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Chapter 2: Q10E (page 68)

Question: 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 earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation鈥擝uildings 60,000

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, 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 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

Short Answer

Expert verified

Answer

  1. Depreciation is an allocation of cost, not an attempt to value assets.
  2. A gain should not be recognized until the inventory is sold
  3. Recording the asset at the par value of the stock has no conceptual validity.
  4. Deferral of the gain should not be permitted.
  5. Revenue should be recognized when a performance obligation is met.

Step by step solution

01

Meaning of Accounting Procedures

The definition of an accounting strategy may be a standardized preparation that carries out a certain accounting work and is made to incorporate improved risk management rules so that these tasks are carried out more successfully and beneficially.

02

(1) Commenting on the appropriateness of the accounting procedures

Depreciation is not an attempt to appraise assets; it is an allocation of cost. Because of this, costs associated with this building should be matched with revenues on the income statement rather than being charged to retained earnings, even though the building's value is rising.

03

(2) Commenting on the appropriateness of the accounting procedures.

The inventory should not be sold until a gain is recorded. Accountants use the measurement principle (historical cost) approach, and asset write-ups are not allowed. According to the revenue recognition principle, a performance requirement must first be fulfilled before revenue should be recognized. When the consumer receives the goods in this instance

04

(3) Commenting on the appropriateness of the accounting procedures.

Assets must be valued at either the fair market value of what is acquired or the fair value of what is given up, whichever is more obvious. It should be underlined that using the stock's fair value does not contradict the measuring (historical cost) principle. No conceptual justification exists for recording the asset at the stock's par value. Simply put, par value is a fictitious sum typically determined at the time of incorporation.

05

(4) Commenting on the appropriateness of the accounting procedures

When the customer receives the equipment, the gain should be acknowledged. Because the corporation has met the performance commitment, deferral of the gain shouldn't be allowed.

06

(5) Commenting on the appropriateness of the accounting procedures.

According to the information, the sale should have been recorded in 2018 instead of 2017. When a performance obligation is satisfied, revenue should be pronounced. When the order is delivered to the buyer in this circumstance, the performance obligation is satisfied. 2018 ought to be the year that deals income and accounts receivable are reported. It ought to be famous that a charge to Cost of Goods Sold and a credit to Inventory are moreover required in 2018 if the company uses an interminable stock framework in terms of dollars and quantities.

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Most popular questions from this chapter

Question: William Murray achieved one of his life-long dreams by opening his own business, The Caddie Shack Driving Range, on May 1, 2017. He invested \(20,000 of his own savings in the business. He paid \)6,000 cash to have a small building constructed to house the operations and spent \(800 on golf clubs, golf balls, and yardage signs. Murray leased 4 acres of land for \)1,000 per month. (He paid the first month鈥檚 rent in cash.) During the first month, advertising costs totaled \(750, of which \)150 was unpaid at the end of the month. Murray paid his three nephews \(400 for retrieving golf balls. He deposited in the company鈥檚 bank account all revenues from customers (\)4,700). On May 15, Murray withdrew \(800 in cash for personal use. On May 31, the company received a utility bill for \)100 but did not immediately pay it. On May 31, the balance in the company bank account was \(15,100.

Murray is feeling pretty good about results for the first month, but his estimate of profitability ranges from a loss of \)4,900 to a profit of \(1,650.

Accounting

Prepare a balance sheet at May 31, 2017. Murray appropriately records any depreciation expense on a quarterly basis. How could Murray have determined that the business operated at a profit of \)1,650? How could Murray conclude that the business operated at a loss of \(4,900?

Analysis

Assume Murray has asked you to become a partner in his business. Under the partnership agreement, after paying him \)10,000, you would share equally in all future profits. Which of the two income measures above would be more useful in deciding whether to become a partner? Explain.

Principles

What is income according to GAAP? What concepts do the differences in the three income measures for The Caddie Shack Driving Range illustrate?

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

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.

(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.

1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle

Instructions

Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once

.(a) Allocates expenses to revenues in the proper period.

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

(c) Ensures that all relevant financial information is reported.

(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.

(g) Assumes that the dollar is the 鈥渕easuring stick鈥� used to report on financial performance.

Question: What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new accounting standards are being proposed.
See all solutions

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