Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Multiple Choice

Which one of the following is a true statement regarding prepayment penalties in the context of revenue and expense recognition?

Prepayment penalties are never recognized in the financial statements.

Prepayment penalties paid by a lender are recognized as an asset.

Prepayment penalties are always recognized as revenue over the life of the loan.

Prepayment penalties paid by a borrower are recognized as an expense in the period the loan is prepaid.

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Verified step by step guidance

Understand the concept of prepayment penalties: Prepayment penalties are fees charged by lenders when a borrower pays off a loan early. These penalties are designed to compensate the lender for the loss of interest income that would have been earned over the life of the loan.

Analyze the context of revenue and expense recognition: Revenue and expense recognition principles dictate that transactions should be recorded in the period they occur and are relevant to the financial statements.

Evaluate the options provided: Each statement must be assessed for its accuracy based on accounting principles. For example, the statement 'Prepayment penalties are never recognized in the financial statements' is incorrect because penalties are recognized either as an expense or revenue depending on the party involved.

Focus on the correct statement: 'Prepayment penalties paid by a borrower are recognized as an expense in the period the loan is prepaid.' This aligns with the matching principle in accounting, which states that expenses should be recognized in the period they are incurred.

Conclude the reasoning: Prepayment penalties paid by a borrower are recorded as an expense because they represent a cost incurred by the borrower at the time of prepayment. This ensures accurate representation of financial performance in the period the transaction occurs.