned in late:
- Firstly, you need to determine the accounting period in which the revenue should be recognized. In this case, the work was performed in December, so the revenue should be recognized in December 2007.
- Create an adjusting entry to record the revenue and accounts receivable:
- Debit the Accounts Receivable account (an asset) for $63,000 to recognize the amount owed by the customers.
- Credit the Sales Revenue account (an income statement account) for $63,000 to recognize the revenue earned.
2. For the purchase of the new server with a negotiated discount:
- Determine the appropriate accounting treatment based on the timing of the purchase and delivery.
- Since the server will be delivered on March 1, 2008, it falls into the next accounting period. Therefore, the transaction should be recorded accordingly.
- No adjusting entry is required for the discount negotiation. The purchase should be recorded when the server is delivered in 2008.
Overall, in accounting, it is essential to recognize revenues and expenses in the period they are earned or incurred. Adjusting entries are made to ensure accurate financial reporting and to match revenues with expenses appropriately.