(Learning Objective 3: Explaining accruals and deferrals) During 2006, Pier I Imports had numerous accruals and deferrals. As a new member of Pier 1’s accounting staff, it is your job to explain the effects of accruals and deferrals on Pier 1’s net income for 2006. The accrual and deferral data follow, along with questions that Pier 1 stockholders have raised (all amounts in millions):
1. Beginning total receivables for 2006 were $47. Ending receivables for 2006 are $64. Which of these amounts did Pier 1 earn in 2005? Which amount did Pier 1 earn in 2006? Which amount is included in Pier 1’s net income for 2006?
2. Accumulated depreciation stood at $383 at the end of 2005 and at $370 at year end 2006. Depreciation expense for 2006 was $56. How can accumulated depreciation decrease during 2006 when the company is adding more depreciation each year? (Challenge)
3. Pier 1 reports an account titled Gift Cards and other Deferred (Unearned) Revenue. This account carried credit balances of $61 at the end of 2005 and $64 at the end of 2006. What type of account is Gift Cards and other Deferred (Unearned) Revenue? Make a single journal entry to show how this account could have increased its balance during 2006. Then explain the event in your own words.
4. Certain income-statement accounts are directly linked to specific balance-sheet accounts other than cash. Examine Pier 1’s income statement in Appendix B at the end of this book. For each “Operating cost and expense,” each “Non operating (income) and expense,” and Provision for income taxes, identify the related balance sheet account (other than cash). Use standard account titles, not necessarily the titles Pier 1 uses.