Identifying the effect of product versus selling, general, and administrative cost on the income statement Each of

Question:

Identifying the effect of product versus selling, general, and administrative cost on the income statement

Each of the following events describes acquiring an asset that requires a year-end adjusting entry.

1. Paid $14,000 cash on January 1 to purchase computer equipment to be used for administrative purposes. The equipment had an estimated expected useful life of four years and a $2,000 salvage value.

2. Paid $14,000 cash on January 1 to purchase manufacturing equipment. The equipment had an estimated expected useful life of four years and a $2,000 salvage value.

3. Paid $12,000 cash in advance on May 1 for a one-year rental contract on administrative offices.

4. Paid $12,000 cash in advance on May 1 for a one-year rental contract on manufacturing facilities.

5. Paid $2,000 cash to purchase supplies to be used by the marketing department. At the end of the year, $400 of supplies was still on hand.

6. Paid $2,000 cash to purchase supplies to be used in the manufacturing process. At the end of the year, $400 of supplies was still on hand.

Required

Explain how the adjusting entry affects the amount of net income shown on the year-end financial statements. Assume a December 31 annual closing date. The first event has been recorded as an example. Assume that any products that have been made have not beensold.

Net Income Amount of Change Event No. 1. Adjusting entry S(3,000)

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...