The following information is taken from the accrual accounting records of Kroger
ID: 2380208 • Letter: T
Question
The following information is taken from the accrual accounting records of Kroger Sales Company:
a. During January, Kroger paid $9,150 for supplies to be used in sales to customers during the next 2 months (February and March). The supplies will be used evenly over the next 2 months.
b. Kroger pays its employees at the end of each month for salaries earned during that month. Salaries paid at the end of February and March amounted to $4,925 and $5,100, respectively.
c. Kroger placed an advertisement in the local newspaper during March at a cost of $850. The ad promoted the pre-spring sale during the last week in March. Kroger did not pay for the newspaper ad until mid-April.
Required:
1. Under cash-basis accounting, how much expense should Kroger report for February and March?
2. Under accrual-basis accounting, how much expense should Kroger report for February and March?
The following information is taken from the accrual accounting records of Kroger Sales Company: During January, Kroger paid $9,150 for supplies to be used in sales to customers during the next 2 months (February and March). The supplies will be used evenly over the next 2 months. Kroger pays its employees at the end of each month for salaries earned during that month. Salaries paid at the end of February and March amounted to $4,925 and $5,100, respectively. Kroger placed an advertisement in the local newspaper during March at a cost of $850. The ad promoted the pre-spring sale during the last week in March. Kroger did not pay for the newspaper ad until mid-April. Under cash-basis accounting, how much expense should Kroger report for February and March? Under accrual-basis accounting, how much expense should Kroger report for February and March?Explanation / Answer
1. Under cash-basis of accounting, expenses are accounted for as soon as they're incurred irrespective of over how long the benefits will be availed.
Therefore expenses for February and March are : 4925 + 5100 = $10,025
Supplies and Ad expenses won't be counted as they weren't incurred in the relevant period.
2. Under accrual basis of accounting, expenses are to be accounted for as soon as they become due and apportioned over the relevant period if their benefits are to be availed over a longer period where the extra amount becomes an asset.
Therefore expenses for February and March are : 9150 + 4925 + 5100 + 850 = $20,025
The supplies expenses incurred in Jan was an asset showed as Pre-paid expenses until Feb and March when it's benefits were availed and turned into expenses.
The ad expense is an outstanding expense and hence a liability but still an expense to be accounted for.
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