- Per company policy, tools with a purchase price greater than $1,000 are capitalized. What’s the correct entry to record a tool purchase of $500?
(A) Debit tools expense $500, credit cash $500
(B) Debit fixed asset $500, credit tools expense $500
(C) Debit fixed asset $500, credit cash $500
(D) Debit fixed asset $1,000, cred it cash $1,000
(E) Debit tools expense $1,000, cred it cash $1,000
- A company performs $10,000 of services and issues an invoice to the customer. Using the accrual method. what’s the cored entry to record the transactions?
(A) Debit unearned revenue $10,000, credit salles revenue $10,000
(B) Debit accounts payable $10,000, credit sales revenue $10,000
(C) Debit services expense $10,000, credit sales revenue $10,000
(D) Debit cash $10,000, credit sales revenue $10,000
(E) Debit accounts receivable $10,000, credit salles revenue $10,000
The Correct Answer and Explanation is :
1. Correct Entry for Tool Purchase of $500:
Answer: (A) Debit tools expense $500, credit cash $500
Explanation:
Under the company’s policy, only tools with a purchase price greater than $1,000 are capitalized. Since the cost of the tool in question is $500, it is considered an expense rather than a fixed asset. The correct accounting treatment involves recognizing the $500 as an expense rather than a capitalized asset.
- Debit Tools Expense: The purchase price of $500 will be recorded as an expense because it does not meet the capitalization threshold (greater than $1,000).
- Credit Cash: Since the purchase was made in cash, a reduction in cash of $500 will be recorded.
This ensures that the tool is recognized in the period it was purchased and used, in line with the matching principle of accrual accounting.
2. Correct Entry for Service Revenue under the Accrual Method:
Answer: (E) Debit accounts receivable $10,000, credit sales revenue $10,000
Explanation:
Under the accrual basis of accounting, revenue is recognized when earned, regardless of when cash is received. Since the company has performed $10,000 of services and issued an invoice to the customer, revenue is considered earned at the time the service is completed, not when the payment is received.
- Debit Accounts Receivable: The company is entitled to receive the $10,000, but cash has not yet been collected. Therefore, an accounts receivable (an asset account) is debited, recognizing the amount the customer owes.
- Credit Sales Revenue: Revenue is earned from the services performed, so the company recognizes $10,000 in sales revenue. According to the revenue recognition principle, this amount is recognized when the service is completed, not when cash is received.
This entry follows the matching principle, ensuring that revenues are recognized in the period when earned and properly recorded even though cash has not yet been exchanged.