Intermediate Accounting Solution: 2016

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Intermediate Accounting Solution Solution of Intermediate Accounting

Sunday, March 27, 2016

Chapters

Chapter- 1

P3-12

Chapter- 2 Chapter- 3

P3-12 (Worksheet, Balance Sheet, Adjusting and Closing Entries) Cooke Company has a fiscal year ending on September 30. Selected data from the September 30 worksheet are presented below.

Blog Archive

t 2016 (75) t March (75) P3-12 P3-8 P3-6 P3-4

Instructions(a) Prepare a complete worksheet.

P3-3

(b) Prepare a classified balance sheet. (Note $10,000 of the mortgage payable is due for payment in the next fiscal year) (c) Journalize the adjusted entries using the worksheet as a basis. (d) Journalize the closing entries using the worksheet as a basis.

E3-12 E3-10 E3-5 E3-4 E3-2 E3-16 P3-10

(e) Prepare a post closing trial balance.

P3-5 Posted by mbhpblog at 2:57:00 AM

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E3-11

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E3-9 E3-15 E3-21

P3-8

E3-19 E3-18

P3-8

E3-3

(Adjusting Entries and Financial Statements) Vedula Advertising Agency was founded by Murali Vedula in January 2009. Presented on the next page are both the adjusted and unadjusted trial balances as of December 31, 2014.

E3-23 P3-2 E3-7 P3-7 E3-14 E3-22

Instructions(a) Journalize the annual adjusting entries that were made. (b) Prepare an income statement and a retained earnings statement for the year ended December 31, and a classified balance sheet at December 31. (c) Identify which accounts should be closed on December 31. (d) If the note has been outstanding 10 months, what is the annual interest rate on that note? (e) If the company paid $10,500 in salaries and wages in 2014, what was the balance in Salaries and Wages Payable on December 31, 2013?

E3-1 BE3-13 BE3-12 BE3-11 BE3-10 BE3-9 BE3-8 BE3-7 BE3-6 BE3-5 BE3-4 BE3-3

Posted by mbhpblog at 2:33:00 AM

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BE3-2

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BE3-1 E2-10 CA2-4

P3-6

E2-5 BE2-6

P3-6

BE2-1

(Adjusting Entries and Financial Statements) The following are the trial balance and the other information related to Yorkis Perez, a consulting engineer.

BE2-2 E2-6 E2-4 E2-9 CA2-11

1. Fees received in advance from clients $6,000. 2. Services performed for clients that were not recorded by December 31, $4,900. 3. Bad debt expense for the year is $1,430. 4. Insurance expired during the year $480. 5. Equipment is being depreciated at 10% per year. 6. Yorkis Perez gave the bank a 90-day, 10% note for $7,200 on December 1, 2014. 7. Rent of the building is $750 per month. The rent for 2014 has been paid, as has that for January 2015. 8. Office salaries and wages earned but unpaid December 31, 2014, $2,510. Instructions(a) From the trial balance and other information given, prepare annual adjusting entries as of December 31, 2014. (Omit explanations.) (b) Prepare an income statement for 2014, a statement of owner's equity, and a classified balance sheet. Yorkis Perez withdrew $17,000 cash for personal use during the year.

CA2-10 CA2-9 CA2-8 CA2-7 CA2-6 CA2-5 CA2-3 CA2-2 CA2-1 E2-8 E2-7 E2-3 E2-2 E2-1 BE2-12

Posted by mbhpblog at 2:29:00 AM

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BE2-11

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BE2-10 BE2-9 BE2-8

P3-4

BE2-7 BE2-5

P3-4

BE2-4

(Financial Statements, Adjusting and Closing Entries) The trial balance of Bellemy Fashion Center contained the following accounts at November 30, the end of the company's fiscal year.

1. Supplies on hand totaled $1,500. 2. Depreciation is $15,000 on the equipment. 3. Interest of $11,000 is accrued on notes payable at November 30. Other data: 1. Salaries expense is 70% selling and 30% administrative. 2. Rent expense and utilities expenses are 80% selling and 20% administrative. 3. $30,000 of notes payable are due for payment next year. 4. Maintenance and repairs expense is 100% administrative. Instructions(a) Journalize the adjusting entries. (b) Prepare an adjusted trial balance. (c) Prepare a multiple-step income statement and retained earnings statement for the year and a classified balance sheet as of November 30, 2014. (d) Journalize the closing entries. (e) Prepare a post-closing trial balance.

Posted by mbhpblog at 2:23:00 AM

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P3-3 P3-3 (Adjusting Entries) A review of the ledger of Baylor Company at December 31, 2014, produces the following data pertaining to the preparation of annual adjusting entries. 1. Salaries and Wages Payable $0. There are eight employees. Salaries and wages are paid every Friday for the current week. Five employees receive $700 each per week, and three employees earn $600 each per week. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.

InstructionsPrepare the adjusting entries at December 31, 2014. (Show all computations).

Posted by mbhpblog at 2:09:00 AM

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E3-12 E3-12 (Prepare Financial Statements) Santo Design Agency was founded by Thomas Grant in January 2008. Presented below is the adjusted trial balance as of December 31, 2014.

Instructions(a) Prepare an income statement and a statement of retained earnings for the year ending December 31, 2014, and an unclassified balance sheet at December 31. (b) Answer the following questions. (1) If the note has been outstanding 6 months, what is the annual interest rate on that note? (2) If the company paid $17,500 in salaries in 2014, what was the balance in Salaries and Wages Payable on December 31, 2013?

Posted by mbhpblog at 1:58:00 AM

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E3-10 E3-10 (Adjusting Entries) Greco Resort opened for business on June 1 with eight airconditioned units. Its trial balance on August 31 is as follows.

1. The balance in prepaid insurance is a one-year premium paid on June 1, 2014. 2. An inventory count on August 31 shows $450 of supplies on hand. 3. Annual depreciation rates are buildings (4%) and equipment (10%). Salvage value is estimated to be 10% of cost. 4. Unearned Rent Revenue of $3,800 was earned prior to August 31. 5. Salaries of $375 were unpaid at August 31. 6. Rentals of $800 were due from tenants at August 31. 7. The mortgage interest rate is 8% per year. Instructions(a) Journalize the adjusting entries on August 31 for the 3-month period June 1August 31. (Omit explanations.) (b) Prepare an adjusted trial balance on August 31.

Posted by mbhpblog at 1:53:00 AM

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E3-5 E3-5 (Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

An analysis of the accounts shows the following. 1. The equipment depreciates $250 per month. 2. One-third of the unearned rent was recognized as revenue during the quarter. 3. Interest of $500 is accrued on the notes payable. 4. Supplies on hand total $850. 5. Insurance expires at the rate of $300 per month. InstructionsPrepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense. (Omit explanations.)

Posted by mbhpblog at 1:47:00 AM

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E3-4 E3-4 (Corrected Trial Balance) The trial balance of Watteau Co. (shown on the next page) does not balance.

Each of the listed accounts should have a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors. 1. Cash received from a customer on account was debited for $570, and Accounts Receivable was credited for the same amount. The actual collection was for $750. 2. The purchase of a computer printer on account for $500 was recorded as a debit to Supplies for $500 and a credit to Accounts Payable for $500. 3. Services were performed on account for a client for $890. Accounts Receivable was debited for $890 and Service Revenue was credited for $89. 4. A payment of $65 for telephone charges was recorded as a debit to Office Expense for $65 and a debit to Cash for $65. 5. When the Unearned Service Revenue account was reviewed, it was found that service revenue amounting to $325 was performed prior to June 30 (related to Unearned Service Revenue). 6. A debit posting to Salaries and Wages Expense of $670 was omitted. 7. A payment on account for $206 was credited to Cash for $206 and credited to Accounts Payable for $260. 8. A dividend of $575 was debited to Salaries and Wages Expense for $575 and credited to Cash for $575. InstructionsPrepare a correct trial balance. (Note: It may be necessary to add one or more accounts to the trial balance.) Posted by mbhpblog at 12:06:00 AM

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Wednesday, March 16, 2016

E3-2 E3-2 (Corrected Trial Balance) The trial balance of Wanda Landowska Company (shown on the next page) does not balance. Your review of the ledger reveals the following. (a) Each account had a normal balance. (b) The debit footings in Prepaid Insurance, Accounts Payable, and Property Tax Expense were each understated $100. (c) A transposition error was made in Accounts Receivable and Service Revenue; the correct balances for Accounts Receivable and Service Revenue are $2,750 and $6,690, respectively. (d) A debit posting to Advertising Expense of $300 was omitted. (e) A $1,500 cash drawing by the owner was debited to Owner's Capital and credited to Cash.

Posted by mbhpblog at 11:50:00 PM

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E3-16 E3-16

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P3-10 P3-10

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P3-5 P3-5

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E3-11 E3-11

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E3-9 E3-9

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E3-15 E3-15

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E3-21 E3-21

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E3-19 E3-19

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E3-18 E-18

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E3-3 E3-3

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E3-23 E3-23

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P3-2 P3-2

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E3-7 E3-7

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P3-7 P3-7

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E3-14 E3-14

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E3-22 E3-22

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Tuesday, March 15, 2016

E3-1 E3-1 (Transaction Analysis—Service Company) Beverly Crusher is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions occurred. April 2 Invested $32,000 cash and equipment valued at $14,000 in the business. April 2 Hired a secretary-receptionist at a salary of $290 per week payable monthly. April 3 Purchased supplies on account $700. (Debit an asset account.) April 7 Paid office rent of $600 for the month. April 11 Completed a tax assignment and billed client $1,100 for services rendered. (Use Service Revenue account.) April 12 Received $3,200 advance on a management consulting engagement. April 17 Received cash of $2,300 for services completed for Ferengi Co. April 21 Paid insurance expense $110. April 30 Paid secretary-receptionist $1,160 for the month. April 30 A count of supplies indicated that $120 of supplies had been used. April 30 Purchased a new computer for $6,100 with personal funds. (The computer will be used exclusively for business purposes.) InstructionsJournalize the transactions in the general journal. (Omit explanations.)

Posted by mbhpblog at 9:03:00 PM

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Thursday, March 10, 2016

BE3-13 BE3-13 Assume that Best Buy made a December 31 adjusting entry to debit Salaries and Wages Expense and credit Salaries and Wages Payable for $4,200 for one of its departments. On January 2, Best Buy paid the weekly payroll of $7,000. Prepare Best Buy's (a) January 1 reversing entry; (b) January 2 entry (assuming the reversing entry was prepared); and (c) January 2 entry (assuming the reversing entry was not prepared). Read more » Posted by mbhpblog at 2:41:00 AM

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BE3-12 BE3-12 Kelly Company had cash receipts from customers in 2014 of $142,000. Cash payments for operating expenses were $97,000. Kelly has determined that at January 1, accounts receivable was $13,000, and prepaid expenses were $17,500. At December 31, accounts receivable was $18,600, and prepaid expenses were $23,200. Compute (a) service revenue and (b) operating expenses. Read more » Posted by mbhpblog at 2:39:00 AM

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BE3-11 BE3-11 Side Kicks has year-end account balances of Sales Revenue $808,900; Interest Revenue $13,500; Cost of Goods Sold $556,200; Administrative Expenses $189,000; Income Tax Expense $35,100; and Dividends $18,900. Prepare the year-end closing entries. Read more » Posted by mbhpblog at 2:38:00 AM

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BE3-10 BE3-10 At the end of its first year of operations, the trial balance of Alonzo Company shows Equipment $30,000 and zero balances in Accumulated Depreciation—Equipment and Depreciation Expense. Depreciation for the year is estimated to be $2,000. Prepare the adjusting entry for depreciation at December 31, and indicate the balance sheet presentation for the equipment at December 31. Read more » Posted by mbhpblog at 2:36:00 AM

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BE3-9 BE3-9 Prepare the following adjusting entries at August 31 for Walgreens. (a) Interest on notes payable of $300 is accrued. (b) Services performed but unbilled total $1,400. (c) Salaries and wages earned by employees of $700 have not been recorded. (d) Bad debt expense for year is $900. Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable, Salaries and Wages Expense, Salaries and Wages Payable, Allowance for Doubtful Accounts, and Bad Debt Expense. Read more » Posted by mbhpblog at 2:33:00 AM

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BE3-8 BE3-8 Included in Gonzalez Company's December 31 trial balance is a note receivable of $12,000. The note is a 4-month, 10% note dated October 1. Prepare Gonzalez's December 31 adjusting entry to record $300 of accrued interest, and the February 1 journal entry to record receipt of $12,400 from the borrower. Read more » Posted by mbhpblog at 2:31:00 AM

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BE3-7 BE3-7 Dresser Company's weekly payroll, paid on Fridays, totals $8,000. Employees work a 5-day week. Prepare Dresser's adjusting entry on Wednesday, December 31, and the journal entry to record the $8,000 cash payment on Friday, January 2. Read more » Posted by mbhpblog at 2:29:00 AM

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BE3-6 BE3-6 LaBouche Corporation owns a warehouse. On November 1, it rented storage space to a lessee (tenant) for 3 months for a total cash payment of $2,400 received in advance. Prepare LaBouche's November 1 journal entry and the December 31 annual adjusting entry. Read more » Posted by mbhpblog at 2:27:00 AM

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BE3-5 BE3-5 Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years' insurance coverage. Prepare P&G's February 1 journal entry and the annual adjusting entry on June 30. Read more » Posted by mbhpblog at 2:26:00 AM

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BE3-4 BE3-4 Using the data in BE3-3, (BE3-3 On July 1, 2014, Crowe Co. pays $15,000 to Zubin Insurance Co. for a 3-year insurance policy. Both companies have fiscal years ending December 31. For Crowe Co., journalize the entry on July 1 and the adjusting entry on December 31.) journalize the entry on July 1 and the adjusting entry on December 31 for Zubin Insurance Co. Zubin uses the accounts Unearned Service Revenue and Service Revenue. Read more » Posted by mbhpblog at 2:25:00 AM

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BE3-3 BE3-3 On July 1, 2014, Crowe Co. pays $15,000 to Zubin Insurance Co. for a 3-year insurance policy. Both companies have fiscal years ending December 31. For Crowe Co., journalize the entry on July 1 and the adjusting entry on December 31. Read more » Posted by mbhpblog at 2:23:00 AM

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BE3-2 BE3-2 Agazzi Repair Shop had the following transactions during the first month of business as a propri-etorship. Journalize the transactions. (Omit explanations.) Aug. 2 Invested $12,000 cash and $2,500 of equipment in the business. Aug 7 Purchased supplies on account for $500. (Debit asset account.) Aug 12 Performed services for clients, for which $1,300 was collected in cash and $670 was billed to the clients. Aug 15 Paid August rent $600. Aug 19 Counted supplies and determined that only $270 of the supplies purchased on August 7 are still on hand. Read more » Posted by mbhpblog at 2:21:00 AM

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BE3-1 BE3-1 Transactions for Mehta Company for the month of May are presented below. Prepare journal entries for each of these transactions. (You may omit explanations.) May 1 B.D. Mehta invests $4,000 cash in exchange for common stock in a small welding corporation. May 3 Buys equipment on account for $1,100. May 13 Pays $400 to landlord for May rent. May 21 Bills Noble Corp. $500 for welding work done. Read more » Posted by mbhpblog at 2:19:00 AM

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Monday, March 7, 2016

E2-10 E2-1O (Accounting Principles—Comprehensive) Presented below is information related to Cramer, Inc. Instructions Comment on the appropriateness of the accounting procedures followed by Cramer, Inc. (a) Depreciation expense on the building for the year was $60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earn-ings instead of to net income. The following entry is recorded. Retained Earnings 60,000 Accumulated Depreciation—Buildings 60,000 (b) Materials were purchased on January 1, 2014, for $120,000 and this amount was entered in the Materials account. On December 31, 2014, the materials would have cost $141,000, so the following entry is made. Inventory 21,000 Gain on Inventories 21,000 (c) During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of $135,000 and a fair value of $450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows. Equipment 135,000 Common Stock 135,000 (d) During the year, the company sold certain equipment for $285,000, recognizing a gain of $69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased. (e) An order for $61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2015. The company made the following entry in 2014. Accounts Receivable 61,500 Sales Revenue 61,500 Read more » Posted by mbhpblog at 9:34:00 PM

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Labels: Chapter- 2

Sunday, March 6, 2016

CA2-4 CA2-4 (Qualitative Characteristics) Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate tradeoffs or sacrifices among the characteristics of useful information. Instructions (a) Describe briefly the following characteristics of useful accounting information. (1) Relevance. (2) Faithful representation. (3) Understandability. (4) Comparability. (5) Consistency. (b) For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other. (1) Relevance and faithful representation. (2) Relevance and consistency. (3) Comparability and consistency. (4) Relevance and understandability. (c) What criterion should be used to evaluate trade-offs between information characteristics? Read more » Posted by mbhpblog at 10:53:00 PM

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E2-5 E2-5 (Elements of Financial Statements) Ten interrelated elements that are most directly related to mea-suring the performance and financial status of an enterprise are provided below. Assets Distributions to owners Expenses Liabilities Comprehensive income Gains Equity Revenues Losses Investments by owners InstructionsIdentify the element or elements associated with the 12 items below. (a) Arises from peripheral or incidental transactions. (b) Obligation to transfer resources arising from a past transaction. (c) Increases ownership interest. (d) Declares and pays cash dividends to owners. (e) Increases in net assets in a period from nonowner sources. (f) Items characterized by service potential or future economic benefit. (g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners. (h) Arises from income statement activities that constitute the entity's ongoing major or central operations. (i) Residual interest in the assets of the enterprise after deducting its liabilities. (j) Increases assets during a period through sale of product. (k) Decreases assets during the period by purchasing the company's own stock. (l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners. Read more » Posted by mbhpblog at 10:48:00 PM

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BE2-6 BE2-6

Read more » Posted by mbhpblog at 10:41:00 PM

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BE2-1 BE2-1

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BE2-2 BE2-2

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E2-6 E2-6

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E2-4 E2-4

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Friday, March 4, 2016

E2-9 E2-9

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Wednesday, March 2, 2016

CA2-11 CA2-11 (Cost Constraint) The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting. 1. Business reporting should exclude information outside of management's expertise or for which management is not the best source, such as information about competitors. 2. Management should not be required to report information that would significantly harm the company's competitive position. 3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast for themselves the company's financial future. 4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business. 5. Companies should present certain elements of business reporting only if users and management agree they should be reported a concept of flexible reporting. 6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so. InstructionsFor each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting. Read more » Posted by mbhpblog at 9:30:00 PM

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Labels: Chapter- 2

CA2-10 CA2-10 (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be matched to revenue. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs. InstructionsAnswer the following questions. (a) What stakeholders should be considered? (b) What ethical issue, if any, underlies the dispute? (c) What alternatives should be considered? (d) Assess the consequences of the alternatives. (e) What decision would you recommend? Read more » Posted by mbhpblog at 9:27:00 PM

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CA2-9 CA2-9 (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the "ground floor" of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items. You have told Neville that, unless you can take a look at its financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville's most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240. The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available. InstructionsWrite a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful. Read more » Posted by mbhpblog at 9:10:00 PM

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CA2-8 CA2-8 (Expense Recognition Principle) Daniel Barenboim sells and erects shell houses, that is, frame structures that are completely finished on the outside but are unfinished on the inside except for flooring, partition studding, and ceiling joists. Shell houses are sold chiefly to customers who are handy with tools and who have time to do the interior wiring, plumbing, wall completion and finishing, and other work necessary to make the shell houses livable dwellings. Barenboim buys shell houses from a manufacturer in unassembled packages consisting of all lumber, roofing, doors, windows, and similar materials necessary to complete a shell house. Upon commencing operations in a new area, Barenboim buys or leases land as a site for its local warehouse, field office, and display houses. Sample display houses are erected at a total cost of $30,000 to $44,000 including the cost of the unassembled packages. The chief element of cost of the display houses is the unassembled packages, inasmuch as erection is a short, low-cost operation. Old sample models are torn down or altered into new models every 3 to 7 years. Sample display houses have little salvage value because dismantling and moving costs amount to nearly as much as the cost of an unassembled package. Instructions(a) A choice must be made between (1) expensing the costs of sample display houses in the periods in which the expenditure is made and (2) spreading the costs over more than one period. Discuss the advantages of each method. (b) Would it be preferable to amortize the cost of display houses on the basis of (1) the passage of time or (2) the number of shell houses sold? Explain. Read more » Posted by mbhpblog at 9:08:00 PM

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CA2-7 CA2-7 (Expense Recognition Principle) Accountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to record costs and revenues properly. Proper recognition of costs and revenues requires that costs resulting from typical business operations be recognized in the period in which they expired. Instructions (a) List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period. (b) As generally presented in financial statements, the following items or procedures have been criticized as improperly recognizing costs. Briefly discuss each item from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information. (1) Receiving and handling costs. (2) Cash discounts on purchases. Read more » Posted by mbhpblog at 9:05:00 PM

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CA2-6 CA2-6 (Expense Recognition Principle) An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the proper recognition, in general, of revenues and expenses for a given time period. In some situations, costs are recognized as expenses at the time of product sale. In other situations, guidelines have been developed for recognizing costs as expenses or losses by other criteria. Instructions(a) Explain the rationale for recognizing costs as expenses at the time of product sale. (b) What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain. (c) In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense? Explain. (d) Some expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on the basis of systematic and rational allocation of asset cost. (e) Identify the conditions under which it would be appropriate to treat a cost as a loss. (AICPA adapted) Read more » Posted by mbhpblog at 9:03:00 PM

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CA2-5 CA2-5 (Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company's magazine. She feels that the "crucial event" in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be "recognized" in the period of the cash sale. InstructionsDiscuss the propriety of timing the recognition of revenue in Piper Publishing Company's accounts with: (a) The cash sale of the magazine subscription. (b) The publication of the magazine every month. (c) Both events, by recognizing a portion of the revenue with the cash sale of the magazine subscription and a portion of the revenue with the publication of the magazine every month. Read more » Posted by mbhpblog at 9:00:00 PM

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CA2-3 CA2-3 (Objective of Financial Reporting) Homer Winslow and Jane Alexander are discussing various aspects of the FASB's concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if any, guidance to the practicing professional in resolving accounting controversies. He believes that the statement provides such broad guidelines that it would be impossible toapply the objective to present-day reporting problems. Jane concedes this point but indicates that the objective is still needed to provide a starting point for the FASB in helping to improve financial reporting. Instructions(a) Indicate the basic objective established in the conceptual framework. (b) What do you think is the meaning of Jane's statement that the FASB needs a starting point to resolve accounting controversies? Read more » Posted by mbhpblog at 8:57:00 PM

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Labels: Chapter- 2

CA2-2 CA2-2 (Conceptual Framework—General) The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective and fundamentals that will be the basis for developing financial accounting and reporting standards. The objective identifies the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties. The purpose of the statement on qualitative characteristics is to examine the characteristics that make accounting information useful. These characteristics or qualities of information are the ingredients that make information useful and the qualities to be sought when accounting choices are made. Instructions(a) Identify and discuss the benefits that can be expected to be derived from the FASB's conceptual framework study. (b) What is the most important quality for accounting information as identified in the conceptual framework? Explain why it is the most important. (c) Statement of Financial Accounting Concepts No. 8 describes a number of key characteristics or qualities for accounting information. Briefly discuss the importance of any three of these qualities for financial reporting purposes. Read more » Posted by mbhpblog at 8:54:00 PM

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CA2-1 CA2-1 (Conceptual Framework—General) Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne's supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice. Instructions(a) Help Wayne recognize the purpose of and benefit of a conceptual framework. (b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background. Read more » Posted by mbhpblog at 8:52:00 PM

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E2-8 E2-8 (Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mention of these facts was made in the financial statements and the related notes. InstructionsAssume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items. (a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted. (b) Equipment purchases of $170,000 were partly financed during the year through the issuance of a $110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at $60,000. (c) Weller has reported its ending inventory at $2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes. (d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements. Read more » Posted by mbhpblog at 8:50:00 PM

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E2-7 E2-7 (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time. InstructionsSelect the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.) (a) Fair value changes are not recognized in the accounting records. (b) Financial information is presented so that investors will not be misled. (c) Intangible assets are capitalized and amortized over periods benefited. (d) Repair tools are expensed when purchased. (e) Agricultural companies use fair value for purposes of valuing crops. (f) Each enterprise is kept as a unit distinct from its owner or owners. (g) All significant post-balance-sheet events are reported. (h) Revenue is recorded at point of sale. (i) All important aspects of bond indentures are presented in financial statements. (j) Rationale for accrual accounting. (k) The use of consolidated statements is justified. (1) Reporting must be done at defined time intervals. (m) An allowance for doubtful accounts is established. (n) Goodwill is recorded only at time of purchase. (o) A company charges its sales commission costs to expense. Read more » Posted by mbhpblog at 8:48:00 PM

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E2-3 E2-3 (Qualitative Characteristics) SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint. (a) What is the quality of information that enables users to confirm or correct prior expectations? (b) Identify the pervasive constraint developed in the conceptual framework. (c) The chairman of the SEC at one time noted, "If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined." Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.) (d) Muruyama Corp. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed? (e) Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.) (f) What are the two fundamental qualities that make accounting information useful for decision-making? (g) Watteau Inc. does not issue its first-quarter report until after the second quarter's results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.) (h) Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes? (i) Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed? (j) Roddick Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.) Read more » Posted by mbhpblog at 8:30:00 PM

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E2-2 E2-2 (Usefulness, Objective of Financial Reporting, Qualitative Characteristics) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. (a) The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. (b) Relevant information only has predictive value, confirmatory value, or both. (c) Information that is a faithful representation is characterized as having predictive or confirmatory value. (d) Comparability pertains only to the reporting of information in a similar manner for different companies. (e) Verifiability is solely an enhancing characteristic for faithful representation. (f) In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities. Read more » Posted by mbhpblog at 8:28:00 PM

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E2-1 E2-1 (Usefulness, Objective of Financial Reporting) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. (a) Accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements. (b) General purpose financial reports are most useful to company insiders in making strategic business decisions. (c) Accounting standards based on individual conceptual frameworks generally will result in consistent and comparable accounting reports. (d) Capital providers are the only users who benefit from general purpose financial reporting. (e) Accounting reports should be developed so that users without knowledge of economics and business can become informed about the financial results of a company. (f) The objective of financial reporting is the foundation from which the other aspects of the framework logically result. Read more » Posted by mbhpblog at 8:26:00 PM

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BE2-12 BE2-12 Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material. (a) Legal fees paid in connection with the purchase of land are $1,500. (b) Eduardo, Inc. paves the driveway leading to the office building at a cost of $21,000. (c) A meat market purchases a meat-grinding machine at a cost of $3,500. (d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months. (e) Smith's Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business. (f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck. Read more » Posted by mbhpblog at 8:23:00 PM

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BE2-11 BE2-11 What accounting assumption, principle, or constraint would Target Corporation use in each of the situations below? (a) Target was involved in litigation over the last year. This litigation is disclosed in the financial statements. (b) Target allocates the cost of its depreciable assets over the life it expects to receive revenue from these assets. (c) Target records the purchase of a new Dell PC at its cash equivalent price. Read more » Posted by mbhpblog at 8:22:00 PM

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BE2-10 BE2-10 If the going concern assumption is not made in accounting, discuss the differences in the amounts shown in the financial statements for the following items. (a) Land. (b) Unamortized bond premium. (c) Depreciation expense on equipment. (d) Inventory. (e) Prepaid insurance. Read more » Posted by mbhpblog at 8:20:00 PM

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BE2-9 BE2-9 Vande Velde Company made three investments during 2014. (1) It purchased 1,000 shares of Sastre Company, a start-up company. Vande Velde made the investment based on valuation estimates from an internally developed model. (2) It purchased 2,000 shares of GE stock, which trades on the NYSE. (3) It invested $10,000 in local development authority bonds. Although these bonds do not trade on an active market, their value closely tracks movements in U.S. Treasury bonds. Where will Vande Velde report these investments in the fair value hierarchy? Posted by mbhpblog at 8:16:00 PM

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BE2-8 BE2-8 Identify which basic principle of accounting is best described in each item below. (a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected. (b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater. Read more » Posted by mbhpblog at 8:13:00 PM

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BE2-7 BE2-7 Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports. (b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. Read more » Posted by mbhpblog at 8:12:00 PM

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BE2-5 BE2-5 Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material. (a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income. (b) Hindi Co. has an extraordinary gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Hindi Co.'s income for the current year was $10 million. (c) Damon Co. expenses all capital equipment under $25,000 on the basis that it is immaterial. The company has followed this practice for a number of years. Read more » Posted by mbhpblog at 8:09:00 PM

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BE2-4 BE2-4 Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and faithful representation.) (a) The annual reports of Best Buy Co. are audited by certified public accountants. (b) Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption. (c) Starbucks Corporation has used straightline depreciation since it began operations. (d) Motorola issues its quarterly reports immediately after each quarter ends. Read more » Posted by mbhpblog at 8:08:00 PM

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BE2-3 BE2-3 Discuss whether the changes described in each of the cases below require recognition in the CPA's audit report as to consistency. (Assume that the amounts are material.) (a) The company changed its inventory method to FIFO from weighted-average, which had been used in prior years. (b) The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years. (c) The estimated remaining useful life of plant property was reduced because of obsolescence. Read more » Posted by mbhpblog at 8:06:00 PM

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CA1-2 CA1-2 (GAAP and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false. 1. The objective of financial statements emphasizes a stewardship approach for reporting financial information. 2. The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and a statement of owners' or stockholders' equity. 3. Because they are generally shorter, FASB interpretations are subject to less due process, compared to FASB standards. 4. The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report.

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Labels: Chapter- 1

CA1-1 CA1-1 (FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false. 1. GAAP is the term used to indicate the whole body of FASB authoritative literature. 2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements. 3. The primary governmental body that has influence over the FASB is the SEC. 4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard. Posted by mbhpblog at 7:51:00 PM

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