Question

During September, the Bug-B-Gone Company buys and pays for a six-month supply of pesticides in order to receive a bulk discount. The company uses accrual basis accounting. The cost of the pesticides is recorded:
A. as a liability, which will later be reduced as the pesticides are used.
B. immediately as an expense.
C. as an asset, which will later be reduced as the pesticides are used.
D. partially as an expense and partially as a liability.

Answer 1

Answer:

C) As an asset, which will later be reduced as the pesticides are used.

Explanation:

The pesticides were bought because there was a discount, and the company has paid in cash but the pesticides won't be used for now, so it will be recorded as prepaid asset (Current Asset) which will liquidate in a year.

Answer 2

Answer:

The correct answer is letter "C": as an asset, which will later be reduced as the pesticides are used.

Explanation:

In the Accrual Basis Method of accounting revenues and expenses are recognized when incurred not when the cash is received like in the Cash Basis Method of accounting. In the accrual method, supply expenses are recorded like assets which will be reduced as long as they are used.

Thus, Bug-B-Gone pesticides purchase cost will be recognized as an asset on the date when the purchase is incurred and the number of supplies will be reduced as long as the pesticides are used.