Question

"Nigel has received the following telephone bills during his year end 31st December 20X7.

Bill period Amount Paid
Nov 20X6 - Jan 20X7 450 Feb 20X7
Feb 7 - Apr 20X7 480 May 20X7
May 20X7 - Jul 20X7 410 Aug 20X7
Aug 20X7 - Oct 20X7 460 Nov 20X7
Nov 20X7 - Jan 20X8 465 Jan 20X8

What entry should be made in the Statement of Financial position at year-ended 20X7 in respect of this?"

Answer 1

At the year-end 31st December 20X7, an accrual must be recorded for two-thirds of the telephone bill covering Nov 20X7 - Jan 20X8, resulting in a 310 expense for the year 20X7 to be recognized on the Statement of Financial Position as a liability.

Step-by-step explanation:

The student is asking how to account for the telephone bills in the Statement of Financial Position at the year-end 31st December 20X7. Since Nigel paid for the Nov 20X7 - Jan 20X8 bill period, an accrual needs to be made. This means recording an expense for the amount that relates to 20X7, even though the payment covers a period that extends into 20X8.

As the payment of 465 covers November and December 20X7 and January 20X8, two-thirds (2/3) of this should be attributed to 20X7. That will result in an expense of 310 (465 / 3 * 2) for 20X7. The accrued expense of 310 should be recorded on the Statement of Financial Position as a liability as of 31st December 20X7, with the corresponding expense recognized in the income statement.