Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 4-8

Selected Explanations:

1. Salaries and Wages Expense (Item #11), Utilities Expense (Item #16), Depreciation Expense (Item #17), and Rent Revenue (Item #20) are all income statement accounts. Hence, they are nominal or temporary accounts and do not belong on the balance sheet.
2. Prepaid items such as Prepaid Insurance (Item #12), Prepaid Advertising (Item #23), and Prepaid Property Taxes (Item #24) are generally expected to be consumed within the next year or operating cycle, whichever is longer; hence, they are current assets.
3. Rent Revenue Received in Advance (Item #18) is an alternate title for Unearned Rent Revenue. Unless otherwise indicated, you should assume the unearned amount will be earned within the year following the balance sheet date; hence, it is a current liability. If evidence existed to show the unearned amount was not expected to be earned in the next year, it would be classified as a long-term (noncurrent) liability. The same reasoning applies to Unearned Subscription Revenue (Item #31).
4. Interest payments are typically due monthly, quarterly, semiannually, or at least annually. Hence, we expect to collect the amount in Interest Receivable (Item #19) within the next year (unless evidence exists to the contrary).
5. Investments such as Investment in Orlando Aviation Authority Bonds (Item #25) and Investment in Stock of ABC Corporation (Item #27) ...