Under accrual accounting, Tiana Limited purchased supplies costing $20,000 with cash on 1st January 20XY and supplies costing $8,000 on credit. The supplies were recorded as an asset. On 31st December 20XY, $13,000 of the supplies are still left on hand and unused. If Tiana Limited makes the appropriate end of year adjustments, the accounts for the financial year ending 31st December 20XY should reflect:

Question

Under accrual accounting, Tiana Limited purchased supplies costing $20,000 with cash on 1st January 20XY and supplies costing $8,000 on credit. The supplies were recorded as an asset.  On 31st December 20XY, $13,000 of the supplies are still left on hand and unused.  If Tiana Limited makes the appropriate end of year adjustments, the accounts for the financial year ending 31st December 20XY should reflect:

BlackTom AI · Accepted Answer

To begin, restate the scenario to unpack the accounting treatment being asked.
- Tiana Limited buys supplies costing 20,000 in cash on 1 January and 8,000 on credit, for a total of 28,000 supplies purchased during the year. The supplies account was recorded as an asset.
- At year-end (31 December 20XY), 13,000 worth of supplies remain unused and on hand.
- Under accrual accounting, we must match expenses to the period in which they are used, so we adjust the accounts to reflect the consumption of supplies as an expense, with the unused portion remaining as an asset (inventory or supplies on hand).

Step-by-step evaluation of the situation:
1) Calculate total supplies consumed during the year: total purchases (28,000) minus ending supplies on hand (13,000) equals 15,000. This represents the amount of supplies that were used (and therefore expensed) during the year.
2) Determine the year-end adjustment: since the supplies asset balance needs to reflect only the on-hand amount, we debit (increase) Supplies Expense by 15,000 and credit (decrease) Supplies Asset by 15,000 to remove the cost of used supplies from assets and recognize it as an expense.
3) Confirm the ending balances after adjustment: Supplies on hand remains 13,000 (asset); Supplies Expense is 15,000 for the year.

Now evaluate the given option:
- Option: 'Supplies expense’ of 15,000.
  Why this is correct: It matches the calculation of supplies used during the year (28,000 purchased minus 13,000 on hand = 15,000). Recording 15,000 as an expense aligns with accrual accounting’s matching principle, recognizing the consumption of supplies as an expense in the current period while reducing the asset by the same amount.

Addressing potential alternative options (even though none are provided here):
- If the option suggested a higher or lower expense, it would misstate either the amount consumed or fail to adjust the asset balance correctly. For example, expensing 28,000 would overstate expenses and understate assets, while expensing 0 would understate expenses and overstate assets.
- If the ending on-hand amount were different, the expense would change accordingly (expense = total purchases - ending on-hand). Any mismatch would indicate an incorrect application of the accrual principle.

In summary, the correct end-of-year adjustment under accrual accounting is to recognize a supplies expense of 15,000 and to reflect 13,000 of supplies still on hand as a current asset.

BUSMGT 713 Quiz 5.1

View Explanation

Log in for full answers

Similar Questions

On December 1, Ford Company received three months’ rental income in advance and increased a liability account. On December 31, the end of the accounting period, Ford failed to make an adjusting entry reflecting that a portion of this rent had been earned. This error results in:

Received $1,000 invoice for April's utilities expense. (Hint: Bills and invoices reflect goods or services that have been provided, but are unpaid, unless specified otherwise.)

For what are Adjustments used?

For the year ending December 31, Orion, Inc. mistakenly omitted adjusting entries for $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. For the year ending December 31, what is the effect of these errors?

At the end of the fiscal year, the usual adjusting entry to prepaid insurance to record expired insurance was omitted. Which of the following statements is true?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler