[Future-CPA]

Hello,

For the life of me, I can not comprehend journal entries,adjusting entries, reversing entries, closing, accruals, and deferrals. What is weird is I understand the concepts, I understand debits and credits, and the theory behind them. However, whenever I see a problem with different dates, accruals , prepaid expenses or unearned revenues, and they ask to prepare the reversing entries or adjusting journals or closings, I am completely lost and don’t know what accounts should be used to prepare those entries. I am not an Accountant and have never worked in the closing process so I do not know if that is a factor, but please can someone explain this to me or tell me what I should do to get it once and for all. I feel like I will never understand this section!!!!!!

Thanks,

Future-CPA

[Roxwella]

Interest Receivable at 1/1/2010 is $1,000. Cash collected for interest on notes receivable during 2010 was $4,500. The 2010 income statement correctly reports Interest Revenue in the amount of $5,200. What adjusting entry must have been made on December 31, 2010?

A. Debit Interest Revenue and credit Interest Receivable, $700.

B. Debit Unearned Interest Revenue and credit Interest Revenue, $700.

C. Debit Interest Revenue and credit Interest Receivable $4,200.

D. Debit Interest Receivable and credit Interest Revenue, $1,700.

This is what I would think, and it takes imagination. At the beginning of the year people owe you 1000 in interest (the problem states that this is as of 1/1/2010, meaning that it is an amount of interest due to you from last year, that would be expected to be collected this year) . During this year, you collect 4500 in cash from interest payments, 1000 of which was owed to you from the previous year, this leaves 3500 in cash from interest during the current year. If your final income statement says that you had a final amount of interest revenue of 5200, that means that between 3500 and 5200 you have adjusted interest revenue (which would be a receivable because you did not receive it in cash payments of interest that would be attributable to this years interest revenue). So 5200 revenue during year-3500 cash collected for this years interest=1700 in adjustment that adds to interest receivable. So Id go with D…?

[Anonymous]

Try looking at this and see if it makes sense to you.

https://docs.google.com/open?id=0B4fedXLjvhzSMS1qZzhFTXFUYWs

[Future-CPA]

Spongfunk, Roxwella got the right answer. It was D.

Roxwella, see when you put it that way, it makes sense, I understand your thought process. I guess the thing is there are so many ways to think about this problem, i-e what Spongfunk originally thought, and thats what my issues are. I don't know how to get to the right answer. IF you could for example tell me why the other answers are wrong, maybe I can understand the logics behind this. Thanks a lot for helping.

Kricket, I will take a look at that link. Thank you!

[Future-CPA]

Kricket,

Thank you so much. That also made a lot of sense and is very helpful. My only question is this, when I read questions like this, I sometimes don't know how to determine what was earned in this current year i-e the problem does state that $5200 was earned this year, but how do I know that the $4500 cash is for this years earnings since there is nothing that specifies it in the problem, I think thats what confuses me when i see problems like this, maybe i'm overthinking it as I have a “Finance” brain which is so different from an “Accounting” brain

[musicamor]

Future-CPA…did you apply the base formula? If you did, you would've gotten the correct answer D:

Beginning balance: $1,000

Add: interest per P&L $5,200

Subtract: cash received ($4,500)

Ending balance $1,700

We need an additional accrual of $1,700 based on the facts provided.

Texas CPA - licensed in 2012!!!

[Future-CPA]

Hello Musicamor, could you please expand on the Base formula. What do you add/substract, never heard of the formula before, just want to know what it means and what the result means so I can apply it further. Thanks a lot

[Roxwella]

First point, a receivable at the beginning of the year is never something you wipe away and forget about. I kinda think the issue you guys had with this problem is just reading it thoroughly.

-When I read it, instantly I notice that they are talking about two distinct accounts. They are talking about cash received from interest, and they are talking about interest revenue.

-Second, when I read any CPA exam question, Im looking for loose connections that they are providing. A full set of financial statements gives a whole story, while a MCQ has only a tiny portion of the picture. With all these questions you must assume, ALL OTHER THINGS BEING EQUAL in order to get anywhere. In effect this means, in this particular answer, that all receivables from a previous period (unless it says otherwise) are collected in the next year.

-So, you connect the two concepts. IF we are searching for loose connections between cash received and revenue recognized, we can instantly see that an interest receivable has to get bigger (and this actually gives you the answer in this particular case).

The BASE formula they are talking about (though I haven't really used it before), is simply a study method for an absolute truth in the world. If you have an account for something with a starting balance and an ending balance, you know the amount of change by default.

Say

B-Beg Account -500

Add

Subtract

E-Ending Account -1200

What was the change? Well. it was an addition of 700. This concepts works both ways, and you do need to be comfortable using the idea forwards, and then backwards if need be.

Say

B-?

A-700

S-0

E-1200

What was the beginning balance? Well, it was the ending balance, minus what was added during the year. So 1200-700=500 beginning balance.

Hope that makes some sense. The concepts are elementary, but when accounting terminology and language is thrown in, it gets confusing quickly. Really, the only way to get better at these though is practice practice practice.

Goodluck!

[Future-CPA]

Thank you Roxwella, that definitely gives me a new perspective and a new way at looking at things to solve these problems. That was very helpful!

[Roxwella]

I have found again and again that the explanations given come from the wrong place for me to understand them. Real life explanations of accounting principles make much more sense than accounting explanations of accounting principles 😉

[Author]

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