Question

Please, I need a correct answer and clear explanation. Thank you,

(Determine expenses)

The following are activities in a three-month period for Basiliadis Company:

1.A new lease for the business premises goes into effect on October 1 and increases the rent from $1,000 to $1,150 per month. The rent for the next month is always prepaid on the last day of the current month. Accordingly, rent of $1,000 was paid on August 31, and $1,150 was paid on September 30 and October 31.

2.The company borrowed $12,000 on September 1. The interest rate on the loan is 10% per year and interest is to be repaid quarterly.

3.Basiliadis Company purchased a large supply of lubricant for $2,000 on September 1. The lubricant is to be used in the company's operations and is expected to last for four months.

4.Employees work Monday through Friday and are paid each Monday for the previous week's work. The payroll for the week of Monday, September 29, to Friday, October 3 (paid on October 6), is $10,000. The payroll for the week of Monday, October 27, to Friday, October 31 (paid on November 3), is $10,500.

Required

For each of the above independent cases, determine how much of the cost should be recognized as expense in each of the months of September, October, and November.

Answer 1

Solution:

Cost is to be recognized on accrual basis assuming that company is recognized monthly expednditure by doing month end adjustments.

1. As rent of particular month is prepaid on last day of previous month, therefore expense will be reconginzed as under on accrual basis:

September = $1,000

October = $1,150

November = $1,150

2. Amount borrowed =$12,000

Interest rate = 10% per annum

Monthly interest = $12,000*10%*1/12 = $100

Hence interest cost to be recognized in September, October and November equal to $100.

3. Lubricant purchased on Sept 1 = $2,000

Expected use of lubricant = 4 months

monthly expense to be recognized for lubricant = 2000/4 = $500

Hence Expense of $500 will be recognized in September, October and November.

4. Payroll for September 29 to October 3 = $10,000

Days in September = 2 days

Expense to be recognized in September = $10,000*2/5 = $4,000

Expense to be regonized in October for Sept 29 to Oct 3 Payroll = $10,000 - $4,000 = $6,000

Payroll for week October 27 to October 31 = $10,500 and same will be recognized in October

Expense to be recognized in October = $10,500 + $6,000 = $16,500