Question

In week 6 case, Anne triggered a cancellation clause on a champagne contract. A payment of $60,000 was made and expensed on January 2nd,20X8, nothing was recorded in 20x7. What was the issue? what was the standard used to explain this? What was the conclusion?

Answer 1

The issue was that an expense related to a champagne contract cancellation was recorded in the wrong period. The matching principle of GAAP dictates that expenses be matched with the period they are incurred. An adjusting entry would be needed to correct the recording of the expense.

Step-by-step explanation:

The issue in question relates to the timing of the expense recognition for the cancellation of a champagne contract. Anne made a payment of $60,000 on January 2nd, 20X8 but did not record anything in 20X7. The accounting standard that is used to explain this situation is the matching principle, which is part of the Generally Accepted Accounting Principles (GAAP). This principle states that expenses should be recorded in the period in which they are incurred and are matched to the revenues of the same period.

As for the conclusion, if the payment is associated with a service or product consumed in 20X7, the $60,000 should be recorded as an expense in 20X7 to adhere to the matching principle regardless of when the payment was made. Failure to do so could misrepresent the financial situation for both years. Therefore, an adjusting entry might be necessary to correct the period in which the expense was recognized.