BSE Problem Set 2 Solution

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School

Babson College *

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Course

1000

Subject

Accounting

Date

Apr 3, 2024

Type

docx

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Uploaded by ElderBoulderRat37

Problem 1. Typically, Anna who has a high-end clothing and jewelry retail shop in a large U.S. city, requires 50% deposit on all custom clothing and jewelry. Once the order is taken, it typically takes Anna 60 days to purchase the raw materials, and craft the final project. The remaining 50% of the selling price is collected when the customer picks up the piece, always at the store. On November 15th, Anna received an order from a bride for her dress along with three dresses for her attendants. The order totaled $50,000 and 50% was paid on November 15. The promised date of delivery was January 5th of the following year. a. Using the BSE format, enter the receipt of cash on November 15. How did this affect income for the month of November? b. On January 6th the customer picks up the dresses for her wedding and pays the final 50% of the $50,000. How should Anna record this event in the BSE? Answer: a) +Cash $25,000; +Unearned Revenue $25,000. Net Income is not affected by this transaction because Anna has not done anything to earn the revenue. However, OCF is improved by this transaction b) + Cash $25,000; --Unearned Revenue $25,000; + Retained Earnings (Revenues) $50,000 Problem 2. Hector is a graphic designer who had his own firm working out of his apartment for the past 18 months. He decided to obtain his own office space in a renovating area of Santa Monica, California, and signed a lease for 12 months. Monthly rental was $2,500 and he had to pay first and last months’ rent when he moved in to the rented space. Hector measures his income on a monthly basis. a. Using the BSE format, record the payment at the beginning of the month for the first and last months’ rent amounts. b. At the end of the first month, record any necessary adjusting entry. Answer: a) –Cash $5,000; +Prepaid Rent $5,000 b) –Prepaid Rent $2,500; --Retained Earnings (Rent Expense) $2,500 Problem 3. When Hector moved into his newly leased space, he purchased office furniture and hung art, all of which cost him $5,000. He estimated the furniture and art would have a 5-year useful life before he would want to replace with new furniture and art. He was struggling because although the useful lives were 5 years, his lease was only for 1 year: over what time period should he depreciate his office furniture? a. Discuss the options you see for Hector to depreciate his assets. Will these options impact his monthly income and operating cash flows? Over what period would you depreciate the assets? b. Using the BSE format, record the depreciation expense for the first month Hector is using the assets. Answer: a) Two possibilities: I. Hector could depreciate his furniture and art over five-year period by reasoning he plans to be in the space for the entire five years (continuing to lease the space), and IF he moves, he could move his furniture and art to his new space. II. OR he could depreciate his furniture and art over one-year period by reasoning that he only has the leased space for one year, and he is not sure of his future and therefore cannot project future benefits of these assets i.e. he does not know if he will actually keep his furniture and art after the first-year lease is up. b) Two possibilities: I. –Accumulated Depreciation $83.34; --Retained Earnings (Depreciation Expense) $83.34 if Hector uses 5-year useful life II. –Accumulated Depreciation $416.67; --Retained Earnings (Depreciation Expense) $416.67 if Hector uses 1-year useful life

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