Question

1. Assume that your organization paid for a three-year maintenance contract that covers four delivery trucks that it recently purchased. The trucks are used more during the summer months than during the winter months. One of the trucks is larger than and is used less often than the other three trucks. Describe what factors you would consider and what type of evaluation you would use in order to develop a basis for adjusting journal entries for truck maintenance costs at the end of each accounting period.

2.You are an experienced accountant assigned to train a student who is in interning with your organization. He/ She tells you that he/she learned about adjusting journal entries in his/her principles of accounting class. He/ She also tells you that he/she never figured out which adjustment(s) is the most important one(s) to make at the end of an accounting period. How would you respond to the intern's comment?

Answer 1

It should be noted that we have paid for three year maintenance of four trucks and also the usage of trucks vary . We can not simply allocate the cost of maintenance on the basis of any fixed amount since their usage varies. Thus the factor which is to be considered while allocating maintenance cost is the expected usage of trucks in the basis of past years. Thus, the best way to allocate the maintenance cost is to allocate it either on the basis of ton kilometers or simply kilometers travelled by each truck.

2. Adjusting are the entries that are performed at the end of year to account for any income or expense that has accrued or incurred or belong to the current financial year and that was not done early in the year due to some accounting principles. These entries are made in accordance with matching principle to match revenue and expense in the period in which they are being occured. It generally involves income statement account and balance sheet account like accrued expense, accrued revenue, prepaid expense and unearned revenue. It cannot be said that which adjustment is the most important one to be made at the end of an accounting period. However there are certain common adjusting entries which normally occurs and which we can see quite often like recording of depriciation expense at the year end, interest expense or revenue accrued, salaries payable, prepaid rent or rent payable are some items which occurs quite frequently and thus can be looked for .