Question

Cray Company started year 2 with $60,000 in its cash and common stock accounts. During year 2 Cray paid $45,000 cash for employee compensation. Assume this is the only transaction that occurred in year 2. Required Determine the total amount of assets at the end of year 2, assuming Cray is a manufacturing company and the employees were paid to make products. Determine the amount of expense recognized on the year 2 income statement, assuming Cray is a manufacturing company and the employees were paid to make products. Determine the total amount of assets at the end of year 2, assuming Cray is a service company. Determine the amount of expense recognized on the year 2 income statement, assuming Cray is a service company.

Answer 1

Determination of total assets at the end of the year - 2:

Cash at the beginning of year - 2 = $60,000

Employee compensation expense = $45,000

Total assets(cash) at the end of the year - 2 = $15,000.

Determination of expense:

Expense to be recognized in the year - 2 in income statement of Cray = $45,000 (employee compensation)

Whether the Cray company is manufacturing or service oriented company expense to be recgnized in the income statement and total assets at the end of the yaer - 2 will be same.

Since, employee compensation is an expense and do not satisfies the criteria of an asset, it cannot be capitalized in either of the above cases.

Note - Definition of an asset : An asset is a resource of an entity which arises as a result of past activities and ensures future economic benefits inflow to the entity for a period greater than one year.