Chapter 4, Problem 4.4EYCT

(a)

To determine

Deferrals:

Deferrals refer to the revenues that are collected in advance before the services are provided or sales are made to the customer, and the expenses are paid in advance before the expenses are incurred.

Deferrals are classified into two types.  They are prepaid expenses, and unearned revenues.

Prepaid expenses:  The expenses are paid in cash, before they are incurred.

Unearned revenue:  The cash is received, before the services are performed.

Accruals:

Accruals refer to the revenues that are generated from goods delivered or, service performed to the customer, but cash is not yet received from the customer, and the expenses are incurred, but cash is not yet paid.

Accruals are classified into two types.  They are accrued revenues, and accrued expenses.

Accrued revenues: Revenues are generated but not yet received in cash.

Accrued expenses: Expenses are incurred but not yet paid in cash.

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses for the period in which they actually occurred.

To identify: Whether the Company LR records the legal expense in accrual basis or deferral basis.

(b)

To determine

To identify:  The adjustments in Company LR, and discuss how it affects the net income.

(c)

To determine

To make:  The journal entry for the accrued interest.