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Chapter 2: 7BE (page 64)

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.

Short Answer

Expert verified

a) Asset

b) Asset

c) Asset

d) Expense

e) Asset

f) Expense

Step by step solution

01

Definition of Asset

It refers to the economic value held or controlled by an individual or business firm to get benefits in the future. It is the capitalized item that helps to generate income in nearby future. For example:building, land, inventory, debtors, etc.

02

Explanation for specific treatment

  1. Legal expense is the cost incurred by the business firm for buying land, and thus it will be debited to the land account.
  2. The amount spent on the driveway is the amount that provides benefits for the long period and thus capitalized to the land improvement account.
  3. Meat grinding machine is the capital expenditure for the meat market and contributes to earning more revenues for many years. Thus, it is an asset.
  4. The duration of the office rent paid is less than a year and thus treated as an expense.
  5. Wages paid by the business firm for building construction provide benefits for many years and are thus treated as an asset.
  6. It is an operating expense as payment of salary is a revenue expenditure.

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Most popular questions from this chapter

Question: What are some of the differences in elements in the IASB and FASB conceptual frameworks?

ETHICS (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 recognized as assets are used up or liabilities are incurred. 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.

Instructions

Answer 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?

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 trade-offs or sacrifices among the characteristics of useful information.

Instructions

a) Describe briefly the following characteristics of useful accounting information.

1. Relevance (4) Comparability

2. Faithful representation (5) Consistency

3. Understandability

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?

What is the primary objective of financial reporting?

The chairman of the company鈥檚 board of directors for which you are the chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than 鈥渙ut-of-date costs.鈥� Present some arguments to convince him that accounting data should still be based on historical cost.
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