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Luton Inc Solution

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Luton Inc Solution Luton Inc. has a year end of December 31 2009. For each of the following transactions, show which figure would be shown in: Income statement Cash Prepayment Accruals Transactions: 1.   Purchased a one year software license for $6,000 on November 1 2009. The payment was made in full on November 1, 2009. 2.   Paid $1,300 of interest expense on January 3, 2010. Interest is to be paid monthly and is for loans outstanding as of the month of December, 2009. 3.   Sold a training contract to be delivered on January 31, 2010. The course fee is $2,000 which will be payable 30 days after the course. There is also a development fee of $5,000 payable at the same time as the course fee.

The development will be carried out in December 2009 and January 2010 and will equal work being done in b

Solution Transaction 1 Software expense (Income statement) Cash (Balance sheet) Prepayment (Balance sheet) Accruals (Balance sheet)

Transaction 2 Interest expense (Income statement) Cash (Balance sheet)

Dr 1,000

6,000 5,000 6,000

6,000

Dr 1,300

Cr

Prepayment Accrued expense (Balance sheet) 1,300 Transaction 3 Revenue (Income statement) Cash (Balance sheet) Prepayment (Balance sheet) Accrued income (Balance sheet)

Cr

Dr

2,500

1,300 1,300 Cr 2,500

2,500

2,500

al work being done in both months.

The full payment of $6,000 was made on Nov 1 so there is a credit in cash on the balance sheet, but the actual expenses will be incurred every month. The monthly expense will be $6,000/12 = $500. On Dec 31, a total of $1,000 ($500 x 2 = $1,000) software expenses is shown on the income statement because two months has passed by that time. This will debit the software expense account by $1,000. The rest of $5,000 is recorded as a debit in prepaid expenses (current asset) on the balance sheet.

The $1,300 was for interest due on Dec 31, 2009. However, Luton did not make the payment until January 3, 2010. Thus, an expense was incurred and accrued since no payment was made yet. On Dec 31, $1,300 is debited as the interest expense. Then, to close the books, accrued expense must be credited for $1,300 as well to that debits and credits balance. This entry will be reversed in the following year and expenses will be re-recognized with the actual payment.

The course fee of $2,000 is only payable after the completion of course so no revenue is incurred on Dec 31. The development fee of $5,000 is incurred monthly ($5,000/2 = $2,500) in Dec and Jan. On Dec 31, there is a $2,500 revenue for the month of Dec shown on the income statement. There is also a $2,500 accrued income in the current asset section of the balance sheet because it will be received at the same time as the course fee.

incurred on Dec 31. The development fee of $5,000 is incurred monthly ($5,000/2 = $2,500) in Dec and Jan. On Dec 31, there is a $2,500 revenue for the month of Dec shown on the income statement. There is also a $2,500 accrued income in the current asset section of the balance sheet because it will be received at the same time as the course fee.