Question

for an construction company

1. What types of employees would be working at your company? Explain how you would use the accounts "Salary Payable" and "Salary Expense"? What financial statements would each account appear?

2. Explain a situation specific to your business when you would need to use the account "Unearned Service Revenue". When would that account be debited and credited?

3. What type of supplies would your business need? Take one of your examples and explain how supplies are classified as both an asset and a prepaid expense.

4. Explain a situation specific to your service that would violate the matching principle.

5. What types of accounts would you need to close at the end of the period? Why are you closing them?

6. Classify your company's assets into current and non-current categories. What is the difference?

7. Classify your company's liabilities into current and non-current categories. What is the difference?

8. How would you interpret a profit margin of 8%. Be specific in regards to your service. Do you feel an 8% profit margin is good? Why or why not?

9. How would you interpret a current ratio of 2? Be specific in regards to your service. Do you feel a current ratio of 2 is good? Why or why not?

10. Differentiate between interest receivable and interest payable. Be specific in regards to your business.

Answer 1

1. Employees who are full-time and part-time as well as contractor employees would be working at the company. Salary payable is used when salaries expense is debited and salaries are not yet paid. Salary expense is gross expense. Salary payable is net expense after deductions like FICA, mediclaim, insurance premium, union dues. Etc. Salary expense would appear in income statement and Salary payable in current liabilities in balance sheet

2. A situation would be when customer makes advance payment for service obligation not yet delivered. Unearned revenue account is credited when advance payment is made by customers for future service to be delivered. When the service obligation is performed the revenue is recognised in income statement by debiting unearned revenue and crediting service revenue

3. Supplies needed for business are like office use- stationeries like pen paper, calendars, staplers, admin use items, etc. They are accounted as current asset in balance sheet. When supplies are purchased they are debited. Based on closing inventory they are charged to income statement for the difference as supplies expense.

4. Charging a bad debts expense of previous year sales to current year sales is violation of matching principle. The bad debts expense should be accounted as per allowance method but if direct method is used it will violate matching principle

5. All nominal accounts need to be closed. Nominal accounts are revenue and expense account. Dividend accounts are closed to Retained earnings. They are closed to start a new accounting period.

6. Current assets

· Cash

· Short term investments

· Accounts receivable

· Inventory

· Supplies

· Prepaid expenses

Noncurrent assets

· Equipment

· Buildings

· Furniture

Current assts are held for less than one year and Noncurrent assets are held for greater than year

7. Current liabilities

· Accounts payable

· Salaries payable

· Unearned revenue

· Interest payable

Noncurrent liabilities

· Notes payable

Current liabilities are obligation which is due in less than one year and noncurrent liabilities are obligation due in greater than one year

8. 8% profit margin is good for a construction business considering the business is done on large transaction value.

9. Current ratio is indication of liquidity of the firm to meet its short term obligation. A ratio of 2 indicates the current assts are twice the current liabilities and good to meet the short term obligations.

10. Interest receivable is current assets and it represents the interest we have to receive from customers. It is part of current assets

Interest payable is the interest expense on notes payable for the borrowing from the bank. It is part of current liabilities