Question

M3-4 Identifying Accrual Basis Expenses [LO 3-2] 

The following transactions are July activities of Bill's Extreme Bowling, Inc., which operates several bowling centers. If an expense is to be recognized in July, indicate the amount. 

 a. Bill's paid $2,000 to plumbers for repairing a broken pipe in the restrooms. 

 b. Bill's paid $3,600 for the June electricity bill and received the July bill for $4,400, which will be paid in August.

 c. Bill's paid $5,525 to employees for work in July.

Answer 1

a.

In this case, the company BEB Inc. paid $2,000 to plumbers for repairing broken pipes in the restrooms. Since, the company BEB Inc. received the plumbing services in their bowling center and paid in cash in the month of July itself therefore it is ascertained that the expense amounting to $2,000 is paid in July and recognized in the month of July itself.

b.

In this case, the Company BEB Inc. paid $3,600 for June electricity and received July bill $4,400 which will be paid in August. Since, the expense of $4,400 is to be recognized in the month of July as the expense are related to the revenue earned in the month of July, though it is paid in August. For the month of July, the amount of $3,600 of (month of June's electricity bill) becomes liability as outstanding expenses.

c.

In this case, the Company BEB Inc. paid $5,525 to employees for work in July. Since, the amount paid $5,525 is to be recognized as expense as they belong to the month of July and they are associated with the revenues of July. Therefore, it is ascertained that the amount recognized accounts for $5,525.