Question

Read the following two situations regarding Webster Co, which uses the accrual method of accounting

I. Webster Co. purchases computers for $20,000 in 2019. The computers have a useful life of 5 years and have no salvage (residual) value. Webster would record the entire $20,000 as an expense on its income statement in 2019 for the purchase of these computers.

II. Webster Co. receives its December 2019 electric bill on December 31, 2019 for $500. Webster pays its $500 electric bill on January 15, 2020. Webster would record the $500 as an expense in January 2020.

In which of the two situations above is Webster correctly applying the Matching (Expense Recognition) Principle by recording expenses in the proper time period?

Answer 1

Answer:

In both situations above is Webster not correctly applying the Matching (Expense Recognition) Principle by recording expenses in the proper time period. explanation as below.

Situation 1:

Here Webster Co. charged entire $20,000 as an expense on its income statement in 2019. It is incorrect, Depreciation is used to distribute the cost of the asset over its expected life span according to the matching principle. $4,000 of the cost (i.e. $20,000/5 years) of the machine is matched to each year and this amount should considered as expenses for 2019.

Situation 2:

The electricity expenses relates to December 2019 should record in the month of December 2019 as accrued expenses. This electricity expenses is a cost incurred in month of December 2019 but unpaid. Accrued expenses is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision