Raymond Company adjusts and closes its accounts at the end of the
calendar year. The following situations are related to this company:
I On 1 January, Raymond Company had a $3,000 debit balance in its
Supplies account. During the year, $4,250 of additional supplies
were purchased. At the end of the year, a count of supplies revealed
$2,650 left on hand.
ii Raymond Company received $72,000 in payments from its customers
in advance for the yearly rent. The rent started from June.
iii A bank loan had been obtained on 1 September. Accrued interest on
the loan at 31 December amounts to $4,800. No interest expense has
yet been recorded.
I've On 31 December, an agreement was signed to lease a truck for 12
months beginning January 1 of next year at a rate of $3 a mile. Usage
is expected to be 2,000 miles per month and the contract specifies a
minimum payment equivalent to 18,000 miles a year.
v Raymond Company's policy is to pay all employees up-to-date each
Friday. Since 31 December fell on Monday, there was a liability to
employees at 31 December for one day's pay amounting to $28,000.
vi Depreciation of office equipment is based on an estimated life of five
years. The balance in the Office Equipment account is $25,000; no
change has occurred in the account during the year.
vii Interest receivable on government bonds owned at 31 December
amounts to $9,300. This accrued interest revenue has not been
recorded.
Required:
a What would be the impact on the financial statements if each of the
adjusting entries in situation (I) to (vii) were not recorded? (Consider
each situation independently.) (21 marks)
b Differentiate the terms accrual and deferral. Which of the above
situations belong to accrual category? (7 marks)
