Question

3. You reserved 104 hotels rooms for four nights (100 rooms for the registered participants and 4 rooms for the people you hired to work at the conference). The total cost of the rooms was $40,000. You paid a 20% deposit in cash (i.e., certified check) upon reserving the rooms in November. The balance is due at the end of the conference, at which time you will provide that payment with a second certified check. a. When should the expense for the hotel rooms be recorded on your organization’s income statement? b. What is the effect on the financial statements (balance sheet and income statement) in November? In February?

Answer 1

As per the standards of the accounts we can say that the expenses should be recognized only when the benefit of that amount is received by our organization.

Explanation for the situation given in the question.

1. We reserved 104 rooms in a hotel for conducting a conference .

2. And the total expense for the company is $40000 and we paid 20% of cost i.e 40000×20%= $8000 as deposit to the hotel.

3. The cash is paid inthe month of the november and that amount to be recorded as deposit in our books of accounts and that amount to be treated as expense only after the completion of conference and after payment of rest 80% i.e 32000 then entire 40000 to be treated as expense.

4. If the amount to be recorded as expenses after payment of 8000 then there is decrease in net profit of the organisation and decrease in assets of the organization this is the effect on financial statements.

5. If that amount is recorded as expense in February after the completion of the conference. Then financial statements shows accurate profit and assets of the company.

6. Till the completion of the completion of the conference the amount paid to hotel to be recognized as deposit and should be classified as current asset to the organization.

7. Treating the amount paid to hotel till completion of the conference as deposit and classify it as current asset and after completion of conference treat as expense and transfer it to the profit and loss account for the given situation this is the correct accounting.

These are all the points and explanations required to solve the question.

I hope, all the above given points and explanations are useful and helpful to you.

Thank you.