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Some clarifications for Marybeth’s Ice Cream Parlor case
1. The use of reverse entries can simplify bookkeeping
Companies typically need to pay rental and other expenses on a regular basis. Often, they record these payments as expenses immediately when payments are made. At the end of the period, they will examine if there is any portion of the payments that is still not expired. If there is, they use a reverse entry to recognize an asset and reduce the expense.
Here is an example. Firm X paid $13,000 for rentals during 2006. As these payments are made, the firm records the following:
Rental expense $13,000
Cash $13,000
At the end of the year, the firm examines to determine whether any portion of $13,000 is still not expired. If all $13,000 is expired, then there is no adjusting entry to make. If, on the other hand, the firm finds that $1,000 of the $13,000 is the payment for next January’s rental (i.e., $1,000 is not expired yet), then the firm records the following adjusting entry on 12/31/2006 (we call this adjusting entry reverse entry):
Prepaid expenses $1,000
Rental expense $1,000
When these two entries are added together, we find that the firm’s rental expense during 2006 was $12,000 and there is a $1,000 prepaid expenses (an asset) at the end of 2006.
For many transactions of Marybeth case, you can use the above technique.
2. Loan on 1/15/05
You do not need to do amortization. All interest expenses are GIVEN to you. You just need to record the transactions or adjust ...