Question

1. Over what period should the following be included as an expense in the income statement?

(a) The interest paid on a five-year corporate bond.

(b) The cost of a truck with an estimated fifteen-year economic life.

(c) The annual bonus earned by chief executive officers and paid in the following year.

(d) The one-time premium paid on a 10-year insurance policy.

(e) What basic accounting concepts do your answers reflect?

Answer 1

(a) The interest paid on a five-year corporate bond

The Company should accrue the interest on Bonds in the Income Statement using effective interest method. Accrued interest is the interest on a bond that has accumulated since the principal investment, or since the previous coupon payment if there has been one already.

Accounting concept : Accrual and the systematic allocation of the discount/premium on bonds payable to Bond Interest Expense over the life of the bonds.

(b) The cost of a truck with an estimated fifteen-year economic life.

Depreciation expense is the amount of an asset's cost that is allocated over the economic life of the asset. in the extant case, the cost of asset will be charged to Income statement as expense over 15 years

Accounting concept: Matching Concept

(c) The annual bonus earned by chief executive officers and paid in the following year.

The bonus is accrued in the year in which it is earned irrespective of the payment being made subsequent to the year end.

Accounting concept : Accrual. Accrued expenses are expenses that are recognized at the time they are incurred, even though cash has not yet been paid.

(d) The one-time premium paid on a 10-year insurance policy.

The Insurance expense is recognised over the term of the Insurance, in the extant case 10 years.

Accounting concept : Prepaid Expenses   

Prepaid expenses are the expenditures that are paid in one accounting period, but are recognized later in another accounting period. Prepaid expenses are initially recorded as assets and are expensed when the benefits are realized.

(e) What basic accounting concepts do your answers reflect? -refer above