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Chapter 4: End of year accounting procedures.

Key Terms

Accrual-adjusted approach

Accrual-adjusted financial statements

Accrual-basis system

Accrued expenses

Accrued revenues

Adjusted Trial Balance

Adjusting journal entries

Cash-basis system

Change in Accounts Payable

Change in Accounts Receivable

Change in Crop Inventory

Change in Interest Payable

Change in Investment in Growing Crops

Change in Market Livestock and Poultry Inventory

Change in Prepaid Insurance

Change in Purchased Feed Inventory

Change in Purchased Feeder Livestock Inventory

Change in Taxes Payable

Change in Taxes Payable

Change in Value Due to Change in Quantity of Raised Breeding Livestock

Current Deferred Taxes

Deferred tax liabilities

Depreciation expense

Financial accounting systems

Gains/Losses Due to Changes in General Base Values of Breeding Livestock

Inventory

Non-Current Deferred Taxes

Prepaid expenses

Tax basis

Trial balance

Unadjusted Trial Balance

**********

In Chapter 3, you learned how to record journal entries for transactions involving typical financing, investing, and operating activities in a journal, how to post journal entries to the ledger, and how to prepare an unadjusted trial balance.

The next step in your education of financial accounting is to learn how to prepare farm financial statements. But first, you have to learn about financial accounting systems. Financial accounting systems provide the guidelines for preparing financial statements. Under each system, the information reported in the financial statements will vary to some extent.

In this chapter, you are learning about a system that combines two other systems. It is necessary to understand these systems to apply the FFSC Guidelines for farm financial statements. This chapter discusses various adjustments made to farm financial statements at the end of the year. Recall from Chapter 1 that financial statements should be prepared on a periodic and timely basis; therefore, you should perform the adjustments discussed in this chapter at the end of the year or at any other time that you need to prepare financial statements. The adjustments add to the relevance of the financial statements by keeping the statements complete and up-to-date. These adjustments are important if significant in amount, because they may make a difference in decisions. However, the farm accountant has to decide for each of these adjustments if they are significant enough to justify making them. The farm accountant can adjust financial statements directly after they are prepared, or in journal entries posted to the ledger just before preparing the statements. This chapter demonstrates the use of journal entries to record the adjustments. Chapter 5 demonstrates the procedures for adjusting prepared financial statements directly.

In this chapter, you will learn how to describe the differences between the cash-basis system, the accrual-basis system, and the accrual-adjusted approach. This chapter introduces you to two methods for implementing the accrual-adjusted approach. You will learn about one of those methods as you study how to prepare and post adjusting journal entries for inventory, prepaid items, depreciation, accrued expenses, accrued revenues, changes in value of raised breeding livestock, income taxes, and deferred taxes, and how to prepare an adjusted trial balance. Although the accrual-adjusted approach provides up-to-date relevant information, you should realize the importance of maintaining the cash account for predicting cash flows and in preparing the tax return.

ACCRUAL ADJUSTED FARM FINANCIAL STATEMENTS
Learning Objective 1 * To
define and distinguish between
the cash-basis system, the
accrual-basis system, and the
accrual-adjusted approach.


Many farm operations use the cash-basis system, in which the farm accountant records revenue only when cash is received and records expenses only when cash is paid. Cash-basis accounting is relatively easy to apply compared to other systems, so many small businesses and farm operations use it. The journal entries that you learned about and recorded in Chapter 3 are examples of using the cash-basis system.

GAAP requires the use of the accrual-basis system to prepare financial statements. In the accrual-basis system, revenue is reported when it is earned, whether the cash has been received or not, and expenses are reported when they occur, not only when they have been paid. The financial statements of an accrual-basis system differ from those of the cash-basis system because sometimes the farm business earns money from the production of crops, livestock, or livestock products before getting paid for them, and because many times the production of crops, livestock, or livestock products costs money before the bills are paid. Figure 4-1 depicts an example of these events.

The accounting difference between the cash-basis and accrual-basis systems is the timing of the reporting of revenues and expenses. Timing becomes an issue if financial statements are prepared between the time of the event and the time that the cash is received or paid. In Figure 4-1, the calendar shows that feeder calves were sold on December 30, but the check was not received until January 2. Similarly, a bill was received on December 26, but was not paid until January. For many farm operations, the financial statements are prepared for each calendar year (on December 31). Under the cash-basis system, the utility bill and the sale of the calves are recorded in January when the check is received and the bill is paid (as you learned in Chapter 3).

Under the accrual-basis system, the expense for the utilities and the revenue from the sale of the calves would be recorded in December instead, because that is when the events occurred.

Another difference between the cash-basis and accrual-basis systems is the reporting of inventory. Figure 4-2 depicts a scenario wherein the feeder calves are not sold until January 3. Under the cash-basis system, the expenses for purchasing and raising the feeder calves are recorded during the year when they are paid, but no inventory is reported at the end of the year. The farm operation has nothing to show for the feeder cattle until January, when they are sold and the cash is received. In the accrual-basis system, the balance sheet reports feeder cattle inventory to show that the farm operation did indeed produce something during the year, and the income statement reports the appropriate amount of expenses for the feeder cattle.

The accrual-basis system provides information that is more accurate because the accounting of events occurs in the period in which the events occur. However, the cash-basis system is easier to use because transactions are recorded only when cash changes hands. The accrual-basis system requires much more bookkeeping, because usually more journal entries are recorded. The following journal entries for the utility bill and the sale of feeder cattle from the calendar in Figure 4-1 demonstrate this complexity.
    Cash-Basis                   Accrual-Basis

When bill is received:      When bill is received:
Dec. 26 (no entry)          Dec. 26 Utility Expense

                                 Accounts Payable

When bill is paid:          When bill is paid:
Jan. 3 Utility Expense      Jan. 3 Accounts Payable

    Cash                         Cash

When calves are sold:       When calves are sold:
Dec. 30 (no entry)          Dec. 30 Accounts Receivable

                                 Sales of Market Livestock

When check is received:     When check is received:
Jan. 2 Cash                 Jan. 2 Cash

   Sales of Market Livestock     Accounts Receivable


The cash-basis system is easier to apply but provides less accurate information. The accrual-basis system is more complicated, but provides information that is more accurate.

To provide a more realistic and accurate picture of the financial position and financial performance of the farm operation than the cash-basis system can provide, the FFSC recommends an alternative to the accrual-basis system, called the accrual-adjusted approach. In the accrual-adjusted approach, the farm accountant makes certain adjustments at the end of the year while preparing financial statements. The accrual-adjusted approach minimizes the effort in preparing realistic financial statements without compromising accuracy. The farm accountant makes adjustments only at the end of the year when financial statements are prepared. The difference between the accrual-adjusted approach and the accrual-basis system is that in the accrual-basis system, the types of journal entries that you see above are recorded all year long, but in the accrual-adjusted approach, the adjustments are made only when the financial statements are being prepared. Tables 4-1 and 4-2 display the journal entries for the situations depicted in Figures 4-1 and 4-2.

The accrual-adjusted approach is a hybrid between the cash-basis and accrual-basis systems. The following features characterize the accrual-adjusted approach.

* End of the year: The accrual-adjusted approach reports events in the year in which the events occur, just as the accrual-basis system does, but the adjustments do not have to be made until the end of the year.

* Only one adjustment: Under the accrual-basis system, several journal entries for Accounts Payable, Accounts Receivable, and other accounts potentially would have to be recorded throughout the year, depending on how often they occur. Only one adjustment is made for these items under the accrual-adjusted approach.

* Inventory: In both the accrual-basis system and the accrual-adjusted approach, inventory is reported in the year in which the inventory is owned, but only one adjustment at the end of the year is required under the accrual-adjusted approach. The cash-basis system does not report inventory.

* In the accrual-adjusted approach, the journal entries for the receipt or payment of cash are identical to those recorded in the cash-basis system, which means that the accrual-adjusted approach uses the cash-basis system, but then it adds the adjustments to approximate the use of the accrual-basis system.

The FFSC recommends the accrual-adjusted approach as an acceptable alternative to the accrual-basis system. This book teaches that approach.
PRACTICE WHAT YOU HAVE LEARNED To practice your comprehension of
the differences among the accrual-basis system, cash-basis system,
and the accrual-adjusted approach, complete Problem 4-1 at the end
of this chapter.


In the accrual-adjusted approach, the farm accountant makes adjustments by one of two methods:

* Through journal entries recorded before preparing the financial statements

* Directly inserted into the financial statements after they are prepared
Learning Objective 2 * To
identify two methods for implementing
the accrual-adjusted
approach.


When journal entries are used to make the adjustments, they are posted to the ledger (just like the journal entries in Chapter 3). Therefore, the financial statements that are subsequently prepared include the adjustments and are called accrual-adjusted financial statements. This chapter presents examples of journal entries to illustrate how the farm accountant records adjustments in the journal. These journal entries are called adjusting journal entries.

Under the accrual-adjusted approach, the farm accountant adjusts cash revenues to reflect the amount that the farm operation earned. The farm accountant also adjusts cash expenses to reflect the amount of expenses that occurred. These procedures provide complete, up-to-date, and timely information on the financial statements, and thus contribute to the relevance of the financial statements. The accrual-adjusted approach reports all inventories on the balance sheet and reports inventory adjustments on the income statement. Adjustments are reported as "changes" in relevant accounts and are calculated as the difference in the accounts from the beginning to the end of the year. Figures 4-3 and 4-4 depict the general relationships between cash revenues and cash expenses and related change items.

[FIGURE 4-3 OMITTED]

[FIGURE 4-4 OMITTED]

ADJUSTMENTS

This section addresses the following types of adjustments:

* Inventories

* Prepaid expenses

* Depreciation expense

* Accrued expenses

* Accrued revenue

* Income taxes

* Deferred taxes

Inventories
Learning Objective 3 * To
perform adjustments for various
inventories.


Inventory is an asset (purchased or raised) that will be used up or sold within a year as part of the normal operating activities of the farm business. Common types of inventory items for farm operations include feed, crops, and market livestock. Inventory items can be raised or purchased and can be obtained for use on the farm or for resale. Purchased inventory may include the following:

* Purchased feed for use in the operation

* Purchased feed for resale

* Purchased crops for resale

* Purchased market livestock for resale

Raised inventory may include the following:

* Raised feed for use in the operation

* Raised feed for sale

* Raised crops for sale

* Raised market livestock for sale

The farm accountant records the costs of raising or purchasing the inventory as expenses when the cash is paid for them. After the expenses are adjusted, the total amount of the cost for raising or purchasing the inventory pertains only to any inventory that was sold or used up, and it is recorded in the year in which it was sold or used up. The amount of inventory on hand at the end of the year is determined and reported as an asset on the balance sheet. The procedures for inventories are summarized as follows:

During the year:

* Feed, crops, or market livestock are raised or are purchased at various times during the year.

** Record cash payments for purchase of inventory and other operating expenses

* Feed is used or sold and crops and livestock are sold in various amounts

For accrual-adjusted financial statements at the end of the year:

* Count the amount of purchased and raised feed, crops, and market livestock remaining and determine the dollar value.

** Make adjustment:

*** Balance sheet shows amount of inventory on hand

*** Income statement shows amount of inventory used up or sold

In the following examples, you will learn about feed and crop inventories first, followed by market livestock inventories.
Exercise 4-1 Think about your 4-H steer project. Can you think of any
inventory that you might purchase for the project as an expense but
might not use up entirely by the end of the project (or the end of
the year)? Answer: Possible leftover items could be feed and bedding.


Purchase of feedstuffs for use in the operation

Under the accrual-adjusted approach, the balance sheet reports the amount of purchased feed in a feed inventory account, such as Feed Inventory Purchased for Use. The income statement reports an adjustment for Change in Purchased Feed Inventory, which is added to or subtracted from Purchased Feed (an expense account that shows the amount of cash paid for feed). Change in Purchased Feed Inventory is a contra or adjunct account used with Purchased Feed to report the correct amount of purchased feed expense. The procedures must be applied to each type of purchased feed. If a farm operation has, for example, salt and mineral supplements, purchased grain, pellets, hay, hay cubes, and so on, the inventory amount of each one of these items must be determined separately and then added together for the journal entry.

* Count the amount of purchased feed on hand at the end of the year and determine the dollar value.

** Make adjustment:

*** Balance sheet shows amount of inventory on hand

**** Feed Inventory Purchased for Use

** Income statement shows amount of inventory used up or sold

*** (Purchased Feed)

*** +/- Change in Purchased Feed Inventory
In Chapter 3, the Farmers purchased $1,000 worth of feed for their
livestock and recorded the transaction in the Purchased Feed
account on May 10 in journal entry (20). The Farmers determined
that the purchased feed on hand at the end of the year cost
approximately $230. They had no purchased feed on hand at the
beginning of the year. Change in Purchased Feed Inventory is the
difference in the amount of feed from the beginning to the end of
the year.

     Amount of purchased feed leftover                       $230
     - Feed Inventory Purchased for Use at beginning
        of the year                                             0
     = Change in Purchased Feed Inventory                    $230

If the Farmers used journal entries to make adjustments, they would
have recorded the following journal entry and posted it to the
ledger. The financial statements would be accrual-adjusted when
they were prepared.

(32) Dec. 31 1224 Feed Inventory Purchased for Use            230
          5030 Change in Purchased Feed Inventories               230

On the Income Statement, the amount for Change in Purchased Feed
Inventory ($230) offsets the amount in the Purchased Feed account
($1,000). The net balance of these two accounts is $770, which is
the cost of the feed used up.

Income Statement:
     Operating Expenses:
        Purchased Feed                                       ($1,000)
        + Change in Purchased Feed Inventory                      230
            Net Effect on Net Farm Income from Operations      ($770)

Balance Sheet:
Assets:
        Feed Inventory Purchased for Use                         $230


Remember that the amount that shows up on the income statement ($770) is only for the amount of feed that was used up. The income statement account, Purchased Feed, reports the total amount paid for purchased feed during the year. If not all of the feed was used up, then not all of the purchased amount should be reported as an expense on the income statement. By making the adjustment for Change in Purchased Feed Inventory, the appropriate amount of expense is reported, which is the goal of the accrual-adjusted approach.

The journal entries in Table 4-3 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for purchased feed.

The cash-basis system does not report any feed inventory. The amount of expense for purchased feed in the cash-basis system is overstated ($1,000). The correct amount of purchased feed cost is $770, the amount that was used up. The accrualadjusted approach provides a more accurate report of the farm's assets by reporting the feed inventory on hand and the correct amount of the expense for Purchased Feed by reporting the net difference between Purchased Feed and Change in Purchased Feed Inventory.
Exercise 4-2 Think again about the 4-H steer project. You are
preparing the financial statements on the project. The feed for the
steer consisted of purchased grain and hay. You had some hay but no
grain left over after you sold the steer. How would you report the
cost of the feed for the steer? Answer: Examine your records to
find out how much you spent for the grain and hay. Suppose that you
spent $300 for grain and $150 for hay. Next, you have to estimate
the amount of feed left over. You have $0 of grain left over and
suppose that you have $25 worth of hay left over. You had $30 worth
of grain and no hay on hand when you started the project. Your
calculations for Change in Purchased Feed Inventory would proceed
as follows:

                                            Grain    Hay   Total

Amount of purchased feed left over             $0    $25      25

--Feed Inventory Purchased for Use            -30      0     -30
  at beginning of the year

--Change in Purchased Feed Inventory         $(30)    25      (5)

The journal entry would be recorded with a debit to Change in
Purchased Feed Inventory (because the total is negative 5) and
a credit to Feed Inventory Purchased for Use:

   Change in Purchased Feed Inventory         5

     Feed Inventory Purchased for Use                  5

When you post this journal entry to the ledger,
the accounts appear as follows:

FEED INVENTORY PURCHASED FOR USE

Date                 Description   Debits   Credits   Balance

Beginning Balance                                       30
Dec. 31 Adjustment                             5        25

CHANGE IN PURCHASED FEED INVENTORY

Date                 Description   Debits   Credits   Balance

Beginning Balance                                        0
Dec. 31 Adjustment                   5                   5

Your income statement reports the total amount of feed purchased
($300 for grain and $150 for hay = $450) adjusted for the change in
purchased feed inventory. Your Balance Sheet reports the amount of
purchased feed left over.

Income Statement:

   Operating Expenses:

     Purchased Feed                                    ($450)
     --Change in Purchased Feed Inventory                 (5)

      Net Effect on Net Farm Income from Operations    ($455)

Balance Sheet:

  Assets:

    Feed Inventory Purchased for Use                      $25

The net cost of feed is the amount used up: the $30 that was left
over from last year and the $450 that was purchased except for the
$25 that was left over. $30 + 450 - 25 = $455.


Purchased feed for resale

If the farm operation purchased feed for resale instead for use in the farm operation, the adjustments occur in a similar way for any of the feed still on hand when the financial statements are prepared. The only difference from Feed Purchased for Use might be the specific inventory accounts used. Recall from the chart of accounts (Appendix C) that there can be separate accounts for Feed Inventory Purchased for Use (account number 1224) and Feed Inventory Purchased for Resale (account number 1222). The balance sheet could report the amount on hand for these categories of feed inventory separately using these accounts, or could report a single account for purchased feed if it is not important to differentiate between feed purchased for resale and feed purchased for use.

Purchased crop for resale

When the farm business purchases grain or other crops that are intended to be resold, the purchase would be recorded in an account such as Purchased Crops. The farm accountant makes similar adjustments for any of the crop still on hand when the financial statements are prepared, except that the balance sheet reports Crop Inventory Purchased for Resale (account number 1232) and the contra or adjunct account on the income statement is Change in Crop Inventory.

Raised feedstuffs for use in the operation

Under the accrual-adjusted approach, the balance sheet reports the amount of raised feed on hand in an inventory account, such as Feed Inventory Raised for Use. The adjustment on the income statement is Change in Crop Inventory, which is added to other revenue items to compute Gross Revenue. Change in Crop Inventory is a contra account that reflects the change in revenue to the farm operation from raising the crop.

* Count the amount of raised feed remaining and determine the dollar value.

** Make adjustment:

*** Balance sheet shows amount of inventory on hand

**** Feed Inventory Raised for Use

*** Income statement shows amount of revenue from raising inventory

**** Cash Crop Sales (including the amount of raised feed that was sold)

*** +/- Change in Crop Inventory
Steve and Chris complete the harvest of hay for their cow herd on
August 1, 20X1, and the value of the hay is $3,500. At the end of
the year when they are preparing financial statements, Steve and
Chris determine that the value of the hay still on hand on December
31 is $2,300. They had no raised feed on hand at the beginning of
the year, so the Change in Crop Inventory is

  Amount of raised feed left over at the end of
   the year                                             $2,300
  - Feed Inventory Raised for Use at beginning
   of the year                                               0
  = Change in Crop Inventory                            $2,300

If the Farmers used journal entries to make adjustments, they would
have recorded the following journal entry and posted it to the
ledger. The financial statements would be accrual-adjusted when
they were prepared.

(33) Dec. 31 1223 Feed Inventory Raised
       for Use                                           2,300
                   4010 Change in Crop Inventory                2,300

The adjustment on the Income Statement reflects the increase in
revenue that occurred in 20X1 for the raised feed still on hand.
Change in Crop Inventory affects the computation of Gross Revenue
as follows:

Income Statement:
                 Cash Crop Sales                          $XXX
                 + Change in Crop Inventory              2,300
                 Effect on Gross Revenue                $2,300

Balance Sheet:
        Assets:
        Feed Inventory Raised for Use                   $2,300


The income statement reports the total amount of revenue from raising feed. If Change in Crop Inventory is a positive number, it means that the amount of raised feed that is left over at the end of the current year is more than the amount that was left over at the end of last year. That means that some of the feed that was raised was not used up. The income statement account, Cash Crop Sales, reports money received for crops that were sold. If not all of the raised crop was sold, then Cash Crop Sales is not all of the revenue earned by the farm operation. By making the adjustment, the appropriate amount of revenue earned is reported, which is the goal of the accrual-adjusted system.

The journal entries in Table 4-4 demonstrate the difference between the cashbasis system and the accrual-adjusted approach for raised feed for use.

The cash-basis system does not report any feed inventory. The income statement reports only the expenses for producing the feed as part of the operating expenses. Furthermore, the amount of revenue reported in the cash-basis system is understated because the Change in Crop Inventory is not reported. The result is a mismatching of revenues and expenses, because expenses are recorded but no revenues are recorded. The accrual-adjusted approach provides a more accurate report of the farm's assets by reporting the feed inventory on hand and the correct amount of the revenue for raised feed by reporting the Change in Crop Inventory.

Raised feed for sale

If the farm operation raises feed for sale instead for use, the farm accountant makes similar adjustments for any of the feed still on hand when the financial statements are prepared. The only difference from journal entry (33) is the specific inventory account. Recall from the chart of accounts (Appendix C) that there can be separate accounts for Feed Inventory Raised for Sale (account number 1221) and for Feed Inventory Raised for Use (account number 1223). The balance sheet could report the amount on hand for these categories of feed inventory separately using these accounts, or could report a single account for raised feed inventory if the distinction between feed raised for use and feed raised for sale is not necessary.

Raised crops for sale

The farm accountant makes similar adjustments for crops raised for sale. The balance sheet reports any stored crop as Crop Inventory Raised for Sale. On the income statement, Change in Crop Inventory adjusts other revenue items to compute Gross Revenue.

* Count the amount of raised crop on hand and determine the dollar value.

** Make adjustment:

*** Balance sheet shows amount of inventory on hand

**** Crop Inventory Raised for Sale

*** Income statement shows amount of revenue from raising inventory

**** Cash Crop Sales (including the amount of raised crop that was sold)

**** +/- Change in Crop Inventory
In Chapter 3, Steve and Chris harvested a grain crop and sold part
of it for $12,000. They recorded the sale in the Cash Crop Sales
account in journal entry (17). The Farmers stored the rest of the
crop, valued at $6,000 at the end of the year. If they had no
stored crop on hand at the beginning of the year, the Change in
Crop Inventory is calculated as follows:

     Amount of raised crop left over at the
       end of the year                                  $6,000
     - Crop Inventory Raised for Sale at beginning
       of the year                                           0
     = Change in Crop Inventory                         $6,000

If the Farmers used journal entries to make adjustments, they would
have recorded the following journal entry and posted it to the
ledger. The financial statements would be accrual-adjusted when
they were prepared.

(34) Dec. 31 1231 Crop Inventory Raised for Sale   6,000
                  4010 Change in Crop Inventory          6,000

The income statement reflects the additional amount of revenue
earned in 20X1 for the harvested crop still on hand. Change in Crop
Inventory affects the computation of Gross Revenue as follows:

Income Statement:
                 Cash Crop Sales                   $12,000
                 + Change in Crop Inventory          6,000
                         Effect on Gross Revenue   $18,000

Balance Sheet:
            Assets:
                  Crop Inventory Raised for Sale    $6,000


The journal entries in Table 4-5 demonstrate the difference between the cash-basis system and the accrual-adjusted approach for raised crops for sale.

The cash-basis system does not report any crop inventory. The accrual-adjusted approach provides a more accurate report of the farm's assets by reporting the crop inventory on hand and the correct amount of the revenue for the raised crop by reporting the Change in Crop Inventory.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned and
complete Problem 4-2 at the end of the chapter.


Purchased market livestock for resale

When the farm operation purchases market livestock for resale, the farm accountant makes adjustments similar to the inventory adjustments for crops and feed. If any of the purchased market livestock is on hand when financial statements are prepared, the balance sheet reports the dollar amount of the purchased livestock in an inventory account, such as Feeder Livestock Inventory Purchased for Resale. The adjustment on the income statement is Change in Purchased Feeder Livestock Inventory. Change in Purchased Feeder Livestock Inventory is a contra or adjunct account reported with the Feeder Livestock account to report the correct amount of purchased feeder livestock expense. If the farm operation has more than one type of market livestock (feeder cattle and feeder lambs, for example), the farm accountant performs these procedures separately for each type of animal and then adds the amounts for the journal entry.

* Count the amount of purchased market livestock on hand and determine the dollar value.

** Make adjustment:

*** Balance sheet shows amount of inventory on hand

**** Feeder Livestock Inventory Purchased for Resale

*** Income statement shows amount of inventory that was sold

**** (Feeder Livestock)

**** +/- Change in Purchased Feeder Livestock Inventory
In Chapter 3, the Farmers purchased feeder pigs for $1,500. They
recorded the purchase in journal entry (15) in the Feeder Livestock
account on May 16. In July, they sold half of the feeder pigs. The
cost of the remaining half of the feeder pigs is $750. At the end
of the year, they have not sold the pigs yet, so the Balance Sheet
will report Feeder Livestock Inventory Purchased for Resale for
$750. The expense of purchasing the feeder pigs is the difference
between the $1,500 purchase price and the change in market
livestock inventory. If the Farmers had no market livestock on hand
at the beginning of the year, the Change in Purchased Feeder
Livestock Inventory is calculated as follows:

    Amount of purchased market livestock left over
     at the end of the year                                      $750
    - Feeder Livestock Purchased for Resale at beginning
     of the year                                                    0
= Change in Purchased Feeder Livestock Inventory                 $750

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted when
they were prepared.

(35) Dec 31 1212 Feeder Livestock Inventory
       Purchased for Resale                                750
                 5010 Change in Purchased Feeder
                      Livestock Inventory                         750

On the Income Statement, the amount for the Change in Purchased
Feeder Livestock Inventory ($750) offsets the amount for Feeder
Livestock ($1,500). The net balance of these two accounts is $750,
which is the cost of the half of the pigs that were sold.

Income Statement:
       Operating Expenses:
               Feeder Livestock                              $(1,500)
               + Change in Purchased Feeder Livestock
                 Inventory                                        750
                     Net Effect on Net Farm Income from
                       Operations                               (750)
Balance Sheet:
       Assets:
             Feeder Livestock Inventory Purchased for Resale     $750


The journal entries in Table 4-6 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for the purchase and sale of market livestock.

The cash-basis system does not report any market livestock inventory. The accrual-adjusted approach provides a more accurate report of the farm's assets by reporting the market livestock inventory on hand and the correct amount of the expense for purchased livestock by reporting the net amount of Feeder Livestock and Change in Purchased Feeder Livestock Inventory.

Raised market livestock for sale

The farm accountant makes similar adjustments for raised market livestock. The balance sheet reports the value of the raised market livestock as Feeder Livestock Inventory Raised for Sale. The adjustment on the income statement is Change in Market Livestock and Poultry Inventory. The Change in Market Livestock and Poultry Inventory is a contra account representing an increase in revenue for the farm business from raising livestock.

* Count the amount of raised market livestock on hand and determine the dollar value.

** Make adjustment:

*** Balance sheet shows amount of inventory on hand

**** Feeder Livestock Inventory Raised for Sale

*** Income statement shows amount of revenue from raising inventory

**** Cash Sales of Market Livestock and Poultry (including the amount of raised market livestock and poultry that was sold)

**** +/- Change in Market Livestock and Poultry Inventory
In Chapter 3, Steve and Chris sold raised feeder calves for
$50,000. Suppose instead that they still had those feeder calves on
hand at the end of the year when they needed to prepare financial
statements. If they had no feeder livestock on hand at the
beginning of the year, the Change in Market Livestock and Poultry
Inventory is calculated as follows:

    Amount of raised market livestock on hand at the end
      of the year                                             $50,000
    - Feeder Livestock Inventory Raised for Sale at
      beginning of the year                                         0
    = Change in Market Livestock and Poultry Inventory        $50,000

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted when
they were prepared.

(36) Dec. 31 1211 Feeder Livestock Inventory
   Raised for Sale                                      50,000
                  4110 Change in Market Livestock
                       and Poultry Inventory                   50,000

The Income Statement reflects the amount of the revenue that
occurred in 20X1 for the raised market livestock still on hand.
Change in Market Livestock and Poultry Inventory affects the
computation of Gross Revenue as follows:

Income Statement:
                Cash Sales of Market Livestock and Poultry       $XXX
                + Change in Market Livestock and Poultry
                  Inventory                                    50,000
                     Effect on Gross Revenue                  $50,000
Balance Sheet:
        Assets:
              Feeder Livestock Inventory Raised for Sale      $50,000


The journal entries in Table 4-7 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for raised market livestock.

The cash-basis system does not report any market livestock inventory. The accrual-adjusted approach provides a more accurate report of the farm's assets by reporting the market livestock inventory on hand and the correct amount of revenue for the raised livestock by reporting the Change in Market Livestock and Poultry Inventory.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned and
complete Problem 4-3 at the end of the chapter.

Learning Objective 4 * To
perform adjustments for prepaid
items.


Prepaid Expenses

Prepaid expenses are supplies and other purchases paid for in advance and used up over time. They are recorded as expenses when purchased. When financial statements are prepared, the unused amount for each prepaid item is determined and is reported as an asset on the balance sheet. The income statement reports an adjustment to operating expenses to report the accurate cost of the items purchased.

Prepaid Insurance

Farm operations spend a considerable amount for various types of insurance. Sometimes the insurance policies cover extended periods of time, such as a year or perhaps longer. If the annual insurance premium is paid in full when due, the payment represents insurance coverage paid for in advance. The accrual-adjusted approach requires an adjustment to show the amount of unused insurance coverage on the balance sheet. This amount is reported as Prepaid Expenses and represents the amount of insurance coverage that has not yet been used up and is still owed to the farm business from the insurance company. (The farm accountant may decide to name this account "Prepaid Insurance" to differentiate prepaid insurance from other prepaid expenses and create other prepaid accounts.) The adjustment on the income statement is Change in Prepaid Insurance, a contra or adjunct account reported with Insurance Expense to show only the amount of insurance coverage used up for the year.

* Determine the amount of unused insurance at the end of the year.

** Make adjustment:

*** Balance sheet shows amount of unused insurance

**** Prepaid Expenses

*** Income statement shows amount of insurance that was used up

**** (Insurance)

**** +/- Change in Prepaid Insurance
In Chapter 3, Steve and Chris purchased insurance for $1,200 for a
one-year policy on August 1. They recorded the purchase in the
Insurance account in journal entry (25). By the end of the year,
they have not used up all of the coverage-only the coverage from
August 1 to December 31. The $1,200 premium averages out to $100
per month ($1,200 divided by 12 months). By December 31, five
months of insurance coverage has expired, so only $500 of insurance
expense (5 months times $100) should show up on the Income
Statement. The amount of insurance not used up is $700 ($1,200
minus $500) and should show up on the Balance Sheet as Prepaid
Expense. If the Farmers had no Prepaid Expense at the beginning of
the year, they would calculate Change in Prepaid Insurance as
follows:

Amount of the Prepaid Insurance not yet used up at the end of
  the year                                                        $700
- Prepaid Expense (insurance portion) at the beginning of the
    year                                                            -0
= Change in Prepaid Insurance                                     $700

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted when
they were prepared.

(37) Dec. 31 1300 Prepaid Expenses                     700
                     6820 Change in Prepaid Insurance         700

This adjustment reports the proper amount of insurance expense on
the Income Statement. The $700 Change in Prepaid Insurance offsets
the $1,200 payment recorded in the Insurance account. Therefore,
the records indicate that $1200 was paid for insurance but $700 of
that amount has not been used up. The net amount of Insurance and
Change in Prepaid Insurance is $500, which is the actual expense
for Insurance.

Income Statement:
        Operating Expenses:
                Insurance                                 ($1,200)
                + Change in Prepaid Insurance                  700
                        Net Effect on Net Farm Income
                          from Operations                   ($500)
Balance Sheet:
         Assets:
                 Prepaid Expenses                             $700


The journal entries in Table 4-8 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for prepaid insurance.

The cash-basis system does not report any prepaid expenses. The accrual-adjusted approach provides a more accurate report of the farm's assets by reporting the amount of unused insurance and the correct amount of the expense for the insurance coverage used up as the net amount of Insurance and Change in Prepaid Insurance. These procedures can be used for other types of prepaid expenses, such as rent or any other expenditure that results in some other party owing goods or services to the farm business.

Cash Investment in Growing Crops

A special kind of prepaid expense is Cash Investment in Growing Crops for perennial crops. The accounting procedures are similar to other prepaid expenses. The farm accountant records the costs of growing the crop (such as cultivation, pruning, fertilizing, plant depreciation, and so on) as various operating expenses as they occur. If the harvest of the crop occurs in the year following the year that it was produced, the balance sheet should report the costs of growing the crop as a prepaid expense, such as Cash Investment in Growing Crops. These costs are considered a prepaid expense because the costs have been paid for in advance of the year of the sale. The contra or adjunct account on the income statement is Change in Investment in Growing Crops, calculated as the difference between the growing costs for this year and the balance in Cash Investment in Growing Crops at the end of last year. The effect on the income statement is similar to the effect of prepaid expenses: Operating Expenses +/- Change in Investment in Growing Crops = accrual-adjusted operating expenses.

* Determine the amount of costs incurred for the perennial crop not harvested at the end of the year.

** Make adjustment:

*** Balance sheet shows amount of the costs incurred

**** Cash Investment in Growing Crops

*** Income statement adjusts the operating expenses

**** (Operating Expenses)

**** +/- Change in Change in Investment in Growing Crops
Steve and Chris had developed an apple orchard and recorded the
development in journal entry (14). In the year of their first crop
of apples, they recorded various operating expenses for growing the
apples that amounted to $2,500. If they do not harvest the apple
crop before the financial statements are prepared at the end of the
year, they need to make adjustments to the financial statements to
report a prepaid expense (Cash Investment in Growing Crop) on the
Balance Sheet for $2,500 and to make an adjustment to operating
expenses on the Income Statement (Change in Investment in Growing
Crops). They did not report any Cash Investment in Growing Crops at
the beginning of the year, so they calculate the Change in
Investment in Growing Crops as follows:

Amount of the Cash Investment in Growing Crops at the end of
  the year                                                     $2,500
Cash Investment in Growing Crops at the beginning of the year  -    0
= Change in Investment in Growing Crops                        $2,500

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted when
they were prepared.

(38) Dec. 31 1400 Cash Investment in Growing
       Crops                                               2,500
                    6830 Change in Investment in Growing
                      Crops                                2,500

Instead of reporting expenses associated with the perennial crop,
the expenditures are reported as a prepaid expense (an asset), the
benefits of which will be reaped the following year when the crop
is harvested.

Income Statement:

                Various operating expenses for perennial
                  crop                                       ($2,500)
                + Change in Investment in Growing Crops        $2,500
                       Net Effect on Net Farm Income from
                         Operations                               $ 0
Balance Sheet:
         Assets:
                Cash Investment in Growing Crops               $2,500


The journal entries in Table 4-9 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for cash investments in growing crops.

The cash-basis system reports the growing costs as expenses. The FFSC recommends that costs of growing perennial crops be reported as an investment; therefore, a prepaid expense is reported on the balance sheet instead of expenses on the income statement in the accrual-adjusted approach.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned about
adjustments and complete Problem 4-4 at the end of the chapter.


Depreciation expense

The purchase of non-current assets (breeding livestock, machinery and equipment, perennial crops, buildings and improvements, and leased assets) is another type of prepaid expense. Unlike feed or insurance, non-current assets last longer than a few months or a year. Depreciation expense is the annual allocation of the cost of non-current assets (except land) over the expected length of time that each asset is expected to be used in the farm operation (the estimated useful life). The amount of depreciation for each asset represents the amount of the asset "used up." Unlike feed, however, the amount used up is not an amount that has been literally "used up"; rather it represents a using up of the asset each year. Each year that an asset is used, a certain amount of that use is reported as Depreciation Expense. The use of the estimated life of the asset coincides with the going concern concept mentioned in Chapter 1 because the farm is expected to operate indefinitely. Some assets, like buildings, might outlive the current owners, but the farm business will continue to operate, so the building's expected useful life is used in the calculation of Depreciation Expense. You will learn about how to calculate depreciation expense in Chapter 6.
Suppose that the Farmers determine that depreciation expense for
20X1 is $22,150. If the Farmers recorded journal entries to make
adjustments, they recorded the following journal entry and
posted it to the ledger. The financial statements would be
accrual-adjusted for depreciation when they were prepared.

(39)Dec. 31 6780 Depreciation Expense         22,150
                   1980 Accumulated Depreciation       22,150

Income Statement:
    Depreciation Expense            $22,150
Balance Sheet:
    Assets:
      Non-Current Assets:
        Office Furniture             $1,000
        Buildings, Improvements     110,000
        Tractor                      50,000
        Truck                        15,000
        Leased Harvester            100,000
        Orchard                      45,000
        Accumulated Depreciation   (22,150)

Exercise 4-3 Think about the assets for your 4-H project. Which
ones would be depreciated? How long is the estimated useful life of
each? Answer: You would depreciate the clipping chute and perhaps
the clippers. Deciding on which assets should be depreciated
depends on how long they will last and how much the assets cost.
Some assets such as grooming supplies (brushes, combs, and so on)
might last more than one year, but the amount of depreciation would
be so small that it would not affect the income statement enough to
make the extra bookkeeping worthwhile. The clipping chute is a
rather large expenditure for a 4-H project and the clippers also
might be. If the cost of the clippers is not significant enough to
depreciate, then you can record the cost of the clippers as a

supply expense. The estimated life of the chute depends on how many
years that you expect to be showing cattle.


Accrued Expenses
Learning Objective 5 * To
perform adjustments for accrued
expenses.


Accrued expenses refer to expenses that have occurred for the farm business but have not yet been paid for. Certain expenses "build up" (hence the term "accrued") but are not yet paid for, either because they are not yet due or because the cash is not yet available. The farm accountant needs to determine whether any accrued expenses exist at the time that financial statements are prepared. Because these expenses have not yet been paid, they have not been recorded, but they are costs of the farm business that have occurred for the year. An adjustment is required at the end of the year (or whenever financial statements are being prepared) to record the appropriate amount of expense for the year.

* Determine the amount of unpaid expenses that have accrued by the end of the year.

** Make adjustment:

*** Balance sheet shows amount of unpaid expense

*** Income statement shows amount of accrued expense

Accrued interest

A primary example of accrued expense is interest that is accruing on all of the farm loans. Even if loan and interest payments are made throughout the year, by the end of the year, interest has accrued since the last payment. Under the cash-basis system, interest expense is recorded only when it is paid. The accrual-adjusted approach also reports the accrued interest. To make the adjustments, the farm accountant needs to calculate the amount of accrued interest, and must keep accurate records of principal amounts borrowed, interest rates, the dates on which the loans were borrowed, and when the last payments were made. The balance sheet reports the amount of accrued interest as Interest Payable. The adjustment on the income statement is Change in Interest Payable. Change in Interest Payable is a contra or adjunct account presented with Interest Expense to report the correct amount of interest for the year.

* Determine the amount of interest that has accrued by the end of the year.

** Make adjustment:

*** Balance sheet shows amount of accrued interest

**** Interest Payable

*** Income statement shows amount of interest for the year

**** (Interest Expense)

**** +/- Change in Interest Payable
In Chapter 3, Steve and Chris borrowed $50,000 to purchase a
tractor on March 1, 20X1 in journal entry (7). They will make one
payment a year later and pay off the entire note. No payments for
interest or principal will be made until March 1 next year. At the
end of 20X1, the Farmers calculate the amount of the accrued
interest on this loan. Suppose that the amount of accrued interest
is $5,000. This amount, $5,000, is the amount of accrued interest
that should be reported on the Balance Sheet as Interest Payable
for 20X1. If the Farmers reported no Interest Payable at the
beginning of the year, they would calculate the Change in Interest
Payable as follows:

  Amount of the interest accrued at the end of the year   $5,000
  - Interest Payable at the beginning of the year            - 0
  = Change in Interest Payable                            $5,000

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted when
they were prepared.

(40) Dec. 31 8110 Change in Interest Payable               5,000
                  2200 Interest Payable                          5,000

The Income Statement reflects the amount of interest expense that
occurred in 20X1, including the amount that is not due until March
1, 20X2. Steve and Chris had made a payment for interest for a
different loan on October 1, 20X1, for $1,200 in journal entry (8)
in Chapter 3, so Interest Expense has a balance of $1,200.

Income Statement:
        Interest Expense                                      ($1,200)
        - Change in Interest Payable                           (5,000)
               Net Effect on Net Farm Income from Operations  ($6,200)
Balance Sheet:
        Liabilities:
                   Interest Payable                             $5,000


The journal entries in Table 4-10 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for accrued interest.

The cash-basis system reports neither the amounts owed for interest on outstanding loans nor the correct amount of interest expense. The accrual-adjusted approach adjusts the income statement for the correct amount of interest expense with the Change in Interest Payable, and also reports a more accurate amount of liabilities by reporting Interest Payable for the amount of unpaid interest.

Unpaid bills

As bills are paid throughout the year, the farm accountant records the amounts in the appropriate expense accounts. However, if the farm business has unpaid bills at the end of the year, expenses have occurred and these costs need to be reported on accrual-adjusted farm financial statements. At the end of the year (or when financial statements need to be prepared), the farm accountant needs to determine the total of the unpaid bills. In the accrual-adjusted approach, the balance sheet reports an adjustment for these unpaid bills as Accounts Payable. The adjustment on the income statement is Change in Accounts Payable, a contra or adjunct account reported with operating expenses to reflect the correct amount of expenses that have occurred for the year.

* Determine the amount of unpaid bills at the end of the year.

** Make adjustment:

*** Balance sheet shows amount of unpaid bills

**** Accounts Payable

*** Income statement shows amount of the bills for the year

**** (Operating Expenses)

**** +/- Change in Accounts Payable
Suppose that the amount of unpaid bills for the Farmers at the end
of 20X1 is $340. If Accounts Payable had a zero balance at the
beginning of the year, the Change in Accounts Payable is computed
as follows:

   Amount of the bills owed at the end of the year   $340
   - Accounts Payable at the beginning of the year    - 0
   = Change in Accounts Payable                      $340

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted when
they were prepared.

(41) Dec. 31 6810 Change in Accounts Payable          340
                    2000 Accounts Payable                   340

The income statement reflects the correct amount of operating
expenses that occurred in 20X1, including the amount that was not
paid yet.

Income Statement:
        Operating Expenses                                       $XXXX
        - Change in Accounts Payable                             (340)
                Net Effect on Net Farm Income from Operations   ($340)
Balance Sheet:
        Liabilities:
                   Accounts Payable                              $340


The journal entries in Table 4-11 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for unpaid bills.

The cash-basis system reports neither the amounts owed for the unpaid bills nor the correct amount of expenses. With the Change in Accounts Payable, the accrual-adjusted approach adjusts the operating expenses to the correct amount of expenses that have occurred. The balance sheet reports a more accurate amount of liabilities by reporting Accounts Payable for unpaid bills.

Unpaid taxes

The farm accountant records the amount of taxes paid in Payroll Taxes, Real Estate and Property Taxes, or other tax expense accounts. If the farm operation owes taxes at the end of the year, the farm accountant makes similar adjustments for the unpaid taxes. The balance sheet reports the amount of taxes owed as Taxes Payable. The adjustment on the income statement is Change in Taxes Payable. Change in Taxes Payable is a contra or adjunct account reported with Income Tax Expense to report the correct amount of taxes for the year.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned about
adjustments for accrued expenses by completing Problem 4-5 at the
end of the chapter.


Accrued Revenues
Learning Objective 6 * To
perform adjustments for accrued
revenues.


Accrued revenues refer to earned income for which the cash has not yet been received. In the cash-basis system, revenues are recorded only when cash is received. Under the accrual-adjusted approach, the farm accountant records all amounts of money earned, including any money that has not been received yet. Revenues are earned when a sale has been made and the product has been delivered. An example of accrued revenues is delivering grain to the local grain elevator but not being paid for the grain until some time in the future. At the end of the year, the farm accountant must determine if any money is owed to the farm business from the sale of farm products.

Accounts Receivable

The balance sheet reports an adjustment for accrued revenues as Accounts Receivable. The adjustment on the income statement is Change in Accounts Receivable. Change in Accounts Receivable is a contra or adjunct account reported with cash revenues to reflect the correct amount of money earned. An increase in Change in Accounts Receivable represents an increase in revenue for the farm business and is included in the computation of Gross Revenue.

* Determine the amount of money owed to the farm business at the end of the year.

** Make adjustment:

*** Balance sheet shows amount of accrued revenue

**** Accounts Receivable

*** Income statement shows amount of revenue earned

**** Cash Sales (from crops, feed, and/or market livestock)

**** +/- Change in Accounts Receivable
Steve and Chris determined that $3,500 was owed to them at the end
of 20X1. The accrual-adjusted system requires that the Balance
Sheet reports the amount owed to them as Accounts Receivable. They
adjust the Income Statement for Change in Accounts Receivable. If
Accounts Receivable had a zero balance at the beginning of the
year, they calculate the Change in Accounts Receivable as follows:

   Amount of money owed to the farm business at the end of
     the year                                                 $3,500
   - Accounts Receivable at beginning of the year                - 0
   = Change in Accounts Receivable                            $3,500

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted when
they were prepared.

(42) Dec. 31 1100 Accounts Receivable                    3,500
                    4700 Change in Accounts Receivable   3,500

The Income Statement reflects the amount of revenue earned in 20X1,
including the amount of money that was not yet received.

Income Statement:
       Cash Sales of Market Livestock and Poultry   $XXX
       + Change in Accounts Receivable             3,500
               Effect on Gross Revenue            $3,500

Balance Sheet:
         Assets:
               Accounts Receivable                 3,500


The journal entries in Table 4-12 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for accrued revenues.

The cash-basis system reports neither the amounts owed to the farm business for the sale of the farm products nor the correct amount of revenue. The accrual-adjusted approach adjusts the gross revenue to the correct amount for the revenue that has been earned as the Change in Accounts Receivable and also reports a more accurate amount of assets by reporting Accounts Receivable for the money owed to the farm business.
PRACTICE WHAT YOU HAVE LEARNED Review the types of events requiring
adjustments by completing Problem 4-6 at the end of the chapter.


Change in value of raised breeding livestock due to age progression
Learning Objective 7 * To
record changes in value for
raised breeding livestock.


The cost of raising breeding livestock is sometimes difficult to determine because the record keeping for accumulating and determining such costs is complex. The FFSC recommends that when the cost of raising breeding livestock is not easily determined, base values can be assigned for various age groups of breeding livestock. We use base values to estimate the cost of producing the breeding stock and the value of the animals at different points in their productive lives. The farm accountant can obtain base values from reputable sources that report the approximate cost of raising the livestock.

Breeding livestock move through age groups each successive year after they are put into production. The values of the animals change as the animals proceed through each of the different age groups while they remain in the herd or flock. The result is a change in the value of breeding stock due to age progression. In the FFSC Guidelines, this change in value is reported as Change in Value Due to Change in Quantity of Raised Breeding Livestock. As the productive value of the animal increases, the value to the farm business increases. The farm accountant makes an adjustment at the end of the year to report these changes in value.

* Determine the amount of changes in value for the animals that moved to the next age group.

** Make adjustment:

*** Balance sheet shows new value for raised breeding livestock

**** Breeding Livestock (adjusted for age progression)

*** Income statement shows effect on Gross Revenue

**** +/- Change in Value Due to Change in Quantity of Raised Breeding Livestock
Steve and Chris owned a cow herd at the beginning of the year 20X1.
By the end of the year, some of the animals have moved into the
next age group, so their base values have changed. If Steve and
Chris determined that the change in the value of their raised
cattle herd due to age progression was an increase of $6,000, they
would report an adjustment on the Balance Sheet by adding $6,000 to
the balance for Breeding Livestock.

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted for
changes in value due to age progression when they were prepared.

(43) Dec. 31 1500 Breeding Livestock                      6,000
                  4600 Change in Value Due to Change in
                    Quantity of Raised Breeding Livestock        6,000

If they had determined that the change in value was a decrease, the
entry would be reversed, with the Change in Value account being
debited and the Breeding Livestock account being credited. The
Income Statement reports this increase in value as part of Gross
Revenue.

Income Statement
     + Change in Value Due to Change in Quantity of Raised Breeding
         Livestock                                                $6,000
            Effect on Gross Revenue                               $6,000

Ledger:

1500 Breeding Livestock

Date     Description              JE#   Debits  Credits  Balance

Beginning Balance                                              0

Jan. 2   Set up farm account
           for breeding cattle     (1)  76,000            76,000
Mar. 10  Sale of bull to neighbor (10)            1,000   75,000
Nov. 20  Sale of culled cows      (19)            1,500   73,500
Dec. 31  Adjustment               (43)   6,000            79,500
Balance Sheet:
        Assets:
              Breeding Livestock                 79,500


Changes in base values of raised breeding livestock

Base values are assigned for each age group, and from time to time these base values may change due to new estimates of the cost of raising and maintaining the animals. The preceding adjustment using Change in Value Due to Change in Quantity of Raised Breeding Livestock assumes that base values are unchanged (see Figure 4-5).

If the base values change, the farm accountant makes an additional adjustment to reflect the change in the value of raised breeding livestock due to the change in the base values. This adjustment is reported as Gains/Losses Due to Changes in General Base Values of Breeding Livestock on the income statement. An adjustment is also made to Breeding Livestock for any changes in base values.

[FIGURE 4-5 OMITTED]

* Determine the amount of changes in base values for the entire herd.

** Make adjustment:

*** Balance sheet shows new value for raised breeding livestock

**** Breeding Livestock (adjusted for changes in base values)

*** Income statement shows effect on accrual adjusted net income

**** +/- Gains/Losses Due to Changes in General Base Values of Breeding Livestock
Suppose that the Farmers determined an increase in base values of
$4,500. If the Farmers recorded journal entries to make
adjustments, they would have recorded the following journal entry
and posted it to the ledger. The financial statements would be
accrual-adjusted for changes in base values when they were
prepared.

   Dec. 31 1500 Breeding Livestock                             4,500
                8300 Gains/Losses Due to Changes in General
                     Base Values of Breeding Livestock         4,500

The Income Statement reports the change in value as Gains/Losses
Due to Changes in General Base Values of Breeding Livestock but it
is not part of Gross Revenue.

   Gains/Losses Due to Changes in General Base Values of
     Breeding Livestock                                       $4,500
         Effect on Accrual Adjusted Net Farm Income           $4,500


An increase in base values is recorded as a credit to the account and reported as a gain. If the base values had declined, the entry would be recorded as a debit and would be reported as a loss instead of a gain.

Income Taxes

Income tax expense
Learning Objective 8 * To
perform adjustments for income
taxes, current deferred taxes,
and the first component of
non-current deferred taxes.


Income taxes paid by a farm operation are based on cash-basis income. The actual amount of taxes paid will also depend upon the tax laws and the specific circumstances of the farm business. Accrual-adjusted financial statements report an estimated amount of taxes owed as Taxes Payable on the balance sheet at the end of the year. An adjustment is also made on the income statement as Change in Taxes Payable, a contra or adjunct account that includes the difference between the amount of taxes owed at the end of the previous year and the amount of taxes owed at the end of the current year.

* Estimate the amount of income tax for the year.

** Make adjustment:

*** Balance sheet shows amount of taxes owed

**** Taxes Payable

*** Income statement shows amount of income tax for the year

**** (Income Tax Expense)

**** +/- Change in Taxes Payable (for difference in Taxes Payable from last year)
When the Farmers began their farm business in 20X1, they owed
$2,160 for farm income tax at the end of the previous year. In
journal entry (2) in Chapter 3, they correctly recorded this
liability as Taxes Payable. After consulting with their local
certified public accountant, they estimate that they will owe
$3,030 in income tax for the year 20X1 (which they will pay in
20X2). The Farmers adjust the Balance Sheet so that the reported
tax liability (Taxes Payable) is $3,030. They also make an
adjustment on the Income Statement as Change in Taxes Payable for
the difference between the amount that they owed at the end of 20X0
($2,160) and the amount that they owe at the end of 20X1 ($3,030).
They calculate Change in Taxes Payable as follows:

   Amount of the taxes owed at the end of the year   $3,030
   - Taxes Payable at the beginning of the year     - 2,160
   = Change in Taxes Payable                          $ 870

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted for
the difference between the income tax liability from last year and
the income tax liability for the current year:

(44) Dec. 31 9110 Change in Taxes Payable   870
                   2100 Taxes Payable             870

Income Tax Expense reports the amount of 20X0 income taxes that the
Farmers paid in 20X1. The Change in Taxes Payable is an expense
item that adjusts the amount of taxes paid for the additional
amount of taxes owed for 20X1. The amount of $3,030 is the total
accrual-adjusted income tax expense for the year 20X1.

Income Statement:
        Income before Taxes                                  $XXX
               Income Tax Expense                         (2,160)
               - Change in Taxes Payable                    (870)
                       Net Effect on Accrual Adjusted
                         Net Income                      ($3,030)

Ledger:

                             2100 Taxes Payable

Date    Description                      JE#   Debits  Credits  Balance
Beginning Balance                                                    0

Jan. 2  To set up farm taxes payable     (2)             2,160   2,160
Apr. 1  To record payroll withholdings   (26)                    2,342
Apr. 10 Payment of payroll withholdings  (27)  182               2,160
Dec. 31 Adjustment                       (44)                    3,030

Balance Sheet:
        Liabilities:
                  Taxes Payable                          $3,030


The journal entries in Table 4-13 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for the income taxes owed.

The cash-basis system reports only the amount of income taxes paid. However, the income taxes paid pertain to the previous calendar year, not the current year.

The current year's income taxes should be reported in the current year along with the current year's income. Under the accrual-adjusted approach, the adjustment at the end of the year approximates the income tax liability for the current year's income.

Current deferred taxes

Cash-basis income is usually different from accrual-adjusted net income. To illustrate the potential difference in income between these two systems, Table 4-14 presents sample income statements. The cash-basis income statement is based on the journal entries (8) through (31) in Chapter 3. The accrual-adjusted income statement is based on the journal entries (8) through (31) from Chapter 3 and (32) through (44), except (36), presented in this chapter.

The income tax liability for the year 20X1 ($3,030) is based on net cash income of $52,036 and other provisions of current tax laws (including tax depreciation). The Taxes Payable account had a balance of $2,160 from journal entry (2). Journal entry (44) adjusts that balance up to $3,030. This adjustment is based on cash-basis net income. However, this amount does not reflect income tax expense based on the accrual-adjusted net income, which is a more accurate picture of the financial performance of the farm business (see Figure 4-6). When farm financial statements are prepared according to the accrual-adjusted approach, the income taxes should be based on accrual-adjusted net income, even though the actual amount of income taxes paid is based primarily on cash-basis numbers. The income taxes associated with accrual-adjusted net income should be reported in the same year that the accrual-adjusted net income was earned.

The difference in the tax liabilities between the cash-basis income and the accrual-adjusted income is an example of income taxes that will eventually be resolved in future years. These taxes are known as deferred tax liabilities. They represent tax liabilities that will be paid in the future when the cash transactions are completed. The deferred taxes that will be resolved the next year are reported as Current Deferred Taxes. (The method to calculate the amount of these taxes is discussed in Chapter 9.) The following items result in current deferred taxes:

* The timing of cash transactions between cash-basis net income and accrual-adjusted net income. These timing differences are reflected in the "change items" that were recorded in journal entries (32) through (42), except (36).

[FIGURE 4-6 OMITTED]

The balance sheet reports the current deferred taxes. The income statement presents an adjustment for the difference between last year's amount of current deferred taxes and this year's amount of current deferred taxes.

* Estimate the amount of current deferred taxes for the year.

** Make adjustment:

*** Balance sheet shows amount of current deferred taxes

**** Current Deferred Taxes

*** Income statement shows amount of income tax for the year

**** (Income Tax Expense)

**** +/- Change in Taxes Payable (for difference in Taxes Payable from last year) **** +/- Change in Taxes Payable (for difference in Current Deferred Taxes from last year)
If the Farmers determine that the amount of current deferred taxes
at the end of 20X1 is $1,450, they should adjust the Balance Sheet
to report $1,450 for Current Deferred Taxes. The adjustment on the
Income Statement is part of Change in Taxes Payable. The Farmers
had no current deferred taxes at the beginning of the year, so they
calculate Change in Taxes Payable pertaining to current deferred
taxes as follows:

   Amount of the current deferred taxes owed at the end of
     the year                                                  $1,450
   - Current Deferred Taxes at the beginning of the year          - 0
   = Change in Taxes Payable                                   $1,450

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted for
current deferred taxes when they were prepared.

(45) Dec. 31 9110 Change in Taxes Payable        1,450
                   2510 Current Deferred Taxes          1,450

Because of this adjustment, the Income Statement reports the
appropriate amount of income tax expense in the year in which the
accrual-adjusted income was earned.

Income Statement:
        Income before Taxes                                       $XXX
               Income Tax Expense                              (2,160)
               + Change in Taxes Payable                         (870)
               + Change in Taxes Payable                       (1,450)
                      Effect on Accrual Adjusted Net Income   ($4,480)

Balance Sheet:
        Liabilities:
                   Taxes Payable                                $3,030
                   Current Deferred Taxes                        1,450


The journal entries in Table 4-15 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for current deferred taxes.

The cash-basis system reports neither the amounts owed by the farm business for the deferred taxes nor the correct amount of income tax expense. The accrual-adjusted approach adjusts the income tax expense to the correct amount with the Change in Taxes Payable and reports a more accurate amount of liabilities by reporting Current Deferred Taxes.

Non-current deferred taxes, first component

Non-current deferred taxes arise from the differences between the book or base values of non-current assets and their tax basis, and also from the differences between the market values of non-current assets and their book or base values. (Examples are provided in Chapter 9.) You will recall the definition and computation of book value.

Book Value = Original cost of an asset - Accumulated financial depreciation of the asset

The accumulated depreciation in this definition is based on depreciation methods for financial accounting, such as the straight-line method illustrated in journal entry (39). Tax rules allow for different methods of calculating depreciation. The tax basis refers to an alternative computation for book value using tax depreciation methods for the accumulated depreciation.

Tax Basis ??Original cost of an asset - Accumulated tax depreciation of the asset

The difference between the tax depreciation and the financial depreciation results in deferred taxes. (More on this in Chapter 9.) The balance sheet reports these tax liabilities as Non-Current Deferred Taxes because they are not likely to be resolved during the next year.

A non-current deferred tax consists of two components. The first component relates to

* the difference between base values and tax basis of raised breeding livestock and

* the difference between book values and tax basis of other non-current assets

The balance sheet reports the deferred taxes for the first component as part of the non-current deferred tax liabilities. The adjustment on the income statement for the first component is part of Change in Taxes Payable.

* Estimate the amount of the first component of non-current deferred taxes for the year.

** Make adjustment:

*** Balance sheet shows amount of non-current deferred taxes

**** Non-current Deferred Taxes

** Income statement shows amount of income tax for the year

*** (Income Tax Expense)

*** +/- Change in Taxes Payable (for difference in Taxes Payable from last year)

*** +/- Change in Taxes Payable (for difference in Current Deferred Taxes from last year)

*** +/- Change in Taxes Payable (for difference in first component of Non-current Deferred Taxes from last year)
Suppose that the Farmers estimate that the amount of the first
component of non-current deferred taxes current is $3,300. They had
no non-current deferred taxes pertaining to the first component at
the beginning of the year, so they calculate the Change in Taxes
Payable pertaining to the first component as follows:

   Amount of the first component of non-current deferred taxes
     at the end of the year                                     $3,300
   - Non-Current Deferred Taxes (first component) at the
       beginning of the year                                       - 0
   = Change in Taxes Payable                                    $3,300

If the Farmers recorded journal entries to make adjustments, they
would have recorded the following journal entry and posted it to
the ledger. The financial statements would be accrual-adjusted for
the first component of non-current deferred taxes when they were
prepared.

(46) Dec. 31 9110 Change in Taxes Payable              3,300
                      2500 Non-Current Deferred Taxes          3,300

The Income Statement reports this adjustment as part of Change in
Taxes Payable.

Income Statement:
        Income before Taxes                                      $XXX
               Income Tax Expense                             (2,160)
               + Change in Taxes Payable                        (870)
               + Change in Taxes Payable                      (1,450)
               + Change in Taxes Payable                      (3,300)
                      Effect on Accrual Adjusted Net Income  ($7,780)

Balance Sheet:
        Liabilities:
               Current Liabilities:
                  Taxes Payable                                $3,030
                  Current Deferred Taxes                        1,450
               Non-Current Liabilities:
                  Non-Current Deferred Taxes                    3,300


The journal entries in Table 4-16 demonstrate the difference between cash-basis accounting and the accrual-adjusted approach for the first component of non-current deferred taxes.

The cash-basis system reports neither the amounts owed by the farm business for the non-current deferred taxes nor the correct amount of income tax expense.

The accrual-adjusted approach adjusts the income tax expense to the correct amount with the Change in Taxes Payable and reports a more accurate amount of liabilities by reporting Non-Current Deferred Taxes. Chapter 5 presents a discussion of the second component of non-current deferred taxes.
PRACTICE WHAT YOU HAVE LEARNED Test your knowledge of accounting
for income taxes by completing Problem 4-7 at the end of the
chapter.


POSTING
Learning Objective 9 * To
post adjusting journal entries.


If the farm accountant chooses to record journal entries to make adjustments as illustrated in this chapter, the next step in the year-end procedures is to post them to the ledger accounts. The posting procedures are identical to those for the transactions presented in Chapter 3. The debits and credits from each of the journal entries are copied to each of the corresponding ledger accounts.
Exercise 4-4 Appendix F contains the Farmers' ledger accounts after
posting the adjusting journal entries in Chapter 4. Review the
adjusting entries (32) through (46), except (36). Verify that each
of the adjusting journal entries have been posted correctly (that
is, check that each debit and each credit have been copied
correctly to the appropriate account).

PRACTICE WHAT YOU HAVE LEARNED Practice the posting procedures by
completing Problem 4-8 at the end of the chapter.


TRIAL BALANCE
Learning Objective 10 * To
prepare an adjusted trial balance.


The trial balance is a list of the balances of all accounts in the ledger. The trial balance serves as the basis for preparing the financial statements. The purpose of the trial balance is to check that the sum of all debits equals the sum of all credits. If they do not, then an error has occurred. Errors such as incorrect posting of journal entries or calculation of account balances can occur in a manual accounting system. The farm accountant prepares a trial balance before preparing the financial statements to correct any errors so that these errors do not carry over to the financial statements. If the debits equal the credits, the farm accountant can be assured that the errors indicated above have not occurred. However, if some transactions have not been recorded, or if a journal entry was not posted or was posted twice, or the amounts in journal entry are incorrect, the trial balance will not reflect these errors and the farm accountant must be aware that these other types of errors can occur. If the farm accountant records and posts the journal entries to make adjustments, the trial balance is called an Adjusted Trial Balance, and it includes all of the accounts in which adjustments were made. A trial balance without the accounts used to make adjustments is called an Unadjusted Trial Balance, like the trial balance in Appendix E.

Before preparing the trial balance, the farm accountant must calculate the account balances. Then, all of the accounts are listed in the order in which they appear in the ledger with one column for the debit balances and one column for the credit balances, creating the trial balance. To know which balances are debits and which are credits, the farm accountant must recall which column records the increases for each type of account.

* Increases are recorded as debits for assets, expenses, and owner withdrawals.

* Increases are recorded as credits for liabilities, equity, and revenue accounts.

As you learned in Chapter 3, the normal balance for each type of account is wherever increases are recorded.

* The normal balance for assets, expenses, and owner withdrawals are debits; therefore, the credit entries are subtracted from the debit entries 'to calculate the balance. If the balance is a positive number, it goes in the debit column on the trial balance. If the result is a negative number, it goes in the credit column on the trial balance.

* The normal balance for liabilities, equity, and revenue accounts are credits; therefore, the debits are subtracted from the credits to calculate the balance. If the balance is a positive number, it goes in the credit column of the trial balance. If the balance is a negative number, it goes in the debit column of the trial balance.

(Not many accounts will ever have a negative number.) Table 4-17 shows the format for a trial balance.

The last step is to add all of the numbers in the debit column and then add all of the numbers in the credit column. If the two totals are equal to each other, the trial balance is complete. If they are not equal, the farm accountant must examine all of the journal entries to ensure that they have been recorded and posted properly and that the balances have been calculated correctly.
Exercise 4-5 Prepare an adjusted trial balance from the Farmers'
ledger accounts in Appendix F, which include the journal entries in
this chapter. The balances are calculated. Just prepare the trial
balance from the information given. Then ensure that the total of
the debits equals the total of the credits. Answer: Check your
answer with the adjusted trial balance in Appendix G.

PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned by
completing Problem 4-9 at the end of the chapter.


CHAPTER SUMMARY

Many farm operations use the cash-basis system and record revenue only when cash is received and record expenses only when cash is paid. The accrual-adjusted approach provides a more accurate picture of the financial performance and financial position of a farm business. The adjustments presented in this chapter provide the means to convert a cash-basis system to an accrual-adjusted system. These procedures allow the farm accountant to provide accrual-adjusted financial statements for lenders and other parties who need to make meaningful comparisons with the past performance of the farm business or with other farm operations.

The procedures for the adjustments discussed in this chapter include those involving inventories, prepaid expenses, depreciation expense, accrued expenses, accrued revenues, changes in values of raised breeding livestock, income taxes, and deferred taxes for the first year of operation for a farm business. After these entries are recorded and posted and an adjusted trial balance is prepared, the financial statements can be prepared, which is the subject of the next chapter.

PROBLEMS

4-1 * Identify which of the phrases below describe (a) the accrual-basis system, (b) the accrual-adjusted approach, or (c) the cash-basis system.

--Revenue is recorded only when cash is received.

--Revenue is reported when it is earned, whether the cash has been received or not.

--Expenses are reported when they have been incurred, not necessarily when they have been paid.

--Expenses are recorded only when cash is paid.

--No inventory is reported.

--Inventory is recorded when it is purchased.

--Inventory is recorded at the end of the year.

--Adjustments are recorded all year long.

--Adjustments are made only when the financial statements are being prepared.

4-2 * For the following scenario: a) calculate the Change in Purchased Feed Inventory and the Change in Crop Inventory, b) prepare the journal entries for the adjustments, and c) indicate the effects on the income statement for purchased feed, raised feed, and raised crops.

Steve and Chris harvested a grain crop in July and sold part of it for $13,500. The Farmers stored the rest of the crop, valued at $5,500 at the end of the year. They had no stored crop on hand at the beginning of the year. The Farmers completed the harvest of hay for their cow herd on August 1, and the value of the hay is $4,500 at harvest time. At the end of the year, they determined that $2,300 worth of that hay is still on hand on December 31 when they are preparing financial statements. Steve and Chris had no raised feed on hand at the beginning of the year. The Farmers purchased pelleted feed for $2,000 and salt and mineral blocks for $350 on October 15. This purchase was paid for on the day it was purchased and was recorded in the Purchased Feed account. The Farmers determined that the pelleted feed on hand at the end of the year cost approximately $500 and the salt and mineral blocks on hand cost approximately $250. The Farmers had no purchased feed on hand at the beginning of the year.

4-3 * For the following scenario: a) calculate the Change in Purchased Feeder Livestock Inventory and the Change in Market Livestock and Poultry Inventory, b) prepare the journal entries for the adjustments, and c) indicate the effects on the income statement for purchased feeder livestock and raised market livestock.

The Farmers purchased feeder calves for $10,500 and feeder pigs for $2,500. At the end of the year, they had all of the calves and half of the feeder pigs on hand. The Farmers also had raised feeder calves on hand with a market value of $26,000 at the end of the year. The Farmers had no market livestock on hand at the beginning of the year.

4-4 * For each of the events below, select the appropriate adjusting journal entry that would be recorded at the end of the year (December 31).

The Farmers purchased a one-year insurance policy on June 1 for $1800. No prepaid expenses existed at the beginning of the year.
a. Prepaid Expenses                      1,050
           Change in Prepaid Insurance           1,050
b. Prepaid Expenses                        750
           Change in Prepaid Insurance             750
c.  Change in Prepaid Insurance          1,050
           Prepaid Expenses                      1,050
d.  Change in Prepaid Insurance            750
           Prepaid Expenses                        750


The Farmers spent $3,000 for the costs of growing a perennial crop and recorded these costs as expenses. The crop is not harvested during the same year that it was grown. No investment in growing crops existed in the accounting records at the beginning of the year.
a. No adjusting entry is necessary under the accrual-adjusted approach.
b. Change in Investment in Growing Crops         3,000
          Cash Investment in Growing Crops       3,000
c. Cash Investment in Growing Crops                      3,000
          Change in Investment in Growing Crops          3,000


4-5 * For each of the multiple choice questions below, select the appropriate adjusting journal entry that would be recorded at the end of the year (December 31).

The Farmers determined that their unpaid bills at the end of the year are $690. They will not pay the bills before December 31. They had no bills at the beginning of the year.
a. Accounts Payable                  690
        Change in Accounts Payable         690
b. Prepaid  Expense                  690
        Change in Accounts Payable         690
c.  Change in Accounts Payable       690
        Accounts Payable                   690
d. Prepaid  Expense                  690
        Accounts Payable                   690


The Farmers determined that they owed $3500 in real estate and property taxes at the end of the year. They will not pay the taxes before December 31. They did not owe any taxes at the beginning of the year.
a. Taxes Payable                   3,500
         Change in Taxes Payable           3,500
b. Taxes Payable                   3,500
         Cash                              3,500
c. Change in Accounts Payable      3,500
         Accounts Payable                  3,500
d. Change in Taxes Payable         3,500
         Taxes Payable                     3,500


4-6 * Place a check mark beside each of the following events that would require an end-of-year adjustment. Assume that the end of the fiscal year is December 31.

--Cash was paid for a utility bill before the end of the year.

--A bill for veterinary services was received before the end of the year and will be paid the following year.

--Grain was sold on December 21 but the check was not received by December 31.

--A perennial crop was harvested and sold before the end of the year.

--All feed that was purchased during the year was used up by the end of the year.

--No purchased market livestock were on hand at the end of the year.

--50 head of raised feeder pigs were on hand at the end of the year.

--Raised grain for feed was still on hand at the end of the year.

4-7 * For each of the multiple choice questions below, select the appropriate adjusting journal entry that would be recorded at the end of the year (December 31).

Suppose that the Farmers estimated on December 31 that they owed income tax for $3,670. They will pay their taxes in February next year. They did not owe any income taxes at the beginning of the year.
a. Taxes Payable                  3,670
         Change in Taxes Payable          3,670
b. Taxes Payable                  3,670
         Cash                             3,670
c. Change in Taxes Payable 3,670
         Taxes Payable             3,670
d. No entry is required under the accrual-adjusted approach.


The Farmers determine that the amount of current deferred taxes at the end of the year is $2,000. No current deferred taxes existed at the beginning of the year.
a. Change in Taxes Payable         2,000
          Current Deferred Taxes           2,000
b. Current Deferred Taxes          2,000
          Change in Taxes Payable          2,000
c. Change in Taxes Payable         2,000
          Taxes Payable                    2,000
d. No entry is required under the accrual-adjusted approach.


4-8 * Create ledger accounts for the items in the following adjusting journal entries and post the entries to the ledger accounts.
a. Feed Inventory Purchased for Use                        570
         Change in Purchased Feed Inventories                      570
b. Crop Inventory Raised for Sale                       10,000
         Change in Crop Inventory                               10,000
c. Feeder Livestock Inventory Purchased for Resale       9,050
         Change in Purchased Feeder Livestock Inventory          9,050
d. Prepaid Expenses                                      1,000
         Change in Prepaid Insurance                             1,000
e. Depreciation Expense                                 31,000
         Accumulated Depreciation                               31,000
f. Change in Accounts Payable                              600
         Accounts Payable                                          600
g. Breeding Livestock                                    2,100
         Gains/Losses Due to Changes in General
           Base Values of Breeding Livestock                     2,100
h. Change in Taxes Payable                               3,600
         Non-Current Deferred Taxes                              3,600


4-9 * Using the unadjusted trial balance below (from Appendix E) and the ledger accounts from Problem 4-8, prepare an adjusted trial balance.
Unadjusted Trial Balance
Steve and Chris Farmer
December 31, 20X1

Accounts                                     Debits        Credits

1000 Cash                                     $203.80
1500 Breeding Livestock                     73,500.00
1600 Machinery and Equipment                65,000.00
1650 Office Equipment and Furniture          1,000.00
1700 Perennial Crops                        45,000.00
1800 Land, Buildings and Improvements      470,000.00
1910 Leased Assets                         100,000.00
2100 Taxes Payable                                         2,160.00
2310 Notes Payable Due within One Year                    50,000.00
2400 Real Notes Payable-Non-Current                      120,000.00
2600 Obligations on Leased Assets                         76,018.00
3100 Retained Capital                                    104,540.00
3110 Owner Withdrawals                         150.00
3120 Non-Farm Income                                         100.00
3130 Other Capital Contributions/
     Gifts/Inheritances                                  350,000.00
4000 Cash Crop Sales                                      12,600.00
4100 Cash Sales of Market Livestock                       50,900.00
4500 Gains (Losses) from Sale of Culled
     Breeding Livestock                        250.00
5000 Feeder Livestock                        1,500.00
5020 Purchased Feed                          1,000.00
6100 Wage Expense                            1,200.00
6110 Payroll Tax Expense                       129.20
6310 Truck and Machinery Hire                  150.00
6520 Herbicides, Pesticides                    500.00
6630 Livestock Supplies, Tools,
     and Equipment                              75.00
6700 Insurance                               1,200.00
6710 Real Estate and Personal
     Property Taxes                          1,300.00
8100 Interest Expense                        1,200.00
8200 Gains (Losses) on Sales of Farm
     Capital Assets                            800.00
9100 Income Tax Expense                      2,160.00
Totals                                    $766,318.00   $766,318.00

TABLE 4-1 * Journal entries for Calendar 1 events.

Date and Event        Cash-Basis        Accrual-Basis

Dec. 26: Utility      (no entry)        Utility Expense
  bill received                           Accounts Payable

Dec. 31: End          (no entry)        (no entry)
  of year

Jan. 3: When          Utility Expense   Accounts Payable
  bill is paid          Cash              Cash

Dec. 30: When         (no entry)        Accounts Receivable
  calves are sold                         Sales of Mkt.
                                          Livestock
Dec. 31: End          (no entry)        (no entry)
  of year

Jan. 2: When          Cash              Cash
  check is received     Sales of Mkt.     Accounts
                        Livestock         Receivable

Date and Event        Accrual-Adjusted

Dec. 26: Utility      (no entry)
  bill received

Dec. 31: End          Change in Accounts Payable
  of year               Accounts Payable

Jan. 3: When          Utilities Expense
  bill is paid          Cash

Dec. 30: When         (no entry)
  calves are sold

Dec. 31: End          Accounts Receivable
  of year               Change in Accounts Receivable

Jan. 2: When          Cash
  check is received     Sales of Mkt. Livestock

TABLE 4-2 * Journal entries for Calendar 2 events.

Date and Event        Cash-Basis        Accrual-Basis

During the year:      Expenses          Mkt. Livestock Inventory
  Expenses for          Cash              Cash
  purchase or
  raising calves

End of year           (no entry)        (no entry)

Jan. 3: When calves   Cash              Cash
  are sold for cash     Sales of Mkt.     Sales of Mkt. Livestock
                        Livestock
                                        Cost of Sales
                                          Mkt. Livestock Inventory

Date and Event        Accrual-Adjusted

During the year:      Expenses
  Expenses for        Cash
  purchase or
  raising calves

End of year           Mkt. Livestock Inventory
                        Change in Mkt.
                        Livestock Inventory

Jan. 3: When calves   Cash
  are sold for cash     Sales of Mkt. Livestock

TABLE 4-3 * Cash-Basis vs. Accrual-Adjusted (feed purchased for use).

Cash-Basis

Purchase

Purchased Feed                        1,000
          Cash                                1,000

Adjustment when financial statements are prepared

(none)

Accrual-Adjusted

Purchase

Purchased Feed                         1,000
          Cash                                 1,000

Adjustment when financial statements are prepared

Feed Inventory Purchased for Use         230
   Change in Purchased Feed Inventory            230

TABLE 4-4 * Cash-Basis vs. Accrual-Adjusted (feed raised for use).

Cash-Basis                  Accrual-Adjusted

Harvest                     Harvest

(none)                      (none)

Adjustment when financial   Adjustment when financial
statements are prepared     statements are prepared

(none)                      Feed Inventory Raised
                            for Use                      2,300
                              Change in Crop Inventory           2,300

TABLE 4-5 * Cash-Basis vs. Accrual-Adjusted (crops raised for sale).

Cash-Basis

Harvest

(none)

Sale

Cash                             12,000

  Cash Crop Sales                         12,000

Adjustment when financial statements are prepared

(none)

Accrual-Adjusted

Harvest

(none)

Sale

Cash                             12,000

   Cash Crop Sales                        12,000

Adjustment when financial statements are prepared

Crop Inventory Raised for Sale    6,000

  Change in Crop Inventory                  6,000

TABLE 4-6 Cash-Basis vs. Accrual-Adjusted
(livestock purchased for resale).

Cash-Basis

Purchase

Feeder Livestock                  1,500
     Cash                                  1,500
Sale
Cash                                900
    Sales of Market Livestock                900

Accrual-Adjusted

Purchase

Feeder Livestock                  1,500
     Cash                                  1,500
Sale
Cash                                900
    Sales of Market Livestock                900

Adjustment when financial statements

Feeder Livestock Inventory
  Purchased for Resale              750
    Change in Purchased Feeder
      Livestock Inventory                    750

Adjustment when financial statements are prepared
(none)

TABLE 4-7 Cash-Basis vs. Accrual-Adjusted
(raised market livestock).

Cash-Basis              Accrual-Adjusted

Adjustment when         Adjustment when financial statements
                           are prepared
financial statements    Feeder Livestock Inventory     50,000
are prepared (none)       Raised for Sale
                        Change in Market Livestock              50,000
                               and Poultry Inventory

TABLE 4-8 Cash-Basis vs Accrual-Adjusted (prepaid insurance).

Cash-Basis

Purchase
Insurance                   1,200
    Cash                            1,200

Adjustment when financial
statements are prepared
(none)

Accrual-Adjusted

Purchase
Insurance                   1,200
Cash                                1,200

Adjustment when financial
statements are prepared
Prepaid Expenses              700
   Change in Prepaid Insurance        700

TABLE 4-9 Cash-Basis vs. Accrual-Adjusted
(cash investment in growing crops).

Cash-Basis

When growing expenses occur:
Operating expenses                   2,500
    Cash                                     2,500

Adjustment when financial
statements are prepared
(none)

Accrual-Adjusted

When growing expenses occur:
Operating expenses                   2,500
Cash                                         2,500

Adjustment when financial
statements are prepared

Cash Investment in Growing Crops     2,500
     Change in Investment in                 2,500
       Growing Crops

TABLE 4-10 Cash-Basis vs. Accrual-
Adjusted (interest owed).

Cash-Basis         Accrual-Adjusted

Adjustment when    Adjustment when
  financial          financial statements
  statements are     are prepared
  prepared         Change in Interest Payable   5,000
(none)             Interest Payable                     5,000

TABLE 4-11 Cash-Basis vs. Accrual-Adjusted (unpaid bills).

Cash-Basis               Accrual-Adjusted
Adjustment when          Adjustment when
  financial statements     financial statements
  are prepared             are prepared
  (none)                 Change in Accounts Payable   340
                         Accounts Payable                   340

TABLE 4-12 Cash-Basis vs. Accrual-Adjusted
(accrued revenues).

Cash-Basis               Accrual-Adjusted
Sale                     Sale

(none)                   (none)

Adjustment when          Adjustment when
  financial statements     financial statements
  are prepared             are prepared

(none)                   Accounts Receivable       3,500
                         Change in Accounts
                           Receivable                      3,500

TABLE 4-13 * Cash-Basis vs. Accrual-Adjusted (income taxes).

Cash-Basis

When income taxes are paid

Income Tax Expense           2,160
  Cash                               2,160

Adjustment when financial statements are prepared

(none)

Accrual-Adjusted

When income taxes are paid

Income Tax Expense           2,160
  Cash                               2,160

Adjustment when financial statements are prepared

Change in Taxes Payable        870
  Taxes Payable                        870

TABLE 4-14 * Cash-Basis versus Accrual-Adjusted Income Statements.

Cash-Basis Income Statement

Revenue:

Cash Crop Sales                       $12,600

Sales of Market Livestock              50,900
Loss from Sale of Culled Livestock       (250)
    Total Revenue                                $63,250

Expenses:

Feeder Livestock                       (1,500)
Purchased Feed                         (1,000)
Wage Expense                           (1,200)
Payroll Tax Expense                      (129)
Truck and Machine Hire                   (150)
Herbicides, Pesticides                   (500)
Livestock Supplies                        (75)
Insurance                              (1,200)
Real Estate/Property Taxes             (1,300)
Interest Expense                       (1,200)
    Net Farm Income from Operations               54,996
Loss on Sale of Capital Assets           (800)
    Income before Taxes                           54,196
Income Tax Expense                     (2,160)
Net Cash Income (Loss)                           $52,036

Accrual-Adjusted Income Statement

Revenue:

Cash Crop Sales                       $12,600
Change in Crop Inventory                8,300
Sales of Market Livestock              50,900
Loss from Sale of Culled Livestock       (250)
Change in Quantity of
  Raised Breeding Livestock             6,000
Change in Accounts Receivable           3,500
    Gross Revenue                                $81,050

Expenses:

Change in Investment
  in Growing Crops                     $2,500
Feeder Livestock                       (1,500)
Change in Purchased Feeder
  Livestock Inventory                     750
Purchased Feed                         (1,000)
Change in Purchased Feed Inventory        230
Wage Expense                           (1,200)
Payroll Tax Expense                      (129)
Truck and Machine Hire                   (150)
Herbicides, Pesticides                   (500)
Livestock Supplies                        (75)
Insurance                              (1,200)
Change in Prepaid Insurance               700
Real Estate/Property Taxes             (1,300)
Change in Accounts Payable               (340)
Depreciation Expense                  (22,150)
Interest Expense                       (1,200)
Change in Interest Payable             (5,000)
    Net Farm Income from Operations               49,486
Loss on Sale of Capital Assets           (800)
Income before Taxes                               48,686
    Income Tax Expense                 (2,160)
Change in Taxes Payable                  (870)
    Accrual Adjusted Net Income                  $45,656

TABLE 4-15 Cash-Basis vs. Accrual-Adjusted (current deferred taxes).

Cash-Basis                  Accrual-Adjusted

Adjustment when financial   Adjustment when financial
  statements are prepared     statements are prepared

(none)                      Change in Taxes Payable     1,450
                                Current Deferred Taxes          1,450

TABLE 4-16 Cash-Basis vs. Accrual-Adjusted (first component
of non-current deferred taxes).

Cash-Basis                  Accrual-Adjusted

Adjustment when financial   Adjustment when financial
  statements are prepared     statements are prepared

(none)                      Change in Taxes Payable     3,300
                                Non-Current Deferred
                                Taxes                           3,300

TABLE 4-17 * Trial balance format.

TRIAL BALANCE
(NAME OF FARM OPERATION)
(DATE)

Accounts                         Debits   Credits

(Assets listed first)              XXXX

(Liabilities listed next)                    XXXX

(Equity accounts listed next)                XXXX

(Revenue accounts listed next)               XXXX

(Expense accounts listed next)     XXXX

Totals

FIGURE 4-1 * Calendar 1 events (revenues and expenses).

  Sunday       Monday      Tuesday     Wednesday

December 1       2            3            4

    8            9            10          11

    15           16           17          18

    22           23           24          25

    29       30 Feeder        31       January 1
               calves
                sold

  Sunday      Thursday      Friday     Saturday

December 1       5            6            7

    8            12           13          14

    15           19           20          21

    22       26 Utility       27          28
                bill
              received

    29        2 Check     3 Utility        4
              received    paid bill
             from sale

FIGURE 4-2 * Calendar 2 events (inventory).

  Sunday      Monday    Tuesday    Wednesday

December 1      2          3           4

    8           9          10         11

    15          16         17         18

    22          23         24         25

    29          30         31      January 1

  Sunday     Thursday    Friday    Saturday

December 1      5          6           7

    8           12         13         14

    15          19         20         21

    22          26         27         28

    29          2       3 Feeder       4
                         calves
                          sold
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Publication:Introduction to Agricultural Accounting
Geographic Code:1USA
Date:Jan 1, 2008
Words:15789
Previous Article:Chapter 3: Journal entries.
Next Article:Chapter 5: Financial statement preparation and closing entries.
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