Multiple Choice
Which of the following adjusting entries should be made on July 31 to record accrued revenues that have been earned but not yet received in cash?
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3. Accrual Accounting Concepts
Adjusting Entries: Accrued Revenues
Multiple Choice
When accounting for accrued revenues, how should changes in estimated option forfeitures be recognized?
A
Retroactively to all prior periods
B
Only when the options are exercised
C
In the period in which the estimate changes
D
Only at the end of the fiscal year
Verified step by step guidance1
Understand the concept of accrued revenues: Accrued revenues are revenues earned but not yet received in cash or recorded. They are recognized in the period they are earned, regardless of when the cash is received.
Learn about option forfeitures: Option forfeitures refer to the cancellation or expiration of stock options before they are exercised. Changes in estimated option forfeitures impact the accounting for stock-based compensation.
Recognize the principle of accounting for changes in estimates: According to accounting standards, changes in estimates should be recognized in the period in which the estimate changes. This ensures that financial statements reflect the most accurate and current information.
Apply the principle to the problem: Changes in estimated option forfeitures should be recognized in the period in which the estimate changes, as this aligns with the accounting treatment for changes in estimates.
Avoid retroactive adjustments or deferring recognition: Retroactive adjustments to prior periods or recognizing changes only at the end of the fiscal year or when options are exercised would not comply with the principle of recognizing changes in estimates in the current period.
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